Advice to Franchisees and Associations Regarding Restaurant Mergers and Buyouts

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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, just announced today, via Chapter 11 auction results, for $60M); and rumored , Nelson Peltz selling Wendy's/Arby's.  Some of the prices paid have been pretty low (CKR) and some much higher.

This was all somewhat predictable. And 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'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 have daily news clips and columns touching on these topics.

(3)    Document and come to agreement on your business strengths and weaknesses. And how to respond. You may need this information someday.    

John A. Gordon is a restaurant financial analyst and management consultant, and can be reached via (619) 379-5561, or [email protected]. 



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