Restaurant Mergers & Buyouts and Advice For Franchisee Associations

Since February, 2010, there has been a spate of chain restaurant merger and acquisition action underway: CKR (Carl’s/Hardees’s), Papa Murphy’s,  Rubio’s , On the Border, Lubys buying Fuddruckers (a $60M purchase was announced via Chapter 11 auction results); and reported buyer's interest in Wendy’s/Arby’s.

 Some of the prices paid have been pretty low (CKR) and some much higher.

This was all somewhat predictable. All of these transactions involve franchisees in the mix.

In some cases, private equity (PE) firms are eager to rebalance their portfolios and sell their concepts outright, or to buy the chains for later turnaround/later initial public offering (IPO).  And Denny’ recently had the battle royale of proxy contests, where an outside, dissident force hoping to get board seats was narrowly turned back.  

How the debt is done, what the leverage and interest costs are what the plans for management, supply chain and future business expansion matters to franchisees.

For most of these chains, about 80% of the stores are franchised, and the franchisee owners collectively have more money invested in the current total enterprise value than does the company.

Just today, I saw a prominent restaurant security analyst’s report that valued franchise earnings (company franchise operational profit, the royalty stream) at twice the multiplier rate of company owned stores. Wow. That’s a lot of money for that fairly predictable piece of the top line that the franchisor receives in royalties.

Of course, associations aren’t consulted nor have much information about this. The company views the buyout deal as complicated enough without involving franchisees.

Here are some suggestions for franchise associations:

  1. Buy some company stock. That elevates the franchisee associations a bit, and gives access to stockholder meetings, and other communications.
  2. Monitor the news, and include articles in your newsletters. Both the International Association of Franchisees and Dealers and online trade journal Blue MauMau have daily news clips and columns touching these topics.
  3. Document and come to agreement on your business strengths and weaknesses. And how to respond. You may need this information someday. 
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While it takes a good deal of sophistication and care, franchisee associations can exercise a strong voice in acquisitions.  Buyers may  pay a higher premium and are more likely to buy systems if they see harmonious relationships with franchisees and a win-win culture.  And thay may pay a lower premium and be less likely to buy if they see the opposite.  Also, if a numbers-cruncher is looking to buy the system to reap what it considers unrealized value by tapping revenue streams in a way that prejudices franchisees, associations should make their voice heard about how they would plan to respond.