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Exit Strategies

Feature Story:

Loyalty Deserves Rewards: Create A Rewards Program That Suits You (And The Customer!) »

By Jack Mackey

The best loyalty programs do four things:

Feature Story:

M&A Valuations To Fall?: New Rules Likely To Curtail Bank Lending »

By Dean Zuccarello

In March 2013, U.S. banking regulators issued new guidance designed to curb increasingly aggressive lending by both banks and finance companies. The new guidance is intended to provide a "safer" financial landscape and reduce the risk of a financial crisis like the one that occurred in 2008.
Background. Regulators have been under fire from Congress and the current administration for failing to address what is believed to be overly aggressive lending preceding the financial crisis. Historically, the Fed could use its open market policy to raise interest rates as a mechanism to manage lending risk. Theoretically, weaker credits and riskier transactions would be unable to support the higher interest costs, and thereby reduced lending risk...

Feature Story:

The Myth Of Multiples: Beware Of Over-Reliance On EBITDA »

By Dean Zuccarello

Whether the mergers and acquisitions market is in a hot upswing or in a down cycle, one valuation measure remains the primary focus in nearly all transactions: the multiple of EBITDA (or cash flow).
This seems to be universally true, as it is used by buyers, sellers, finance sources, franchisors, franchisees, investment banks, and private equity groups. In more than 23 years of managing M&A activity in the franchise sector, we continue to scratch our heads at the overemphasis and focus on EBITDA multiples. This article explores what we describe as "The Myth of Multiples," and how deal-makers put too much emphasis on this inconsistent measure of value.
While the arithmetic to calculate a multiple is simple (transaction price divided by EBITDA), the variables in the calculation are not quite so simple...

Feature Story:

Preparing For Departure: Experts Share 3 Crucial Planning Steps For Leaving The Business You Built »

Multi-Unit Franchisee

More and more small business owners are selling their companies, with sales hitting a four-year high in early 2013 in the United States, and Canada predicting its largest small business turnover ever in the next five years.
"Many of our CEOs are baby boomers approaching retirement age," says Kathleen Richardson-Mauro, co-author with Jane M. Johnson of a practical new guide, "Cashing Out of Your Business," (www.richardsonmauroandjohnson.com).
"We're about to see a tsunami of ownership transitions and Kathleen and I worry that too many of these small business owners are not taking steps early enough to plan for it," adds Johnson.
Richardson-Mauro, a Certified Financial Planner, and Johnson, a Certified Public Accountant, specialize in helping business owners successfully transition out of companies and achieve their goals...

Feature Story:

Let's Make A Deal! »

By Dean Zuccarello

Keep your eye on the big picture during negotiations
Recently, we represented a multi-unit operator in the sale of a tier-one franchise business that had to overcome numerous hurdles to achieve a successful outcome. The company had suffered as a result of the recession, challenges in the local economy, and some operational challenges on the part of the existing operator. The company was underperforming the brand and lacked the resources needed to pull itself out of its downward spiral. Many units were old and tired, and in desperate need of remodeling. Several units needed to close. Operations had suffered and turnover and employee morale were a continuing challenge.
To arrive at a successful transfer, concessions were required from landlords, lenders, and the franchisor...

Feature Story:

Economic Obstacles »

By Darrell Johnson

Despite the economy, it's been a good time to be a multi-unit operator



Multi-unit franchise operators are about to exceed the 55 mph speed limit (or in this case, the 55% limit). We can now officially say that they control 55% of all franchised units in the U.S. The 80/20 rule also applies now to franchising. Those 55% of all franchised units in the U.S. are controlled by 20 percent of all franchise unit operators. Both are records.
The steady expansion of multi-unit dominance got started in the late 1980s so it is relatively recent in the context of the franchise business model. As recently as eight years ago there were more units controlled by single unit operators. The pace of change has been consistent and rather predictable with a current rate of change of about one percent each year...

Feature Story:

Are You Truly A Seller?: The Market Is Ready--are You? »

By Dean Zuccarello

You've heard it before, and have likely seen it firsthand in the market: interest rates are at historic lows, franchisee consolidations and refranchisings are prevalent, lenders are hungry, pent-up equity is available and waiting to be deployed, and deal activity is high. You might be contemplating taking advantage of this environment. But are you truly a seller? To help you make that determination, let's address some critical considerations.

Feature Story:

Unique Opportunity--Act Today! »

By Dean Zuccarello

We are experiencing a rare alignment of stars in the franchise finance world right now, and it's essential that operators act quickly to take advantage of this situation, before the party's over. To understand the current financing environment, let's take a look at the economic "big picture."

Macroeconomic framework
Signals for overall economic recovery continue to be mixed. Households are deleveraging: the ratio of household debt service to income has reached a 30-year low. The housing market is on the rebound: inventory is down, prices are rising, and financing is cheap. Yet the latest figures show a negative GDP for the U.S. in the fourth quarter of 2012, and consumer confidence has begun to wane. Jobs reports seem to swing up and down...

Feature Story:

Future World: Franchising 2018: Position Yourself Now For The Shifts Already Under Way  »

By Dean Zuccarello

Welcome to 2018. The future of franchising is upon us. What does the landscape look like? We don't have a crystal ball, but we can make some educated guesses based on what is happening around us today, and what is likely to transpire in the coming years.

The groundwork
President Obama has recently finished his second term in office. The Affordable Care Act has been absorbed by the many businesses it affects, and these businesses have learned to deal with the incremental costs through managing hours and taking price increases as the market allowed. Business owners have also adjusted to increased income and capital gains taxes, and have devised strategies to minimize the bite. After a few years of historically low interest rates and central banks pumping liquidity into the economy, inflation has begun to kick in, and this is now putting a lot of upward pressure on commodities...

Feature Story:

The Gift Of Organization: A Six-Step Action Plan To Prepare Your Business For Sale »

By Dean Zuccarello

The decision to sell your successful multi-unit business is now firmly on the horizon. You have come to terms with the lifestyle implications and changes. What, specifically, can you do now to prepare?
First, contemplate which very real vision of the future you would prefer to have:

Feature Story:

Outsourcing To Add Value: Using Third Parties To Enhance Valuation »

By Dean Zuccarello

During the initial stages of an exit strategy engagement with our clients, we spend considerable time gaining a full understanding the client's business. One component of developing this strong grasp of the client's specific situation is uncovering situations that can enhance the overall profitability of the client's company. This process is critical in assessing the "true" value of the business, which is one of the valuable services we provide our clients.
Typically, our areas of focus will include the investigation of issues such as temporary impacts to the business (e.g., road construction), facets of the business that have not yet matured (e.g., new unit development), and corporate overhead structure to ensure that any excess owner-specific compensation and benefits are removed...

Feature Story:

Red, Yellow, Or Green?: What Signals Are Affecting Your Business? »

By Dean Zuccarello

We have made progress digging our way out of the pit of economic meltdown we tumbled into in 2007, but we certainly have a long way to go before we experience the vibrant economy we enjoyed in much of the 1990s and the early to mid-2000s. For many, it seems like we are in a state of purgatory--not knowing if we are heading to heaven or hell. So where does that leave business owners today as many face critical decisions regarding exit strategies? We are finally seeing positive signs that the window of opportunity to sell businesses is open. Will it last? Many owners seem to be at this intersection, but also seem to be having difficulty determining if the signal is red, yellow, or green. Let's take a look at our view of the signals as they relate to various elements affecting the transaction world...

Feature Story:

Finding Your Optimal Buyer: Sellers Must Learn To Look Beyond Price »

By Dean Zuccarello

When sellers are contemplating a decision regarding the sale of their business, they overwhelmingly select the bidder with the highest price, only to find afterward that this might not have been the best decision for their circumstances. Just as a financing decision is more complex than simply getting the lowest interest rate, the process of selecting the optimal buyer for a particular transaction entails more than simply selecting the one offering the highest price.
For business owners, the decision to sell requires careful consideration. Frequently, sellers arrive at their decision to sell after a long and thoughtful assessment, which includes an analysis by the seller of their personal, lifestyle, and financial considerations. Unfortunately, after the decision to sell is made, many sellers give considerably less thought to the buyer selection process...

Feature Story:

Project Financing: Should The Fix Be In? »

By Dean Zuccarello

Interest rates right now are low—very low. They’ve been low for a while. And they’re expected to remain low for the foreseeable future. So, when you go to your bank and they have only a floating-rate loan to offer you, no problem, right? Maybe… but you better make sure you’ve considered all the angles before you pass up the opportunity to convert that loan to a fixed rate.
Entrepreneurs securing new project financing are well aware that banks today typically offer only floating-rate products. Although some lenders may not offer fixed-rate loans themselves, they typically will facilitate converting the loan to a synthetic fixed rate by helping borrowers purchase an interest rate hedge known as a swap...

Feature Story:

Greed Is Good - Not!: Strive For A Fair Balance In Transactions »

By Dean Zuccarello

Gordon Gekko, the main character in the 1987 blockbuster film Wall Street, quickly became a popular cultural icon of unrestrained greed. The "Greed is good" phrase comes from his address at a stockholder meeting:

"...greed--for lack of a better word--is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms--greed for life, for money, for love, knowledge--has marked the upward surge of mankind..."

Feature Story:

M&A Activity: 2011 Outlook: Avoid Obstacles As The Climate Slowly Improves »

By Dean Zuccarello

Many restaurant operators and dealmakers are hoping for a return to the pre-2008 environment, when multiples were robust, liquidity was flowing, equity was prolific, and debt capital was plentiful.

We have seen a respectable improvement in restaurant company performance, capital availability, and M&A activity in the past six months, and we expect a recovery in deal transactions. We have seen some market players revert to what we'll refer to as the "new normal," in which buyers and sellers recalibrate valuation expectations and deal structures to reach the closing table. This caution has arisen from the difficult economy, and may be a factor for some time. However, we sense that the M&A market is recovering in lockstep with the general economy and expect 2011 and beyond to be increasingly healthy and active in terms of the deal environment...

Feature Story:

Family Matters: Franchising Families Face Unique Succession Dilemmas »

By Dean Zuccarello

Family and entrepreneur-run businesses face many unique and complex challenges, including succession planning. Generally, family businesses are more than just a place of work; there is emotional as well as financial capital tied up in the business, and passing on the family legacy can be stressful and fraught with difficulty.

It is common for small-business owners to be so consumed by running the day-to-day activities of their businesses that they forget to take a step back and contemplate transition planning for the future. Founders work hard to build a solid company, but it is important they take their own needs into account and plan for their eventual retirement and/or the transition of their company. This process becomes even more complicated when families have adult children who are active in the family business and are possible successors to the ownership and management of the company...

Feature Story:

Looking For Mr. Goodbuyer?: Exit Strategy Dynamics Are Changing »

By Dean Zuccarello

Over the past 25 years, franchising has continued to develop and become more sophisticated. The reins of the franchisor have passed from the pioneering founders to established management teams with significant industry experience. Today, many of these companies are publicly traded or majority-owned by institutional equity investors.

Franchisees, too, have grown in size and scope. Many now have a national or super-regional reach, having transitioned from small-scale, mom-and-pop operations to larger, professional, institutionalized operations. As the nature of today's larger franchise companies requires more complex capital structures, various forms of capital alternatives continue to evolve for franchised companies seeking to change ownership or fund growth initiatives...

Feature Story:

The Other Side Of The Table: Successful Buyers Understand Sellers »

By Dean Zuccarello

As we work our way out of the current recession, we are already starting to see early signs of life in the merger and acquisition market.

2010 is evolving into the year of the transition buyers and sellers have been looking for. The significant unit contraction retail establishments have experienced in the current recession is causing companies to act more prudently when thinking about their growth strategies. Many brands have recognized the limitations of new-unit expansion and the inherent risks that accompany greenfield growth. Companies that have been on the sidelines with their growth plans are now starting to reemerge with a revised strategy for growth focused on acquisition and conversion, and enhanced availability to capital to fund growth...

Feature Story:

Timing CAPEX To Valuation: Plan Capital Expenditures To Maximize ROI »

By Dean Zuccarello

Historically, franchising has accepted EBITDA as the benchmark for establishing valuation. However, as seen over the past several years, valuations can vary widely across franchisors, franchisees, and company-owned concepts.

Franchising has seen transaction multiples ranging from the low single digits up to lofty double digits. So what is the justification for this wide range in transaction multiples? What makes a buyer willing to pay 8x for one deal, but only 4x for another?

In franchising, EBITDA multiples vary for several key reasons. This article explores the effects of capital expenditures (CAPEX) on franchise company valuations, and how CAPEX factors into the ultimate value a franchise owner receives in a transaction...



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