Time to acquire another brand? valuations for '09 are down, creating excellent investment opportunities.

Author:Davies, John


The world-wide financial crisis has negatively affected most segments of our economy and franchising is no exception. In franchising, the downturn has manifested itself in declining franchisee revenues and corresponding franchisor royalties, the closing of marginal franchised locations and a decline in new franchise sales. While the fluctuations in royalties, operating units and new franchise sales certainly varying among franchisors, the overall decline in consumer confidence and the tightening of the credit market has created a very challenging operating environment for most of us. With all of these challenges, how do we as franchisors continue to grow our businesses and create opportunities for our franchisees, employees and shareholders? One opportunity for many systems would be to sustain growth during the recession by acquiring other franchised brands.

During the past five years, there has been a proliferation of new franchisors and franchised brands. Many of these newer companies are still developmental-stage businesses that rely on the proceeds of new franchise sales to sustain positive cash flow. The economic downturn has negatively affected their ability to sell new franchises and, in many cases, has flipped their cash flows from positive to negative. The tight credit market has made it very difficult for these companies to obtain additional loans to fund their operations and, consequently, they need to explore other options. Additionally, there are more mature brands that need capital to retire existing debt or reinvest in their businesses. While these more mature brands may have more options than the developmental brands, many of them will also be seeking a buyer or partial equity investor as well.

As the CEO of Merrymeeting, Inc, a company that specializes in acquiring franchisors, I have seen all of these factors create a sharp upturn in the number of franchise management teams looking to either sell completely or, in the alternative, bring in a "value added" equity partner who understands the franchising industry. I expect that this trend will continue throughout 2009 and that it will be a "target rich" environment for those of us that may be interested in growing in this manner.

Starting Point

Although it is going to be a buyer's market, franchise systems should start the development of an acquisition strategy by assessing the performance of existing operations and understanding how any acquisition...

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