Franchise Private Equity Webinar 11 2010

8/6/2019 Franchise Private Equity Webinar 11 2010

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Your Hosts

Craig R. Tractenberg

Partner, Franchise

Nixon Peabody LLP

M. Avi Epstein

VP, Legal Affairs

Sterling Partners

Darrell Johnson, CFE

President and CEO

FRANData

Christine Friedberg, CFE

Dir of Sales Innovation

FRANData

Daniel F. Dovi

Associate, IP

Nixon Peabody LLP


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Dan Dovi| Associate | Rochester, NY

CLE Information

An attendance CLE verification codewill be

announced at the end of the presentation.Please make a note of it.

CLE documents are downloadable from theAdobe Connect file share box on your screen.

Complete and return your CLE certificate ofattendance and evaluation form to NixonPeabodys CLE assistant (Lauren Gomes

[email protected]).

When we receive your attendance verification

form we will issue you a certificate ofcompletion within 10 days.

All attendees will also receive a link to the

presentation slides and a recording.


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Craig Tractenberg | Partner | Philadelphia, PA; New York, NY

Agenda

Private equity landscape: where are we in the cycle?

Why is franchising appealing to private equity?

What kinds of things are happening now?

How do you prepare for private equity funding?


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Darrell Johnson | President and CEO, FRANdata | Arlington, VA

Private Equity Landscape

Where are we in the cycle of private equity investing activities, and whenwill the money become available?

Fundraising

Investment

Exits


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Christine Friedberg | Director of Sales Innovation, FRANdata | Arlington, VA

Fundraising


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Fundraising Overhang


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Fundraising

Investment

Exits


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Deal Size

Source: PitchBook*Through Q3

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Fundraising

Investment

Exits

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Exits

*3Q 2010

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Why is Franchising Appealing to PrivateEquity?

1. Proven business model: brand or concept has already been developed,successful, and expanded

2. Predictable and recurring revenue stream

3. Underlying demand for brand or concept or product or service

4. Franchisors, and/or existing management teams knowledge of market and

business5. Clarity and transparency in franchise business standards, operations, and

earnings

6. Growth model straightforward to execute

7. CapX needs are usually modest

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What Private Equity Firms Look For in aFranchise Concept

1. Market share and/or differentiation2. How make $

3. Opportunity to grow business in 3 to 5 year time frame

4. Proven management

5. Good system support infrastructure

6. Solid unit economics, low adverse unit turnover

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Avi Epstein | Vice President, Sterling Partners | Chicago, IL

Where is the Company in its GrowthCurve?

Private equity firms view the investment opportunity differently based onthe size and trajectory of the potential investment. Important factors:

Early growth stage

Cash flow positive

Differentiated product offering (innovative? how many competitors?)

Does the franchisor have its act together (processes and procedures)

Solid (although lightly tested) thesis on unit economic model

Knowledge of customer base

Larger franchise businesses

Steady income (EBITDA stream)

Proven unit economic model

Quality of franchisee system

Stability in the operating/financial model

Competitive landscape

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What Kinds of Things Are Happening Now, andWhat Deals Have Already Occurred?

Franchisor Investor Purchase Price

Burger King 3G Capital $24/share, 9x EBITDA

Papa Murphys Lee Equity Partners Estimated at $180 million, 10x

EBITDA

Massage Envy Sentinel Partners Not disclosed. $2.8 millionEBITDA

ReBath Webster and Sorenson Capital Not disclosed. $5.7 million

EBITDA

Rubios Mill Road Capital $8.70/share, 7.5x EBITDA


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Concerns Beyond EBITDA

How should a franchise system prepare for private equity funding?A. Franchise sales dynamic (private equity invests in multi-unit franchisees, or

franchise networks, as well as franchisors)

B. Differences between sales to individual franchisees and large private equity

investors

C. Negotiating control: Equity financing results in some business decisionsbeing made by the investor

1. Private equity is focused on investing not management, but requires a certainamount of control

2. Private equity wants to know when to get in and when to get out

3. Exit strategies and some flexibility in the typical franchise agreement are key to aprivate equity deal and are elements that will affect how franchisors and multi-unit developers operate

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B. Negotiating control: the private equity investors perspective1. Exit Strategy: key elements for private equity funding in multi-unit

developers or franchise networks

a) Transfer restrictions (when may franchisees exit and who may enter the system)

a) Franchisors right of first refusal and options to buy

b) Restrictions on initial public offerings

b) Development right for additional units or new territories

2. Other provisions particularly important to private equity investors

a) Restrictions on ownership of other brands/concepts, in-term non-competes, post-term non-competes (operating multiple brands, selling similar products)

b) Owner involvement in daily operation of business (non-owner representative)c) Training requirements (certified trainer)

d) Personal guarantees for equity owners (risk exposure and predictability)

e) Clarifying or modifying franchisors sole discretion provisions

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C. Negotiating control from the franchisors perspective protecting thebrand and franchisor interests:

1. Private equity investors ask how can I grow the brand and exit the

investment after reaching the desired return

2. Franchisors ask how important is growth; is it strategically more important

to focus on brand/concept improvement; how much control should Irelinquish?

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3. Key Provisions from the Franchisors perspective:a) Maintain control over brand standards and the franchise system (confidentiality,

specifications/standards, image construction, production standards, supplyagreements)

b) Maintain strict control over all IP especially considering the potentialweakening of non-compete covenants

c) In the absence of personal guarantees, negotiate other financial protections

i. Letters of credit

ii. Ensure general partner of the private equity investor has and maintains aminimum investment in the acquiring company

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21/26Craig Tractenberg | Partner | Philadelphia, PA; New York, NY

Getting Ready for the Dance of Diligence

1. Using the bankers and lawyers effectively2. Organizing and retrieving archives

3. Do you need a trade secret audit?

4. Proactive brand and patent management

5. Assessing the role of franchisees in the process

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Thank you! Questions?

Craig R. Tractenberg

Partner, Franchise

Nixon Peabody LLP

M. Avi Epstein

VP, Legal Affairs

Sterling Partners

Darrell Johnson, CFE

President and CEO

FRANData

Christine Friedberg, CFE

Dir of Sales Innovation

FRANData

Daniel F. Dovi

Associate, IP

Nixon Peabody LLP

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On the Nixon Peabody Website

Upcoming webinars

December 14, 2010: False Advertising

Recent recorded webinars

Sustainability for Franchise Systems

Best Practices in Protecting Your Brand in the New Media

Mid-Year Franchise Case Law Round-up

Document Retention and Destruction: Issues for Franchisors

Alerts

California Franchise Relationship Act sets the floor, not ceiling offranchisee rights

Franchise industry receives a jolt from the Small Business Jobs Act

Choice of law and forum provisions in franchise agreements: jurisdictionaldifferences in enforcing the covenant not to compete

Federal judge likens franchising as business to modified Ponzi scheme andholds that franchisor is employer of Massachusetts franchisees

U.S. Supreme Court raises threshold for constructive termination andconstructive nonrenewal

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CLE Information

Attendance CLE Verification CODE:

NPCLE NPCLE 11172010

Send forms to:

Lauren Gomes

[email protected]

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Thank You! Contact us

Twitter: @nixonpeabodyllp

Craig [email protected]

Avi [email protected]

Darrell [email protected]

Christine [email protected]

Daniel [email protected]


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Franchise Private Equity Webinar 11 2010

Documents

Transcript of Franchise Private Equity Webinar 11 2010