Franchise Times Dealmakers Week

Rent-A-Center is done refranchising, but the rent-to-own company and two of its operators shared some good advice to make the complex task of selling company units to franchisees a little easier.

In a Franchise Times Dealmakers Week session, franchisees Al Bhakta and David Paris joined Rent-A-Center vice president Michael Landry to talk through the topic with FT reporter Callie Evergreen.

The story starts in 2014. Rent-A-Center was not doing great, so the company thought about spinning off some of the worst-performing markets.

"You can look at the Rent-A-Center stock price and you can see we were in a decline. We were chasing a few different avenues and not focusing on the core business. So refranchising was a unique strategy that we could thought could address some underperforming markets and it did that," said Landry.

Rent-A-Center was mostly company owned at the time with a small franchise operation, but it sought to expand the franchise program dramatically by unloading around 200 locations. Unloading a pile of low-earning assets doesn't sound like a great deal at first blush, but Landry said the company did a lot to ensure it was successful and it could bring in savvy operators who would take ownership and take on the turnaround.

There were four key things that made the program work: finding the right franchisees, ensuring financing was available, making sense of the handoff and securing the right operators.

The picture of the right franchisees was pretty clear. Landry wanted a savvy, multi-unit franchisee with scale enough to take on 30 or more locations.

"We figured it would be a bit of a challenge primarily because Rent-A-Center was not known as a franchise operation. We had a small franchise piece but really we were corporate-owned," sad Landry. "Part of my strategy was get one large sale to a group out there, make sure they're successful. If they're successful, we believed, others would come."

The first franchisee was Shirin Kanji, a franchisee with deep experience in hotels and plenty of resources to make it work. And work it did; a couple months later he was asking for more locations.

Kanji's lawyer just happened to be David Paris, who became part of one of the next franchise groups.

"Michael contacted me and said, 'I have a book of markets, can you bring some candidates to the table?'" said Paris. "Arizona was one of the markets that was available and it jumped off the pages for me, and I said, 'You know what I got some guys we can get together and take that.' We bought 38 stores in 2018 then another 24 stores in Kentucky and Ohio at the end of 2019 and here we are trying to get more."

Bhakta, who also has a background in hotels as well as QSR, was another franchisee who got wind of the success and signed on. He had no rental-industry experience.

"Every franchise and multi-unit business is different, we learned over the years that a restaurant, QSR guy can't necessarily run a hotel and vice versa," said Bhakta. "That where Michael and his team gave us a lot of insight into operators who we could say, 'Hey, come over to the dark side and be a franchisee.' A lot of operators have an entrepreneurial spirit and they saw a path for them and retirement and equity in a business."

Landry provided a roster of key leaders in the company, but also outside the business. Paris called it a, "very personalized model."

As for financing, Landry said there was a lot of interest at conferences, but when it came to actual deals, it was tricky. Rent-to-own is a small niche, and it has a lot of "what ifs" for typical finance folks.

"It was one of the pieces that I didn't completely understand early on," said Landry. "Explaining our deprecation and cash flow, it took a lot. It was one of the hardest things that we had to do."

Ultimately, capital partners that had been with Rent-A-Center stepped up, as did longtime lenders to the franchisee partners—another perk of grabbing sophisticated operators for the big refranchise push.

"The space is not as saturated with franchises, so there's not a lot of lenders calling on the space," said Bhakta. "In rent-to-own, it was something that took al little time. You really have to have existing lending relationships, that's really where those guys can step up and believe as you as an operator."

The final handoff was the last thing to figure out. There were a lot of vendors selling into Rent-A-Center, but they were used to dealing with the corporate entity, not some guy in Arizona with 38 locations. Retaining employees was another trick.

"Rent-A-Center had been a company that had acquired other companies, but we never divested. So, we spent a lot of time on the handoff and set up a program," said Landry. "With our low labor, we knew we couldn't risk losing too many people. We spent a lot of time making sure they were happy."

He said bringing operators in from the initial refranchising group to talk about their experience was a big help, and most employees stuck around for the following divestitures.

"Working with the vendors was difficult, even with 20 to 30 stores, a truck leasing company didn't want to extend the same deal it would to RAC," said Paris. "But RAC would stay on as a corporate guarantor; you never see a franchisor doing that."

Paris said as a lawyer, he wouldn't advise going that far, but he was happy to have the support. Landry said it just made sense to the company.

"Maybe we didn’t know any better, but later we learned that franchisors don't get as involved. They're concerned with the asset price, but we were keenly aware that for the success of the franchise program that the handoff had to be successful."

In the end, Rent-A-Center sold out all the stores it sought to divest and the program is largely done and "business is booming," said Landry.

Watch the full Dealmakers session for more insights from the group.

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