Multi-Unit Franchisee Magazine Issue II, 2011 | Page 66
Private equity
tor? To expand through the acquisition of new units or territories? Fulfill their development schedule when banks aren’t
lending? Have capital available when an opportunity arises?
Remodel or upgrade their units (an expensive proposition if
a significant number of their restaurants or hotels are due
for a facelift)? Make the first step toward the exit through
a deal that requires the operator to stay on for a number of
transitional years? Family succession? Or simply to sell the
company and retire?
In some deals, says Stiles, operators can do partial cashouts and stay on as they phase themselves out. “If they want
to take some chips off the table in terms of a distribution,
some private equity firms are okay with that.” Is it time to
put the kids through that Ivy League college? Finally buy
that vacation home by the lake? Travel with your spouse,
now that the kids have moved out? The shape of the deal
really depends on the stage of your business and your goals
over time.
“For the next few years in our business lifecycle, what is the
trajectory? Do we want to supercharge or put it on steroids?
Do we give up control, majority ownership, as the price to
pay to play in the big leagues?” Hashim asks. As for whether
or not to take on a private equity partner to achieve his goals,
“It’s a business decision for me, the emotional part is not critical to me. I have not written it off by any means. I continually
review our business plan.”
are you big enough?
The answer to this depends on the size of the fund, its focus
(restaurants, service, B2B), the time horizon on their capital,
and, often, personalities. Opinions vary on how big a franchise
company has to be for a private equity deal. Here are some
thoughts from the experts.
With the cost of due diligence (time, energy, money), private
equity firms often need revenues of $10 million, $20 million,
or $30 million to make the deal worthwhile, says Loyle. “We
always had some pretty large multi-unit operators out there
but nobody understood it. Now they do.”
“Franchisee deals are very small for these guys,” says Hashim,
and the opportunity costs of getting in bed with franchisees
are a factor. “They can place $200 million deals at the drop of
a hat. You have to get to a point where it makes sense for them
to entertain smaller deals.”
Most private equity deals on the operator side have been
in the $3 million to $15 million range, says Monroe. “In most
cases it’s been smaller players looking to hook up with significant operators.”
Private equity firms won’t buy something with 5 units,
they want large transactions in good brands that they can
scale, sale