Analyzing The Deal: Established vs. Emerging Concepts

By: Carty Davis
Published: April 9th, 2019

There's a lot that's involved in researching and deciding on additional brands to add to your portfolio. Carty Davis, founding partner with C Squared Advisors, a boutique investment bank, has some advice when it comes to considering established (tier one) brands or emerging brands.

Davis has managed hundreds of financing, merger and acquisition, refranchising, and restructuring transactions over the past 35 years as a lender, investment banker, and financial advisor in the multi-unit franchising space.

Here's more from Davis on how to approach investment opportunities with an established brand or an emerging brand:

Tier One Brands v. Emerging Concepts

As owners and investors contemplate other brands, opportunities with tier one legacy brands will be different from opportunities with emerging concepts.

Approval in tier one brands typically is more difficult, takes longer, and requires the buyer applicant to deliver a comprehensive business plan often to senior management teams. Franchisors will ensure that the applicant satisfactorily addresses many of the following areas of importance:

• Proven operations history and excellence in current brand
• No conflict or competitive brand issues between current and new brand
• Proven track record of development and remodel history in current brand
• An understanding of the new brands development requirements with a capital plan that supports new development, remodeling, acquisitions, and timing
• A business plan rooted in empirical data that can withstand industry challenges
• A complete understanding of the capital structure, investors, investor profile and relationship to the franchisee
• Management and operations team responsible and accountable to the new brand

Emerging concepts either in your existing segment or outside of your category are generally much easier to qualify for approval. The roles may even be reversed with emerging brands as these brands may be actively pursuing proven multi-unit operators that are well capitalized to join their system. Established multi-unit franchise owners are often coveted by less established concepts. Proven, successful multi-unit operators will generally have multiple opportunities to evaluate. In these situations, the incoming franchisee generally has more control over the process. Take the opportunity to evaluate the brand, its development strategy, management team, and ownership structure. Ask yourself the important questions. Does the long-term strategy match your development goals? Does the franchisor have a good working relationship with its franchisees? How successful have other large operators been in the system? Does the new brand compliment your existing brand without creating a conflict of interest? Do you have the capital, resources, and patient investment return metrics needed to add another brand to your portfolio? Should you finance this opportunity independently or will you leverage the embedded equity of your existing operations and are your capital partners aligned?

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