Here are 9 Guidelines for PE Buyers in Franchise Deals

After working with many private equity firms over the past few years, here are 9 guidelines that we think that all private equity firms should consider as they look to invest in the franchise business:

  1. Differences – The franchise industry often works differently from other industries. Your employee base is likely larger, your operations team may be set up a bit differently, but most importantly, you have a franchisor over you who largely calls the shots.
  2. Process – In other industries, a buyer often signs an Asset Purchase Agreement (also called APA) the same day the deal closes. That process is not possible in the restaurant industry because of the franchisors’ right of first refusal. Here, we typically perform a 4-week initial marketing process, and then the seller will choose a buyer to enter exclusivity. From there, confirmatory diligence or even Quality of Earnings can be run, depending on the deal and depending on the buyer. But most important is to commence the APA negotiations. Nothing happens until that APA is signed and submitted to Corporate for their Right of First Refusal and Transfer Approval, which can take 60-90 days. During this time, further diligence and lease assignments are completed, with a deal typically taking 90-120 days to close thereafter.
  3. Asset Deals – 95% or more of franchise deals are asset sales, not stock sales. Assume, unless clearly otherwise, that whatever deal you do will end up being an asset deal.
  4. Post LOI – Generally, once a price is set in the LOI and APA, the price is only reduced for initial misrepresentations (which is rare) and store walk throughs for items in major disrepair. Buyers generally need to build-out their own G&A as a condition of making their initial offer, regardless of a seller’s existing G&A structure. Re-trading the price on a deal is not customary during due diligence.
  5. M&A Attorney – Make sure you hire a good franchise restaurant M&A attorney. There are several groups in the country that specialize in this world and this world only. If you have questions as to custom, they will help. They’ll also help navigate the APA much more efficiently than attorneys who don’t specialize in this area.
  6. M&A advisor – Advisors, such as Unbridled, can be very helpful in getting these deals done, again because of the specificity of this industry. This is especially true when buying businesses without sell-side representation, but also important on deals with sell-side representation.
  7. People Business – You’re going to be responsible for the livelihood of many employees. And franchisees love their employees. The more you discuss how you’ll treat their people, truthfully of course, the more desirable a buyer you will be. People talk in this industry, and if you get a reputation for treating your people poorly, franchisees will be hesitant to turn their company over to you.
  8. Custom – there are so many customs in this industry. Talk with people who know them – attorneys, advisors, existing franchisees. There are always going to be things that you aren’t aware of, so be open to new ideas, even if it seems different from your experience.
  9. Reputation – The better your reputation, the more deals will fall in your lap. Many times, deal risk and ability to close can overcome the highest price. Trying to save a few hundred thousand dollars on something that is potentially against a custom could damage your reputation much more than that few hundred thousand that you saved.

We’d be honored to talk anytime. If we can help in anyway, please feel free to reach out anytime.

Disclaimer: Please note that neither Rick Ormsby nor Unbridled Capital LLC give legal, financial or tax advice. These podcasts represent opinions that have been prepared for informational purposes only. We expressly disclaim any and all liabilities that may be based on such information, errors therein or omissions therefrom.