| “Is
There a Buyout in Your Future?” |
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by Dennis L. Monroe |
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from Franchise Times Articles, August 2001 issue |
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We have seen a significant decrease in financing sources for the franchise multi-unit industry. This decline has accelerated in the last six months. Thus, the available sources for financing are limited, particularly for the large, multi-unit operator. There are still a number of sources for the small operator such as SBA loans and personally guarantied loans that use outside personal assets to guaranty the loan.
As has often been said, the price of a multi-unit franchise business directly corresponds to the level of financing available to a buyer. As a result, sales price multiples of multi-unit businesses have declined in many cases as much as 50%.
Below are ten ways the franchisor can help troubled franchisees or a troubled franchise system:
Regardless of this fact, many people still want to sell their businesses or obtain additional expansion capital. Most franchise businesses are still viable and strong. Even though the number of sales transactions are down this year, decline can only last for so long; and in recent months we have seen a resurgence in the number of multi-unit mergers and acquisitions.
Where is this merger and acquisition activity coming from? Over the last several years "buyout funds" have developed in the multi-unit industry. Buyout funds are small, specialized funds that target certain areas of business (specifically, the multi-unit retail area). Because the acquisition prices have come down, acquisition of multi-unit operations now provide a sound business opportunity for these buyout funds.
Buyout funds' level of available funds for investment range from $10,000,000 - $15,000,000 to $500,000,000 or more.
Buyout funds can be divided into three groups:
1. Venture Funds. These funds normally invest in early stage multi-unit franchisor operations. Unfortunately, these funds are few and far between; primarily because the venture capital world has never been particularly enamored with multi-unit retailing.
2. Growth Oriented Funds. These funds look for a concept that has developed to a critical mass and can grow exponentially with additional capital. These funds look to acquire both franchisors and franchisees.
3. Value Buyer Funds. These funds are not necessarily high growth oriented investors. These funds look for strong, stable multi-unit businesses that have a moderate amount of growth and strong economic fundamentals. Value buyer funds may invest in large, multi-unit operators that have development rights in a specific area or a stable regional franchisor.
The buyout funds can provide the following options to an owner of a multi-unit business:
1. Available investment for a management buyout. A management team can partner with a buyout fund and thus, secure the appropriate capital for a successful management buyout.
2. An opportunity to obtain a premium for underperforming assets if the fund believes all that is needed for the target is a proper capital structure with adequate capital.
3. If there is a distressed situation, a buyout fund may be able to fix the financing problems and then put the business back on track.
It is difficult to locate buyout funds since they are not a defined industry and do not have an indexed listing. In most cases, in order to contact a buyout fund the franchisor or franchisee needs to contact people who are familiar with the mergers and acquisitions area of your specific business retail sector.
In summary, while the senior lending and venture capital sectors of the multi-unit financing are tight, a new hybrid group known as buyout funds are alive and well and providing a significant amount of capital to the industry.
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