Multi-Unit Franchisee Magazine Issue II, 2011 | Page 62

PrivaTe equiTy
ascertain. Everything sounds good going into it.” When performance is less than expected or growth is slower, especially
because of unforeseen challenges, how well will the parties
work together under pressure?
“The key thing is the relationship,” agrees Monroe. “Do
they really understand the operator? Are they patient, don’t
micromanage, and let you do what you do best? The franchisee
has to be able to control the operating decisions. Most private
equity groups agree with that.” In fact, it’s why they were interested in the franchisee in the first place.
“Private equity has kind of a mind of their own,” says Stiles.

Two Critical Factors

R

iley Legason is a partner at the law firm Davis
Wright Tremaine and leads the firm’s national
restaurant industry practice group. “Our firm
typically represents the operators in restaurant brands
that are taking on investments,” he says. “We help
them when somebody wants to invest in them and
guide them through the process.”
Although his focus is on restaurants, he says that
for any multi-unit franchisee organization considering
taking on equity partners for growth (as opposed to
an exit or sale), a successful private equity deal comes
down to two core issues:
1) is the investment fair in terms of the
pricing? That is, is the amount of money the private
equity group invests for the percentage they get
reasonable, or are there better alternatives for the
franchisee group? The answer to these questions, he
says, varies from group to group, but the issue the
franchisee group always wrestles with is: Is this the
best option in terms of our growth plan?
Related issues include: What does the investment
look like on the payback schedule? Are there certain
preferences attached to the percentages that will make
it difficult for the business operator to continue to exist
as they have in the past, i.e., depending on the terms,
the investor group will get a certain amount of capital
paid back before the operators do. Sometimes this
makes great sense, sometimes it doesn’t, he says.
2) is the relationship moving forward
a good fit? Perhaps even a bigger—and more
important—issue operators wrestle with, he says, is the
relationship with the people who have invested in them.
In other words, can you play well with others, or do you
need to maintain your autonomy and remain in charge?
“The partner will have a vested interest in being
sure their investment is put to good use,” says Legason.
Whether they have a majority or minority interest,
equity investors are not inclined to be silent partners,

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Multi-unit Franchisee Is s ue II, 2011

“Their vision of what they want for the private equity company could conflict with the vision of the franchise company.”
Thus it’s critically important for both parties to “fully vet
any opportunity, do due diligence as much as they possibly
can,” says Legason. “The more the parties get to know each
other and understand their respective goals, the better. It’s rare
to see a deal go quickly.”
What are your goals?

Just as private equity comes in many shapes and sizes, so do
the ways it’s deployed. What is the motivation of the opera-

he says. “They’ll want membership on the board and
to weigh in on important decisions. When you have
someone new at the table voting on the decisions,
many operators are not accustomed to that; some are
comfortable and have done it before, others are not.”
life after the deal
When a business is making money, everyone is
incredibly happy, says Legason. When it fails to meet
expectations, “That’s where things can get pretty
complicated when you have a number of people with
authority at the table.”
As an attorney advising restaurant operators
seeking private capital, Legason has been involved
in deals that later turned out good, bad, and ugly.
“We’ve seen a number of investments that have
worked out very well,” he says. “We’ve also seen the
other side of the spectrum.”
When it works (the good): “We’ve seen some very
good outcomes with some clients. There’s a group
invested in one of our clients that has management
in place that really connects with our client and their
industry. They’ve played a very valuable role—
mentorship, strategic, and advisory.”
When it doesn’t (the bad): “Often clients have
agreed to terms that in hindsight don’t seem so fair
economically. It felt like a great fit moving in, but when
they get down to working together the relationships do
not work out so well. The investor wants to wield more
influence, there are differences in strategy—it exhausts
both sides and makes the experience of being in
business less enjoyable.”
When it really doesn’t (the ugly): Assuming
the business is still viable, he says, the deal often
ends with a buyout, with one party staying or both
moving on