May 25, 2022 •First Franchise Capital
In a recent webinar, Bruce Hostetler and Jon McClure of First Franchise Capital shared tips for franchise owners considering an acquisition. If you are considering your first acquisition or even if you have acquired many times before, the changing economic and political landscape impacts acquisition strategies and requires careful consideration. There is no set formula for successful acquisitions, but there are three main points all acquirers should think of when considering an acquisition: timing, preparation, and funding.
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Timing
Is the market suitable for an acquisition? When contemplating if the time is right for an acquisition, Jon and Bruce provide several factors to consider:
- Brand economics – Whether you are looking to expand in your current brand or branch out into a new brand, you must consider the brand economics. For example, the market is saturated with big-name burger chains, while Mexican-inspired chains are rising. The level of market saturation for the brand you are looking to acquire will impact the multiples.
- People – Before you acquire, you must determine if you have sufficient staffing to handle the new business. While acquisitions are an excellent opportunity for ambitious employees to grow and develop, they can also strain your staffing resources which are already suffering historic shortages.
- Location – Is the potential acquisition in a location that is experiencing growth? Research the population growth rates, unemployment rates, and other economic factors. Also, consider your capacity to travel and manage a location if it is some distance from most of your current franchisees.
- Cost – The cost of capital and multiples will impact the timing of acquisitions. As interest rates rise, you may need to consider including more equity in the purchase or negotiating seller earnouts. Do you have access to debt capital to fund an acquisition at the current multiples? Calculate your ROI for any debt required to acquire to determine if an acquisition will be beneficial in the long run.
It may be time to acquire when you are confident in the brand economics, have a strong team in place, and have evaluated the location and costs associated with the acquisition. However, it is necessary to continuously assess the brand, your people, the location, and the cost, as any changes in these conditions may make your acquisition timing unfavorable.
Preparation
If the timing and market conditions are suitable for an acquisition, are you prepared? There are four steps buyers should take before beginning the acquisition process:
- Grow your current business – Sellers and lenders will look at the success of your existing business as an indication of your success after the acquisition. So, before you consider acquiring another franchise, focus on the growth of your current franchise(s). With the industry raising prices, “we want to see what your traffic counts are doing, and we want to understand how you are adapting to the new environment,” said Jon.
- Prepare financials – Before you approach a seller or a lender, make sure your financial house is in order. Have 2-3 years’ worth of tax returns and financial statements available for review. According to Jon, lenders want to see solid profit margins, good contribution margins, and strong rents throughout your P&L.
- Find partners – Acquisitions can be time-consuming and complicated, but it is easier if you build a strong team of partners. Bring together legal counsel, a CPA, a lender, and consultants that understand your business and have experience with acquisitions in your industry.
- Outline goals and strategy – Lastly, write down your plan and define your goals. Share this with members of your management team and your partners. Stick to your plan throughout the entire process to avoid distractions from acquisitions that do not fit your strategy. Rely on your partners to help you stick to the plan.
Funding
Bruce recommended that franchisees begin developing a relationship with a lending partner before looking at an acquisition. He also cautioned franchisees to find a lender with similar values and expectations. Finally, consider their lending parameters and other financial metric constraints before you’re under the gun trying to get a deal together.
Additionally, consider the balance of equity and debt when looking to fund an acquisition. According to Bruce, “A larger amount of debt will increase your return on your investment. On the other hand, you don't want to have so much in terms of fixed costs that you can't sleep at night.” The third component to consider is seller financing. If the multiple is a little higher than you and your lender are comfortable with, negotiate a seller financing package. Some clients pull out equity to purchase multiple stores with a development line of credit. Regardless of the method you choose to fund the acquisition, with careful planning and input from your partners, you will be able to find the truth to a successful acquisition.
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