Season 1 Episode 21: Essential Guidelines for Private Equity Buyers in Franchise Deals



Also Listen On:

1. Why Are So Many People Selling?
2. Domino’s Sales Growth Disappoints
3. Essential Guidelines for Private Equity Buyers in Franchise Deals

Title: Welcome to The Restaurant Boiler Room Episode 21. I’m your host, Rick Ormsby, Managing Director at Unbridled Capital.

Today, in the Boiler Room:
Why Are So Many People Selling?
Domino’s Sales Growth Disappoints
Essential Guidelines for PE Buyers in Franchise Deals

Tag Line: The Restaurant Boiler Room is a one-stop-shop for multi-million dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk money, deals, valuations, and risk – delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on an every-other-week basis. Feel free to find our content at Unbridled Capital’s website at

Now, let’s enter the Boiler Room:

A. Why Are So Many People Selling?

Background: It certainly seems that the general pace of buying and selling franchises has increased in the past year or so. Most experts predicted that M&A activity would be strong in 2019 across most sectors of our economy, but from Unbridled’s vantage point, it has been a more feverish pace than what we expected.

Comments: A casual look-around in different asset classes will leave you with a feeling that everything has appreciated so much that there are no bargains. Yet, with so much money available for investment after many years of economic growth nationally, there is a drive to find better risk-adjusted returns than a paltry 2-3%. The franchise industry has benefited as buyers have realized the relatively good returns and moderate risk associated with investing in some of the world’s most recognizable franchise brands. The major driver has thus been a confluence of chasing returns for buyers and consolidation thereafter to gain efficiencies, while for sellers, it has been high prices, increasing operational difficulties, and aging of the franchisee base. Sellers now almost universally know that many brands are trading at or near 10-15-year historically high prices (while other struggling brands are clearly way, way below this). Sellers are also getting hit with increased risk – operating costs are rising, labor is difficult to find, administration is ridiculously difficult, and taxes and regulatory complexities have increased, just to name a few. Finally, many franchise brands have an average age of 60 or older in the franchisee base. While a certain minority percentage is giving these businesses to their children or relatives, most would-be 2nd generation owners - who I know - do not want to get their hands dirty in the daily grind of operating a complicated franchise business. Many of these kids saw dad and mom grow up in the business, working crazy-long hours, weekends, and taking calls in the middle of the night when things went wrong. Most people just aren’t cut out for the sacrifice it takes to operate a business that never really stops – ever.

c. Effects on M&A: The combination of these factors, for both buyers and sellers, has led to consolidation, new entrants into various brands, and a brisk pace of M&A activity. And while we might be nearing the 8th inning in terms of opportunistic sellers, keep in mind that a large number of new buyers and new capital in the franchise industry will likely mean that deals will continue to happen when we hit the economic skids and valuations drop. Maybe there is a time when these larger franchisees and consolidators will become smaller franchisees again – who knows – that’s the beauty of M&A cycles. Things get bought, sold, consolidated, broken apart – it never ends. It’s like the evolution of basketball shorts over the decades – they were very tight and short in the ’50s and ’60s, got ridiculously long – past the knee – in the early and mid-2000s, and are now trending short again. Everything goes in cycles!

Domino’s Sales Growth Disappoint

Background: On July 16, Domino’s announced its same-store sales rose just 3% for the 2quarter, the lowest result for the company in the past seven years. The stock dropped 8% in pre-market, evidently reacting to a disappointing outcome given Wall Street expectations at 4.8% same-store sales growth.

Comments: Domino’s has had an unbelievable run in terms of restaurant sales and new unit growth. They have emerged as the largest pizza company in the US, recently surpassing Pizza Hut. Domino’s franchisees have been rewarded with stronger cash positions, financing to do remodels and new store openings, and momentum to attract and keep good employees. Their ridiculously high sales comps were eventually going to come back to Earth - +3%, for most franchise companies, is a great quarterly sales comp. However, CEO Ritch Allison cited third-party delivery as having a negative sales effect on the business. The emergence of delivery options for other fast-food companies – outside of the pizza space – has had some impact on Domino’s business evidently. As I have said previously, third-party delivery has questionable economics for most food companies in most geographies – but almost everyone is willing to feed this possible loss-leader for now for fear of falling behind or out of long-term optimism that they’ll eventually figure out the profitability problem that exists right now.

Effects on M&A: Domino’s fortressing strategy may also be affecting same-store sales growth. The company has been adding new units at a rapid pace, and there is only so much new growth available in the pizza market – much of it must come at the expense of competitors. I would generally expect Domino’s to continue to perform well – they have a huge competitive advantage in technology, assets, and cache over the other pizza concepts right now – but their sky-high same-store sales results are not likely sustainable forever in an industry that grows by 1-2% per year. Plus, I think many experts would expect that the turnarounds in Pizza Hut and Papa John’s could eventually take hold and produce a more difficult competitive environment for Domino’s.

Essential Guidelines for PE Buyers in Franchise Deals

a. I recently asked Derek Ball in our office to give some commentary for would-be PE firms that are looking to acquire a franchise platform and enter the franchise world for the first time. He has seen quite a few of these groups, and their methods and experience don’t always apply to the franchise industry because what we do is so specialized and has its own rules of the road, so to speak. Derek is super-sharp, an awesome M&A advisor, and is a technical expert, so his comments are specific and require that you pay attention. Thanks to Derek for doing this – here they are:

Differences - From what we hear from PE firms entering the franchise system, it can sometimes be surprising that the franchise industry often works differently from others. 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. This can sometimes take a bit to get used to – although it’s clearly a proven concept.

Process - In terms of the process of how deals are done, the franchise world is a bit different from others as well. In other industries, a buyer likely submits an initial indication of interest, followed by a formal second round diligence process, followed then by a best and final Letter of Intent (also called LOI). From there, you complete whatever diligence necessary to transfer the business and sign the Asset Purchase Agreement (also called APA) the same day the deal closes. That process is not possible in the restaurant industry. Here, we typically perform a 4-week initial marketing process and from there, determine if a second-round diligence process is necessary. If so, further diligence is permitted in order to submit a best and final LOI, of which the seller will choose a buyer to enter exclusivity. From there, confirmatory diligence or even Quality of Earnings (also called QofE) 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 needs, which can take 60-90 days. During this time, further deal diligence, lease assignments, real estate diligence, licenses and permitting, and closing diligence, etc. are completed, with a deal typically taking 90-120 days to close post-APA. Far different from signing an APA and closing simultaneously – as seen in other industries.

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, no matter your initial thinking. Unless it’s your major platform acquisition, you are buying a collection of restaurants, not a company.

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. Otherwise, it is generally assumed that the buyer has built out its own G&A structure (potentially built from information provided by sellers, especially area coach salaries), calculated its own insurance costs, establish its G&A structure and team.

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 work across many segments. Obviously, most large national law firms have an M&A division, but they don’t necessarily specialize in franchise restaurant transactions.

M&A advisor – Sometimes groups find it hard to justify advisory expenses on the buy-side of transactions, but advisors, such as Unbridled, can be very helpful in getting these deals done, again because of the specificity of this industry. Of course, we don’t replace your attorney, but we help navigate customs and help get through other sticking points that could otherwise blow up deals entirely. This is especially true when buying businesses without sell-side representation, but also important on deals with sell-side representation.

People Business – A friend in the industry recently told me that the franchise restaurant world is not a restaurant business, it’s a people business. You’re suddenly going to be responsible for the livelihood of thousands of employees. Know that the existing franchisees love their employees. In many cases, they’ve worked for them for decades and want to know that they’ll be taken care of post-transaction. The more you discuss how you’ll treat their people, truthfully, of course, the more desirable a buyer you will be. Know that in many sales processes, the offers are almost identical in terms of price, but the seller must decide who to choose somehow. Of course, things like financing, deal risk, franchisor approvability, and ability to close are important, but many times, sellers decide on who they think will treat their people the best. People talk in this industry, and if you get a reputation for treating your people poorly, franchisees will know, and they’ll be hesitant to turn their company over to you.

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 - or you don’t know what you don’t know - so be open to new ideas, even if it seems “off.” As mentioned earlier, this industry is very different from others, so if you’re freshly entering this space, be sure to listen to trusted advisors.

  • Reputation – As discussed already, reputation is everything in this industry. People
    talk! Be honest. Try to live by custom. Try to learn what you don’t know. This will get you far! The better your reputation, and the better you’re known as a buyer, and the more deals will fall in your lap! You’ll be shocked! The better the buyer (not necessarily the highest price), the more advisors and franchisees alike will want to work with you. 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. At the end of the day, Unbridled and its clients want a fair and transparent transaction that moves efficiently to closing. One thing to keep in mind is to choose wisely the sword you’re willing to fall on.


Kudos to Derek Ball for his insights here!

Closing: Thanks so much for entering the Boiler Room today. You can find our podcasts on iTunes, Google Play, Stitcher, TuneIn, and Spotify. If you like these podcasts, please listen, rate, and review! I also encourage you to visit our website at for the best franchise M&A and financial resources in the industry. Our website includes podcasts, videos, white papers, and a list of our M&A transactions.

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.