Franchise Industry experts offer tips, thoughts, tools, and a few misconceptions on possible exit strategies for your franchise system.
Years ago you had an idea: “I think I’m going to franchise this business.” You were successful with your local brand and wanted to expand. Franchising seemed like a good expansion model. After all, customers kept telling you they wished there was one of these nearer to their part of town. Out-of-town visitors often mentioned if there was one of these in their town it would do well, often stating, “We don’t have anything like this where I live.” So you went out and found a franchise attorney, drafted your franchise disclosure document, put together manuals and training materials and listed yourself on some franchise portals. After years of hard knocks, you have broken through. You have consistent franchise sales, your franchisees seem happy, your royalty stream is picking up–all seems to be on track. Then, on a cool summer night on the porch, your spouse mentions, “What’s the plan for our franchise company?”
It then hits you; you never thought about it. You have been so busy starting up your original business and then you were buried in the franchise business for years. You never even thought about what you would do with the business long term. Thoughts flood your mind. What are your options? How do I determine the price? How would I list it for sale? Is there some type of network out there? What do I say to my franchisees? Suddenly the cool summer night feels just a bit hotter.
Luckily, over the past 10 years, there has been a rapid increase of investor groups involved in franchising. The strong growth possibilities, predictable royalty revenue streams and the strength of the franchise business model has driven many investment groups to actively pursue franchises for purchase or investment.
We spoke to experts from private-equity firms, as well as a company that assists franchisors prepare their brands for investment and a franchise attorney who created a new tool to help facilitate merger and acquisition transactions. Following is the thoughtful advice they provided to our inquiries. They include:
Geoff Hill, CFE, Vice President, Roark Capital– Private Equity Firm
- Invests in multi-unit franchise groups
- Funds 1) 500M 2) 1B third fund being raised likely slightly more than 1B
- Investment range 5M– 200m+ EBITDA
David Leoncavallo, Founder, Managing Partner, Sopra Capital–Private Equity Firm
- Invests in multi-unit franchises
- Funds totaling over 3B
- Investment Range– Companies with 2M–8M EBITDA
Jeremy Holland, Regional Director, Los Angeles, Calif. Riverside Company–Private Equity Firm
- 4 Funds totaling over 3.4B
- Investment Range– Companies with 1M– 20M EBITDA
Burt Yarkin, Managing Director, McLean Group–Specializing in packaging and assisting in M&A transactions with Private Equity Firms
- Tracks over 225 private equity firms
- Investment Range– Assist companies with the range of 10M–200M EBITDA
Q. How do you identify new brands for investment?
Hill: “We are very active in the IFA and other associations; we look for brands that are good for Roark, brands where we can add value based on our experience and expertise.”
Leoncavallo: “We have a lot of contacts in the franchise industry because of our backgrounds and other businesses we’ve owned, as well as staying very active in franchise events.”
Holland: “We often receive referrals from investment bankers, attorneys and sometimes we reach out into certain industries, but our strongest calling card is our references, they provide a lot of referrals.”
Q. What industries are you currently considering in the near future?
Holland: “At Riverside, we are always open to various types of industries; we have been looking closely at health and wellness, pet franchises as well as financial services and healthcare franchises.”
Hill: “We look to invest in great companies, generally with the possibility of strong growth. We don’t look at specific industries but much of our experience is in food where we can add a lot of value.”
Leoncavallo: “We look at everything; we are willing to look at different industries and various types of deals, even the harrier ones.”
When asked what criteria are applied when deciding to invest in a brand, the experts agreed on quite a few points, such as:
- Unit-Level Economics is a Key Consideration. Even with strong franchise sales, a stable industry and good initial royalties, if the value proposition to the franchisee and repayment of the initial investment is not strong, our experts say they would steer clear
- All of our experts say the management team was paramount when evaluating a brand. While some transactions result in a complete purchase and transition, most cases show the management team stays intact during the investment and it is essential that the team is strong and easy to work with. Yarkin helps prepare management teams for the transition and assists them in working with the new investment groups and a possible change in culture.
- Detailed Financials. Yarkin commented, “Selling a business can be distracting so we come in and do all the legwork including putting financial controls in place and making sure the financials are clean and organized.” Our experts were clear in their comments saying that clean, organized and detailed financials are paramount to a smooth transaction and unorganized financials may delay or even “kill” an opportunity.
Deal Breakers and Acquisition Partners
When asked about “deal breakers” our experts are definitive, saying poor franchise validation, underperforming unit-level economics and too many lawsuits are clear deal “killers.” Leoncavallo added, “We stay away from drama.” Holland seconded the point: “Brands with negative corporate cultures are too difficult to turn around and we would likely pass on the opportunity.”
When asked what advice our experts would provide a brand looking for a partner or acquisition, they provided poignant information. Leoncavallo said, “Be authentic as a person and transparent as a business. Be flexible, friendly and reasonable.” Yarkin commented, “Work on your franchise infrastructure, your systems and franchise support.” Holland echoed the importance of systems, “Surround yourself with the best industry professionals from the start. Value added advisors including attorneys and consultants who can set you up for success.” Hill said, “Know what private equity wants such as historical data. Have all your ducks in a row when you are asked for the due diligence list. Have good franchise systems in place and make sure you can provide clear data about your brand.”
On a final note, our experts had some interesting ending thoughts. Leoncavallo said, “A common misconception is it’s all or nothing. Brands don’t realize that often there are different options for partnering.” Sopra will often come in as a majority partner and keep the “team” intact or sometimes they may even combine competitors. Sopra utilizes a flexible model that allowed them through creativity to perform over 60 percent of the total franchise transactions during the poor economy of 2008.
Hill said, “We keep a close eye on the franchise industry and enjoy watching new brands grow and flourish,” going on to say, “I will speak to anyone; I enjoy helping brands even if they aren’t opportunities that fit our investment strategy.” Holland also offered assistance to brands even if they aren’t a great fit for Riverside and commented, “The punch line is we are active and eager and are enthusiastically looking for new brands.”
From a Legal Perspective
Bret Lowell, CFE, an experienced franchise attorney and partner with DLA Piper LLP, sees the need and the confusion surrounding his clients’ exit strategies and created a web-based franchisor tool to assist with franchisor merger and acquisition transactions. Realizing that the marketplace for franchisor buyers to find franchisor sellers is rather disorganized and inefficient, Lowell created Franchisor Pipeline, a unique web-based matching service for franchisor buyers and sellers. At www.FranchisorPipeline.com, franchisors looking to sell can list their business for sale, and even do so anonymously. Buyers then can peruse the seller listings and, when they find one of interest, click to get more information such as EBITDA, the number of units and industry sector. If that information entices, and the buyer is really interested, the transaction then goes offline for further discussion, documentation, due diligence and closing.
Lowell, who has handled the legal aspects of numerous merger and acquisition transactions involving franchisors, has not only developed a unique matching service for the franchisor community, but has also brought other features to Franchisor Pipeline for those looking to buy or sell franchisors. For example, the site contains news about recent franchisor transactions (including transaction prices), descriptions of the process, an overview of the legal steps necessary to buy or sell a franchisor, and other tools to assist owners that wish to sell, and investors that wish to buy, franchisors.
Certainly managing a private-equity investment and transition can be complex, but armed with expert advice and new cutting edge tools, you can go back to enjoying your relaxing day on the porch and when it comes time to execute your exit strategy, it will be a smooth transition.
By: MJ Alto
