The Role of Franchise Relations in Mergers and Acquisitions

Solid franchise relations is a key element to a strong and viable franchise system, particularly when combining two franchise systems.

By Bruce V. Bloom, CFE, and William S. Vincent

Mergers and acquisitions — whether defined as third-party acquisitions by private equity, private investors, strategic buyers, family members, or the franchisees themselves — have become an important and growing activity in the franchise industry today. This activity has involved not only the acquisitions of franchisors and their systems but also the franchisees themselves.

In 2014, the McLean Group, an independent investment bank, tracked more than 300 private equity firms that had invested in franchising and were active in the market. According to its report Mergers & Acquisitions in Franchising: 2014 Year End Overview: “Almost all of these firms are looking for additional brands in which to invest. In 2014, at least 20 deals were completed in the franchise industry by private equity firms. Valuations for these franchisors generally have been considered to be at a ‘premium’ — or at least at levels considered above average M&A deal valuations in the middle market (i.e., many franchisor transactions are completed at high single-digit, if not double-digit EBITDA multiples).”

Given the importance that franchise relations, confidentiality, trust, transparency and well-planned communications play in the M&A process, it is not difficult to understand why there should be a major emphasis on the “best practices” in franchise relations.

IFA represents more than 1,100 franchise organizations operating within a variety of industries, segmented further into a vast array of vertical markets, and all located within a kaleidoscope of geographic and cultural environments. With all this diversity it is no wonder there is no single strategy for growth and development within the industry. As franchising has matured the practice of mergers and acquisitions, venture capital investments, family and partner successions have all grown substantially as growth and ROI strategies.

New M&A Handbook Available

IFA’s Franchise Relations Committee has focused on the significance of franchise relations in the franchising industry. It has developed a significant resource library of articles and reports focused on recognizing and enhancing franchise relations in our industry. The Role of Franchise Relations in Mergers and Acquisitions handbook was recently completed with the intent to discuss the impact of franchise relations in M&A activity and to present suggestions for best practices to consider in effectively managing franchise relations before, during and after the process.

We believe these recommendations will also serve as a basis for any franchise system in improving and maintaining effective franchise relations within its system. These recommendations are focused at both franchisees and franchisors. The publication is also intended to provide recommendations for franchisees in preparing their businesses for potential M&A related activities.

Franchise Relations Start at Day One

The handbook focuses on some key elements in franchise relations, beginning with the premise that effective franchise relations starts from Day One with any franchise system. It can be effective only if ownership and senior management set the tone and make the commitment to the relationship with its partners, the franchisees.

The handbook provides insight into the potential impact franchise relations may have on the value of the franchise systems, its brand, and more. It discusses initial activities that need to be implemented from the initiation of the system to avoid potential issues (and an impact on its value) in the future. It identifies a number of elements that a potential acquirer in an M&A event will evaluate in establishing the value of the brand, system and assets. These discussions are relevant to franchisee locations, since the value of an individual franchised unit may also be impacted by the perceived value of the brand and system.

Also discussed in the handbook are not only the fundamentals of solid, productive franchise relations, but how to utilize those relationships in an M&A event to protect the brand itself, the franchisees’ assets and effectively manage the transition following an event. It discusses the realities involved in franchise relationships before, during and after an M&A event both from the acquiring and acquired systems.

It provides recommendations on other key elements that may impact a transition such as vendors, landlords, financial sources, your customers, and other key areas. While an M&A event does involve a unique set of circumstances, with external elements having an impact on when, where, and how  communications can occur, it provides suggestions on how to most effectively manage these circumstances.

Key to Success

Franchise relations is a key element to successful franchise systems. The practice impacts not only the ongoing operation and development of a franchise system but can have a significant impact in merger and acquisition activities.

A franchise system with strong unit-level economics, capable franchisor corporate management, solid growth performance and potential, a viable brand, and other essential components possesses strong foundations for maximizing the value of a concept, not only for the franchisor but also the franchisee’s assets. Many of these attributes are directly related to systems with strong franchise relations. Where a buyer identifies issues with a system’s franchise relationships with its franchisees and as a result, the performance of the system, it will typically modify the value it determines for the acquisition itself.

On the Other Hand…

Additionally, a system with poor franchisee relations may increase the potential risk of legal and business issues subsequent to M&A activity and consequently require the buyer to adjust its valuation accordingly.

As important is the focus on insuring a minimally invasive acquisition and integration process occurs to insure the integrity of the system, protect the franchisees business interests.

Solid franchise relations is a key element to a strong and viable franchise system particularly when combining two franchise systems. These relationships can have a material impact on the value of a franchise system and its future. Building those relationships is the result of a strategic and consistent effort orchestrated by ownership and senior management. Those efforts need to start with your first franchisee.

Bruce V. Bloom, CFE, is principal/member at Bloom and Associates. Prof. William S. Vincent is a member of the board of directors of Foot Solutions. Both are members of the IFA Franchise Relations Committee. Find them at fransocial.franchise.org.

Acknowledgement: The authors would like to acknowledge the members of the IFA Franchise Relations Committee who contributed to the development of the handbook, including Jack Pearce CFE, Annex Brands; Tom Baber, Money Mailer of Mercer, Somerset and Bergen counties, N.J.; Mitch Cohen, Baskin Robbins/Dunkin Donuts; Catherine Monson, CFE, FASTSIGNS; and David Steinberg, Jaffe, Raitt, Heuer & Weiss. Special thanks to Barbara Moran-Goodrich, chairperson of the FRC, and IFA Vice President Mark McSteen for their support in the publication’s development.