Buying Corporate Stores



There are inherent plusses and minuses of acquiring a restaurant business from a franchisor versus a franchisee. Which is the best route to take for an M&A transaction? Watch Unbridled Capital’s insights here from Rick Ormsby.

The topic of today's episode is what do you advise franchise clients to consider when purchasing a company-owned location? Now, interestingly, buyers of company-owned restaurant packages and buyers or franchisee restaurants are often two different groups. They will sometimes cross over, but normally not. Re-franchising of corporate-owned units generally has the following benefits: number one, greater confidence in the financial information presented. Number two, easier lease assignment process since the franchisor typically will remain guaranteed on the leases. Number three, pricing upside in the P&L since corporate typically keeps pricing much lower than that of franchisees. This is a huge benefit. Just a five to 6% increase in pricing could have a tremendous positive effect on EBITDA, as pricing generally flows through at 85% or greater. Number four, ability to increase margins since franchisor's almost universally run poor P&L's. Number five, franchisors generally own in big markets, so they typically sell a consolidated group of stores, which is appealing to many from a GNA standpoint and for traveling purposes.

Now, corporate-owned locations are not desirable to some buyers for the following reasons: number one, pricing is generally way too high based on the market multiple of EBITDA, and number two, corporate deals can be difficult to finance since the price can be more arbitrary. Number three, franchisors generally have more near-term remodeling obligations than franchisees do. They generally don't keep up as well with their CapEx. Number four, franchisors will often add huge development obligations on their corporate re-franchise markets, often greater than what you'll find on a franchise to franchise transfer. Additionally, some franchisors will have liquidated damages if new unit development doesn't occur, and number five, some franchisors will mark up third-party leases. In addition to being a bad business practice, in my opinion, it also affects lease adjusted leverage. It makes borrowing more difficult.

Number six, in recent years, some franchisors have started requiring buyers of corporate locations to guarantee to keep the assets for a minimum of five years or give back to profits from the sale if the assets are sold to another franchisee during this time period. Number seven, many franchisees don't like the corporate culture at the store level, and they experienced significant management turnover post-acquisition when compared to franchisee locations, and number eight, key operators for franchisors usually haven't run a true P&L and therefore struggle with doing so when they work for franchisee. For franchisee owned businesses, the upside and downside are typically the inverse of the company-owned locations just mentioned. If you're looking at a corporate owned or franchise business and you need help or thoughts on how to value it, please feel free to reach out to us anytime. Thanks so much.