Exit Strategies for Multi-Unit Operators

For multi-unit owners, planning an exit strategy is something to consider long before investing in that first unit or concept. What are your long-term goals? Would you like to sell in five years? Ten? Pass the business to a family member? Make a clean break, or keep your hand in? Is trading your cash flow for a lump sum the best way to go? What about seller's remorse?

Sounds complicated, and that's only the beginning! Area Developer asked four multi-unit/multi-concept owners and sellers, an attorney, a franchise sales consultant, and a "money man" for their perspective on the pros and cons of different exit strategies.

Let It Roll

In 2000, Allen Peake was the CEO and a minority owner in RMS Family Restaurants, a $100 million-plus company operating more than 130 units in Georgia and Florida, including about 75 Popeyes Chicken & Biscuits restaurants.

"The board started to sell the Popeyes because they were doing so well," says Peake. "And then, boom, once we sold them, it just made sense to go ahead and sell everything." In this case, "everything" was about 35 Shoney's, 14 Fazoli's, 11 Captain D's, and two Church's. The next year RMS was no more.

RMS employed an outside firm to market and negotiate the deals. Each concept sold to different multi-unit operators. "In most cases, your best buyer is another franchisee," says Peake. If that franchisee has a contiguous territory, so much the better.

The Popeyes buyer was a large, aggressive Popeyes operator based in Miami and looking to expand. "The bulk of our restaurants were in Florida, so it made very logical sense for them to be interested," he says. The 14 Fazoli's were sold to an existing Fazoli's franchisee.

Peake, along with Mike Chumbley, chief operating officer at RMS, bought the 11 Captain D's after outbidding another Captain D's franchisee. Even though he and Chumbley were senior executives, they weren't given the Captain D's on a silver platter. "We bought them for a very fair price," he says. They formed C&P Restaurant Co. in Macon, Ga., and later bought three Cheddar's Casual Cafés.

"Timing is everything. You want to sell when your concepts are high," says Peake. That was definitely the case for RMS's Popeyes restaurants. "We were coming off really strong sales increases. We had just remodeled all the restaurants, our cash flow had increased significantly over the past two or three years, and we had some very good growth opportunities. It was a perfect time to sell."

Shoney's represented the other end of the spectrum. "In hindsight we should have sold them about 1991 when they were at their high. They took a nosedive for a long time to the point that we had to sell them at a low." The Shoney's units were sold to a Denny's franchisee - a direct competitor. "We were able to work that out with Shoney's Inc. That was the only one that was kind of a little unusual," he says.

"So who's got the crystal ball?" Peake asks. "You've got to know when is the right time to sell - if that's what you want to do."

Time to Reap

From an exit strategy perspective, the key is the timing, agrees Clarence Mitchell, III, CEO of Tennessee-based Serve Holdings. "You always want to exit at a time when the opportunity is ripe so you can maximize your investment."

In 2001 Mitchell sold his 15 Taco Bells to a minority partner in Charlotte, NC. "He made an offer that was fair and equitable, and it made sense to us. At the time I was in the process of wanting to look at some other expansion opportunities, so the timing was just right for me," he says.

Selling to a minority partner or someone already in the company usually is a smart move for everyone. "They generally have a better understanding of the value end as well as the upside going forward," he says.

The best timing for a sale, says Mitchell, is 1) when performance is meeting projections, and 2) the owners have been in it long enough to get the equity out of it they had planned. The offer, he says, "met our objectives and the criteria we had, and we decided to move on it."

Today, Serve Holdings is busy building equity in its Captain D's investment. After closing on 20 corporate locations in November 2003, the company is completing its first remodel, doing a scrape and rebuild of another location, and permitting two new locations. "We've got a lot of development going on," says Mitchell.

Choosing Your Moment

"If you think your business has any kind of component that might be trendy or faddish, then absolutely have it in your plan to sell while the market is still good," says Howie Bassuk, founder and president of The Franchise Network Group (FranNet). While you might be holding the next Starbucks, Bassuk prefers more reliable steeds. "The more stable the background industry is going in, the better I would like it," he says. Service businesses are exemplars of those Old Reliables: quiet, steady performers consistently in demand, like hair cutters or maid services.

Services also have the virtue of being absentee types of businesses, run by managers and executed by employees. This makes them easier to sell at any time, as opposed to a more hands-on concept that depends on the skills or personality of the individual franchisee. The goal, says Bassuk, is to create the maximum number of selling options and minimize the ups and downs so that it's always a good time to sell. "The more stable, the more the demand holds up, the more say you have in determining that time," he says.

Who Can I Sell To?

The first place to look is to another franchisee in the system who wants to grow, says Hans Sohlen, of Sohlen Franchise Advisors in Minneapolis. Begin in your local or regional market, he says. If nothing comes of that, expand outward on a national scale within your system. If the geography works for them, these buyers can plug your units into their infrastructure, adding value for themselves and dollars to your selling price.

If that doesn't pan out, the next place to look is the franchisor itself. "I always find the best franchisors not only franchise, but also operate corporate-owned locations," says Sohlen. No one understands your business and its value more, and if they are motivated to buy back units, they have the infrastructure to handle it.

Franchisors generally don't pay top dollar to buy back units, but that's not an ironclad rule. If the franchisor operates its own units, and the units for sale are in a contiguous territory, chances of receiving a better price improve. If the units are distant or in a secondary market, the franchisor will probably offer less.

Specific, often unique factors, such as preparing to go public or gussying up the system for its own merger or acquisition activity often play a role. Sohlen said he's seen franchisors pay "pretty full price" under the right circumstances; Burger King has bought back units at 5.5 times earnings, for example. "It's all a function of do they really want it," he says.

With two strikes, the next pitch is outside the system, first to an existing or potential franchisee who wants in at the multiple-unit level. A franchisor usually likes a buyer who comes in with capital and can grow the brand further, especially if they are experienced operators in the same industry. On the other hand, if the purchase is highly leveraged and the buyer has little industry experience, that represents a greater financial risk the franchisor will likely frown on.

Many other potential buyers exist outside the system, such as an individual with private investors and bank financing, or an institutional equity fund. The problem with funds is that investors will want to make their 25-30% on their equity. Success on those terms hinges on their 1) buying it right, and 2) operating it well. To succeed, they must buy as low as possible and hire and pay a management team. "As a seller, you're probably not going to be able to get as attractive a price point," says Sohlen.

A Whole Not Greater than Its Parts

If you're a multi-unit operator with many units in the same system, you can try to sell them all at once or break them up into packages that might be more appealing (or affordable) to potential buyers. Beware of selling off the best units and leaving yourself with a few orphans you may have to sell off for less.

If you're a multi-concept operator, don't bank on selling all your systems to a single customer. If someone offers eight Burger Kings and 16 Great Clips, for example, nine times out of 10 nobody will buy both. "By having both businesses under one umbrella you haven't created a greater whole," says Sohlen. "It may reduce risk but you've created no additional value."

There are operational savings in terms of increased efficiencies and reduced overhead, but at most, he says, G&A amounts to 4-5% of your costs. After all is said and done, "You're lucky if you save 1-2%," he says. "I have seen very few successful plays where somebody has successfully leveraged infrastructure."

Operating in the Real World

The ideal, of course, is to run your business as if you were selling it tomorrow, or even today, allowing the multi-unit owner to sell at the perfect moment. The reality is usually far from that.

First, says Sohlen, "Most are so busy looking for a way to grow, they're not thinking about selling." Second, many are private, family-owned businesses and a lot of their thinking is tax-driven. Thus, when the opportunity to sell arises, they are ill-prepared. "I see 90% flunk at selling at the right time," he says. The reasons may vary - divorce, illness, partners not getting along, sloppy record-keeping - but the results are the same. "While they should be able to do it, most franchisees do a poor job at running the business as if they're ready to sell it."

Start Preparing Yesterday

For those considering the management buyout as a future exit strategy, the time to start grooming your business for that is now, says Bassuk. That means training and preparing current management, or developing a plan to bring in new management to take over later. While you can always change your mind, he says, the goal is to have as many sales channels as possible to maximize your price.

From both a personal and a legal perspective, this also means choosing and structuring your multi-unit and/or multi-concept operation to your best advantage - both operationally today and organizationally tomorrow, when it comes time to sell.

Most people don't think in detail about their exit strategy when they go in, but they should, says Bassuk. "One day, sooner or later, they'll want to be out of it." One pitfall to avoid is making yourself necessary. "There are people who buy multiple territories and work them and are the indispensable link in the chain," he says. If the seller's expertise is indispensable, that doesn't lend itself to a clean exit strategy nearly as well as an operation run by its managers, who often opt to become part of the deal.

"Plan your exit strategy from the first acquisition," says Dennis L. Monroe, a partner and chair at Krass Monroe, a law firm in Bloomington, Minn. That means structuring your business in ways that don't reduce your exit strategy options. "Some of that's a tax-side structuring so it's tax-favorable for a sale. Some of it is trying to maximize your price by keeping the real estate if possible. Some of it is not making your structure overly complicated so that people can't understand it when they're looking to buy it," he says.

"Your first plan for exit strategy is upon the acquisition, because you need to be able to think about what your exit strategy is. Too often, people don't," says Monroe. "One of the things that keeps us very busy is figuring out the structure once they want to exit or sell." Keeps the sellers busy, too.