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Basics Track: Franchise Mergers & Acquisitions

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Presentation on theme: "Basics Track: Franchise Mergers & Acquisitions"— Presentation transcript:

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2 Basics Track: Franchise Mergers & Acquisitions
Michael Bidwell, Andrae Marrocco, Brian Romanzo, and Andrew J. Sherman

3 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

4 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

5 Overview of the Process
Deal Origination Initial Analysis & Strategic Plan Initial Valuation Management Meetings Multiple Levels of Due Diligence; Adjust & Refine Projections Negotiate Documentation Funding Closing Posting Closing Integration & Improvements

6 What Should Buyers Consider When Buying a Franchise System?

7 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. Global Expansion Competitors Key Vendors & Supply Efficiencies End Customers of the Franchisee Strength of the Franchise System Industry Trends Brand and Reputation

8 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

9 Determine the Benefits
01 Does the target franchise system fit into the long-range strategic growth plans of the buyer? 02 Are the target’s products and services competitive in terms of price, quality, style and marketability? 03 What key IP/Technology/Vendor/Supply/Co-Branding agreements make-up key elements of the franchisors system? 04 What is the target’s past and current financial condition? 05 Are the future projections and growth plans of the target realistic? How will they change/be impacted post-closing?

10 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

11 Valuation Variables Quality of Franchise Agreements Issues to Examine Pending Litigation / Regulatory Inquiries Strength of Trademarks, Brands, Social Media (Domestic/Global) Depth and Breadth of Franchise Development Team Quality of Strategic/Vendor Relationships Performance of Company Owned Units Franchisee Relationships (Multi-Unit, Single-Unit, FAC’s, F-Zee Associations, etc.) Training, Operations and Field Support Programs and Manuals/Team

12 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

13 The Buyer Should Ask… 01 What approvals will be needed to effectuate the transaction? 02 Does the transaction raise any antitrust challenges? 03 What are the potential tax consequences as a result of the transaction? 04 What are the buyer’s potential post closing risks and obligations? 05 Have the target’s franchise registration and disclosure documents been properly filed and updated? What problems have they experienced? When is the last time the FDD/FA were strategically reviewed? 06 How and when should the franchisees in the system be contacted/informed as “stakeholders”?

14 Due Diligence Strategic Assessment of Current Franchisee Matrix
Catalysts Leaders Under- performers Marginal “B” Players Influencers Franchisee Matrix Innovators FAC Members Rabble Rousers

15 System Underperformance Concerns
Due diligence review can uncover several forms of underperformance of the franchise system which should raise flags for a buyer. Concern Reason Franchisee Royalty Underperformance This can lead to revenue shortage and can damage brand image Quality of Product A product line/menu mix which has quality or staleness issues can damage brand image and dilute consumer loyalty Systemic Underperformance When the franchisor has failed to enforce system compliance and QC standards the brand can suffer, revenue can fall and quality can be harmed Generational Underperformance Lack of a succession plan can cause uncertainty and lack of growth at the unit level if relationships become stale or taken for granted

16 Due Diligence Impact Purchase Price Structure (Adjustment to Terms)
Relationship Concerns Allocation of Risk and Risk Tolerance (When to walk away)

17 What are the Common Impediments to Successful M&A?

18 Important Factors to Successful Franchising M&A

19 Communication with the Franchise Network

20 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

21 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.

22 Specific Issues for Merging Systems

23 Key Terms in the Purchase Agreement

24 Post-Acquisition Intetregration

25 Questions?


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