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Explore key trends in franchise mergers and acquisitions, from private equity impact to strategic planning and post-closing integration. Understand the benefits, process, and considerations for buyers entering franchise M&A deals. Learn about common impediments and important factors for successful franchising M&A transactions.
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Basics Track: Franchise Mergers & Acquisitions Michael Bidwell, AndraeMarrocco, Brian Romanzo, and Andrew J. Sherman
Key Trends • The Impact of Private Equity • Consolidation and diversification of franchisors • The State of the Capital Markets • The Trump Effect • Globalization and Cross-Border Deals • The Aging Demographic of Baby-boomer Franchisees (Succession planning/transfers) • The Impact of the Sophisticated Multi-Unit Developer
Why Engage in Franchise M&A • Diversify base of franchise offerings to existing or new franchisees • Desire to add new products or services without expense of research and development • Desire to expand into a new geographic markets • Increase size to compete with larger company or eliminate threats of a smaller competitor • Market efficiencies through backward integration or forward integration • Reduce competition or expand market share
Overview of the Process Management Meetings Initial Valuation Deal Origination Initial Analysis & Strategic Plan Multiple Levels of Due Diligence; Adjust & Refine Projections Negotiate Documentation Funding Closing Posting Closing Integration & Improvements
Understanding the Franchisor’s Ecosystem Our initial focus is always to understand how the business and target franchise system performs compared to the competition and within its ecosystem. Strength of the Franchise System Global Expansion Competitors Key Vendors & Supply Efficiencies Brand and Reputation End Customers of the Franchisee Industry Trends
Analysis of Target • Buyer should identify specific objective and narrow the field of candidates • Some Questions to Ask • Does the target operate in an industry with growth potential? • Reputation of the target • Target has a “strong” franchise network and agreements • Target is involved in minimal litigation • Target is in a position to sell
Before Putting Capital to Work… • Determine if there is a strategic fit with overall plans/investment thesis and look at the downstream consequences of the M&A transaction. Where is the value-add that will be applied by the acquirer post-closing? • Carefully consider the management and development teams already in place. • Examine the corporate culture and the franchisor-franchisee relationship. Being a franchisor is all about the maintenance and growth of a series of complex interdependent relationships. Strategic fit? 3rd Party Influencers Corporate Culture
Valuation Variables Issues to Examine Quality of Strategic/Vendor Relationships Performance of Company Owned Units Depth and Breadth of Franchise Development Team Pending Litigation / Regulatory Inquiries Franchisee Relationships (Multi-Unit, Single-Unit, FAC’s, F-Zee Associations, etc.) Quality of Franchise Agreements Training, Operations and Field Support Programs and Manuals/Team Strength of Trademarks, Brands, Social Media (Domestic/Global)
Common Franchise System Due Diligence Areas Brands and IP Real Estate Analysis, Site Selection, Leases Regulatory Inquiries (FDD/FTC/Industry Regulation) Franchise Agreements, ADA’s, Master Franchise Agreements FAC/Franchise Associations Franchise Operations, Training & Support Franchisee Compliance Files (Individual, System-wide, Field Support Reports) Key Vendor/Supplier Agreements Co-Branding/Brand Extension, Licensing Agreements
Due Diligence Strategic Assessment of Current Franchisee Matrix Catalysts Under- performers Leaders Influencers Marginal “B” Players Franchisee Matrix Innovators FAC Members Rabble Rousers
System Underperformance Concerns Due diligence review can uncover several forms of underperformance of the franchise system which should raise flags for a buyer.
Due Diligence Impact Purchase Price Allocation of Risk and Risk Tolerance (When to walk away) Structure (Adjustment to Terms) Relationship Concerns
Why Inform the Franchisee of a Possible Acquisition? • Franchise relations. • The relationship between franchisor and franchisees can range from supportive to demanding, streamlined to tangled or any combination in between. • Franchisors have existing contractual vertical distribution systems in place through their franchisees. • Cooperation of the franchise system can greatly facilitate the transaction. • A potential buyer should not ignore the fact that the franchisee is clearly an interested and affected party and stakeholder. • A potential buyer should have a game plan in place and clearly communicate it to the franchisees to help them adapt and evolve to the impact that the transaction will have on their operations
Franchisee Concerns • The franchisee will have legitimate questions and concerns. • What are the buyer’s plans for the acquired system? • Will the buyer be sensitive to the rights and concerns of franchisees? • What is the financial strength of the buyer? Can the buyer afford to properly support the franchise system? • What is the reputation and management philosophy of the buyer? • To what extent will there be territorial overlap and how will it be handled? • It is crucial for the buyer to anticipate these concerns and communicate with the franchisees.
