IPO fever: discover the payoff of going public.

Author:Steinberg, Carol
Position:Initial public offering - Includes related list of questions that prospective franchisees should ask about publicly traded companies

Many franchisors are finding initial public offerings (IPOs) a good way to raise money for their enterprises. For example, Gymboree Corp's Mar 1993 offering brought it a 125% gain on the NADAQ stock market system. The timing of the IPO must be right for success. Some franchisors, such as Discovery Zone Inc and Nathan's Famous Inc, use IPOs to take over ownership of some of the franchise units.... (see full summary)


In January 1993, GNC was Looking for cash. The retailer of specialty vitamins needed to pay down debt from a 1989 leveraged buyout, so it turned to a money source very popular in the franchise community: Wall Street.

GNC raised $81 million through an initial public offering (IPO). Now the debt is reduced, and the company is using the cash to open stores at the dizzying pace of one a day. GNC has a total of 1,561 outlets and plans to add 125 company-owned and 225 franchise units by the end of the year.

"Everything is based on market dominance," says GNC president and CEO William E. Watts. "The more penetration we have, the more brand awareness we generate, and the more ad dollars we get to reinvest." This year, Pittsburgh-based GNC is pumping an additional $8 million into its marketing budget -- good news for franchisees, who are required to contribute only $4.5 million of the total $30 million.

The sizzling IPO market hit a record dollar volume of $16.38 billion on 520 issues in 1993. And experts say that the fever shows few signs of cooling down -- there's still room for franchise companies to have successful IPOs. "Wall Street has woken up to the fact that franchising is a good way to do business," says Carol W. Hance of Strategic Advisory Group Inc. and formerly of Kidder Peabody.


IPOs among franchisors are blooming at all stages of a company's growth and balance sheet. Child-play franchisor The Gymboree Corp., founded in 1976, was jumping with $6.9 million earnings on $86.4 million in sales when it had its $43.3 million IPO in March 1993. Last year, it ranked among NASDAQ's top performers, with a 125 percent gain from the $20-per-share offering price.

Even companies with annual sales revenues as low as $54,000 have gone public. And despite 1992 losses, Wall Street has bid up trendy stocks such as Boston Chicken and Discovery Zone Inc. Franchise research firm FRANDATA Corp. of Washington, D.C., studied eight franchisors that went public in 1993 and found five were unprofitable in the year preceding their IPO.

Analysts say investors can sometimes forgive losses if they're attributed to interest expenses from debt, unrelated businesses, or front-end training -- or if units are performing well.

"A successful IPO requires advance planning, beginning as early as five years before your IPO date," says Frederick D. Lipman, author of Going Public.

Ideally, the time is right once franchisors have demonstrated that a concept works...

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