FRANCHISOR LIQUIDITY OPTIONS

Sponsored content by Diversified Royalty Corp.

 

FRANCHISOR LIQUIDITY OPTIONS

As a franchisor, you’ve grown your business to scale. Your business is profitable, you believe in its continued growth prospects, and you are looking to take some money off the table. You’ve read the headlines of other franchisors selling to private equity – what should you do?

Traditionally, the liquidity options to consider are limited to the following: debt recapitalisation, outright sale, or private equity transaction. There is another option to consider: royalty transaction.

Debt Recapitalization

A franchisor borrows money from a bank and pays a dividend to the owners. This approach provides modest liquidity (only ~4x EBITDA) and the franchisor retains 100% control of the business. The debt must be paid back over time. This is a good solution for owners with modest liquidity needs and a desire to retain 100% ownership of the business.

No impact on the business from an operational perspective or franchisee relations.

Outright Sale

An outright sale provides the maximum liquidity to a franchisor owner. Buyers often pay a premium multiple. The “big” offset is that you have sold 100% of the ownership, control, and future growth of the business. This solution is optimal for the owner of a franchisor that no longer wants anything to do with the business (as an operator or owner).

An outright sale has maximum operational impact and negatively impacts franchisee relations.

Private Equity Transaction

Private equity transactions have created a lot of headlines since the early 2000’s. Private equity investors often pay attractive EBITDA multiples which creates significant liquidity for business owners. Private equity investors want control and often own up to 90% of the business. By selling so much of the business, the owner has sold the vast majority of the future growth.

Private equity ownership also has maximum operational impact and creates stress in the franchisee community as the long-term relationship has changed. Private equity often seeks to make immediate changes to the business and focusses on ramping up new store openings to best position the business for resale in 3 to 5 years. 

Royalty Transaction

A royalty transaction allows a franchise owner to realize the best of both worlds: the liquidity of a private equity transaction: double-digit EBITDA multiple and the control of a debt recapitalization: retain 100% ownership, control, and future value from new store growth.

Each year, as new locations are added, the owner gets paid for new store growth based on a multiple of incremental cash flow created.

No impact on the business from an operational perspective or franchisee relations.

Analysis

A royalty transaction seems too good to be true – it is not!

A royalty transaction is possible because a high-quality franchisor is a superior business. The cash flow from the existing store base provides a stable cash flow stream. As new locations are added, the profitability of the business grows predictably.

The combination of a large upfront liquidity event with annual liquidity based on new store growth results in a far superior outcome to selling equity.

If you are seeking a liquidity event and believe in the future growth prosects of your business, the royalty option must be considered.

Learn More from Diversified Royalty Corp.

The management of Diversified Royalty Corp has been structuring royalty transactions with leading franchisor brands for over 20 years. If you’re considering a liquidity event for your franchisor business, please reach out to Diversified Royalty Corp to learn more.

There is another option!!

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