Multi-Unit Franchisee Magazine Issue II, 2011 | Page 58

By Eddy GoldBErG

Is Private Equity

Right for You?
FAQs for multi-unit operators
seeking capital in 201
1

Y

ou might not know it from reading the news, but
there’s a lot of money out there looking for a good home,
and high-performing multi-unit franchise companies
have become targets for private equity investors. Estimates of
available private equity peg the pent-up funds at about $500
billion, more than enough pie for most multi-unit franchisees
to get a slice—if they have what it take to appeal to investors.
Developments in the mergers and acquisition universe,
along with the growth in large multi-unit organizations and a
stabilizing economy in 2011, have combined to produce what
experts predict will be a favorable environment for franchise
sellers with the right stuff: a strong national brand; a positive
cash flow for the trailing 12 months; an infrastructure able to
leverage the investment; and an organization large enough to
make the deal worthwhile in terms of the costs and time involved for both buyers and sellers during the due diligence/
courtship process, which can take six months to a year or more.
Real estate assets are a big plus as well. (For more on the 2011
M&A outlook, see page 90.)
Even as the economy writhes its way toward recovery, however, getting your hands on the money—and your mind around
the ramifications of taking on a private investor partner—is
another story. Yes, interest in high-performing franchisee organizations by private equity firms is rising, but is this a good
option for multi-unit operators in need of capital? Is the cost
of money—an active partner, accountability, loss of autonomy
to investors that typically seek a controlling interest—worth it
to a franchise operator used to calling their own shots?
We asked a dozen players—franchisees, attorneys, and
deal-makers of various stripes—to tell us what multi-unit
franchisees should know about the current state of the private

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Multi-unit Franchisee Is s ue II, 2011

equity market, the pros and cons of taking on a private investor partner, and the tradeoffs involved. The answer, of course,
is, “It depends.” The financial terms of the deal are an obvious
critical consideration, but more important, say many, is the relationship between the operator and the investment company.
Is there an alignment of goals? Can an independent-minded
operator get along with an active board during a partnership
that can span five years or more?
How will a capital infusion help achieve a franchise company’s goals over the short, medium, and long term? Is it needed
for expansion within a territory or brand? Strategic acquisitions? An initial step toward an exit in 5 or 10 years? Or, for
food and lodging brands, a way to pay for expensive remodeling obligations?
For most private equity players, the goal is to find a reasonably safe, high-return vehicle for investors to park their money
in for a limited time and make a profitable exit. Following the
end of the high-flying M&A years of 2005–2007 (see graph,
page 57), many investors were disappointed by their returns
in recent years, and are still fairly cautious about doling out
funds—except to those with a positive cash flow and a track
record of success backed by solid management practices. Balancing their investors’ demands to find opportunities for their
pent-up capital, private equity