Michael Aronovici on the Franchisee Distress Problem Most Brands Miss

A System That Looks Fine From the Top

A franchise system can report rising revenue, steady unit counts, and a full pipeline of new signings while individual franchisees are quietly losing money. The two pictures do not contradict each other. System-wide numbers are an average, and averages hide the units that are struggling.

This is the problem a lot of franchisors never see until it is too late: franchisee financial distress that builds for years inside a brand that looks healthy on paper.

Michael Aronovici has dealt with this directly. Through Interaction Restaurants Group, he acquired the Cultures restaurant chain, then a franchisor of 60 locations. Part of that work involved addressing financial challenges within the franchisee base before repositioning the brand and selling it to a company controlled by the Serruya family. Cultures is now part of MTY Food Group. That history is why his read on franchisee health is worth hearing: he has had to find the problem inside a system, not just read about it in a report.

Where the Numbers Hide the Problem

Franchisors typically track royalty revenue, same-store sales, and unit counts. All three can stay flat or grow while a meaningful share of the franchisee base is underwater.

Royalty revenue keeps coming in because franchisees pay it before they pay themselves. Same-store sales track top-line, not what is left after rent, labor, and food cost. Unit counts hide closures if new openings offset them. A franchisor watching only these three figures can miss a brewing problem for several reporting cycles in a row.

Same-Store Sales Isn’t the Whole Picture

A location can post a 3 percent sales increase and still lose money if food cost or labor cost rose faster. Sales growth gets reported up the chain. Margin erosion usually does not, unless someone goes looking for it at the unit level.

What a Closer Look Usually Finds

When a franchisor finally pulls unit-level financials instead of system averages, a few patterns tend to show up:

• A cluster of locations with margins well below the system average, often concentrated in one market or one development group
• Franchisees deferring equipment repairs or reducing staff hours to cover rent
• Renewal conversations that have quietly gotten harder, even though the brand’s public growth story hasn’t changed

None of these show up in a royalty statement. They show up in conversations with operators, or in a review of profit and loss statements the franchisor doesn’t automatically collect.

Why This Gets Missed for so Long

Part of the reason is structural. Franchisors are paid on revenue, not on franchisee profit, so the incentive to dig into unit economics is weaker than it should be. Part of it is timing. A franchisee under pressure tends to hold out for a season or two, hoping sales recover, before raising the issue with the franchisor. By the time it surfaces as a support request or a renewal problem, it has usually been building for a while.

Aronovici’s view is that this gap is the most expensive thing a franchisor can ignore. A brand can have strong system-wide numbers and still be carrying a group of franchisees close to the edge, and the first the franchisor hears of it is often a closure, not a conversation.

What to Check Before It Becomes a Pattern

A few practical steps catch this earlier:

Ask for unit-level profit and loss statements, not just sales reports, on a regular schedule. Royalty data alone cannot show margin.

Track renewal conversations as a signal, not just an administrative step. A franchisee who hesitates on renewal is telling you something before they say it out loud.

Look at closures and transfers by vintage, not just by total count. A cluster of struggling units from the same development period usually points to a shared cause: site selection, a construction cost overrun, or a market that changed after the deal was signed.

Talk to a sample of franchisees directly, outside of the formal support process. Aggregated surveys smooth over the outliers that matter most.

The Fix Costs Less Before the Crisis

Addressing financial strain in a franchisee base early is cheaper and less disruptive than addressing it after several units have closed. A franchisor that catches margin erosion in one region can adjust supply agreements, revisit menu pricing, or support operational changes before it spreads. Waiting until closures pile up turns a fixable problem into a brand-level one, with vacant locations and harder renewal conversations across the system.

That is the pattern Aronovici points to from his own work repositioning a franchise system: the earlier a franchisor is willing to look past the aggregate numbers, the more options it has.