Hire an investment banker or do it yourself?

Multi-unit operators are a sophisticated culture within the franchise industry. They typically are streamlined, aggressive, think big, plan ahead, and are focused on continual growth. So why would a successful area developer want to sell a particular brand or chain of units? Lots of reasons: retirement, health issues, liquidity, a change in direction, a more aggressive growth strategy, a better opportunity, or simply the desire to "try it again with another concept."

Craig Weichmann has witnessed all of these scenarios firsthand. Weichmann is a former restaurant securities analyst and the founding partner of the Dallas-based boutique investment bank Weichmann & Associates. "Those are all very common reasons we see multi-unit developers looking to sell off parts of their operations," he says.

Often, developers have ridden the growth curve of one franchise brand and are ready to try another-and that takes capital, he says. "Another common occurrence is they've completely built out their territory, cash flow is great, and they want to complement their existing brands with another compatible franchise."

Regardless of the reasons, when multi-unit operators get ready to sell, they must have their house in order. A number of factors affect the ability to sell: the number of units being offered, profitability, location, property value/ownership, and of course, the brand itself (see sidebar).

Something else that's important to remember when selling a group of units, say experts, is confidentiality. Employees, customers, and vendors may not be aware of the sale until it's almost complete. Everything from employee morale to continued strong financial performance from the units can be affected negatively if appropriate confidentiality is not maintained.

There are essentially two primary ways to go about the sell: 1) do it yourself, or 2) seek a third party to assist. Generally, the size and numbers will dictate whether or not it's financially feasible to do it yourself. The bigger operator, with more on the line, will probably want to seek assistance from an investment banking company like Weichmann & Associates or Atlanta-based Brookwood Associates.

Retirement scenario

Amy Forrestal is a managing director at Brookwood Associates, where last year she helped Ned Kirby sell his chain of Taco Bell restaurants as he eyed retirement. Kirby is 68 years old and says he was beginning to slow down after spending the last 25 years in franchising. His company, KirTac, Inc., operated 22 Taco Bells, 5 co-branded with KFCs, in the greater Indianapolis area.

"I just felt like it was time for me to step away from this and spend more time with my family," says Kirby. "And I knew that interest rates were good and Taco Bell is a hot property, so there were a lot of things going for me."

Of course franchisors have rules and criteria regarding the sale of franchises. "They are protecting their brand," says Kirby. "But they were very helpful throughout and basically just said ‘The deal just needs to have legs.'" After all, it's in everyone's best interest for the buyer to be financially healthy and have the manpower to run the chain following the purchase.

Kirby made sure his units were fully ready for sale-another key point. To get the best price for your units, everything must be in good order, from buildings and equipment to financial records.

Kirby spoke with three different investment banking firms before making his choice. As with many decisions in business, it came down to relationships. "Our primary lender over the years had a good relationship with Amy and Brookwood," he says.

The entire process took about a year, Kirby says. During that time, he worked closely with Brookwood to gather the necessary data, create" the book," and put together a qualified list of potential buyers. He says it was important to him to find a buyer who had a compatible management style, similarities in operating style, strong financials, and was not overly big. Knowing the type of buyer you are looking for is critical, and will save you time by weeding out those who don't meet your criteria.

Kirby says he expected about a dozen bids and was surprised to get 30. "We narrowed that list down to nine strong prospects and interestingly, we did not select the highest bidder," he says. He then met with the prospective buyers over a couple of days, giving presentations and answering questions before choosing the finalist.

In the end, Kirby sold his company to a buyer he already knew: a private equity firm. But he says it was the process he went through, with the guidance of Brookwood, that assured him he was making the right decision, and that everything was done properly throughout that process. "The investment banker knew the market, the clients, who to contact, and how to negotiate the deal," he says.

Looking back, Kirby says he's very happy with how the deal came together and with the price he got. And while he's happy in retirement, Kirby says he does miss the people he used to work with.

For sale by owner

Kelly Saxton keeps busy operating 30 McAlister's Deli units throughout Texas, Oklahoma, Mississippi, and Kansas under the name Saxton Pierce Restaurant Corp. Until three years ago, the Dallas-based multi-unit operator was also running a dozen Mazzio's Pizza restaurants. That's when he adjusted his operating strategy and put out a For Sale sign.

"We had been with Mazzio's for many years and it was a good brand for us, but we began to feel like the brand and territory was built out," says Saxton. In his view, the brand had created a great cash flow for his company, but growth had become limited.

On the other hand, his McAlister's Deli brand was expanding rapidly. "We decided that aggressively pursuing brand extension and growth was our number-one priority," he says. Saxton also wanted to focus his management team and intellectual resources solely on the McAlister's brand.

Saxton decided to sell the Mazzio's brand himself. He didn't have to go far: a couple of his managers spun off their own company, Pinnacle Restaurant Corp., and purchased the Mazzio's units from him. "It was a perfect scenario because I knew them well, had worked with them for more than 15 years and I knew they could do it successfully," says Saxton.

Because of his financial position, Saxton was able to finance the lion's share (90 percent) of the deal for his former managers. He knew it would be tough for them to get adequate financing on their own starting up a new corporation. "After they proved they could successfully operate that brand after the first year, we went to the primary market and got the majority of that financing shifted over for them," says Saxton, who still maintains a small holding of the loan.

Mazzio's corporate was happy with the deal too because of the buyers' ties to Saxton and his financial backing of the deal. The vendors also liked the arrangement because essentially, they continued working with the same individuals they had come to know over the years.

Saxton says that by organizing the deal this way, he was able to ensure a healthy future for his Mazzio's units, got a fair price for himself, and provided his former partners with a fair purchase price. "It was a win-win deal that we were able to finalize one Saturday morning," he says.

Saxton says he does see value in using an investment banker, especially for larger multi-unit deals where a lot more is on the line financially. "It helps take the risk out of the deal," he says.

Today, three years later, Pinnacle Restaurant Corp. is successfully operating 25 Mazzio's Pizza restaurants, and Saxton's company has been busy building its McAlister's Deli brand.

Regardless of why a multi-unit owner decides to sell off units, identifying objectives, following a systematic checklist, and using all the resources available is the best way to ensure fulfillment for both seller and buyer.

10 Key Steps in Selling a Multi-Unit Operation

Craig Weichmann spent 20 years as a restaurant industry analyst and, after founding his own company, has been in investment banking for the past 5 years. During that time he's helped numerous multi-unit franchise operators to sell their units. Here, distilled from an in-depth interview with Weichmann, are the key steps every multi-unit operator should review when considering a sale of assets through an investment banking company.

1. Make the decision to explore the option of selling.

1. Interview and select an investment banker. Be sure to find a firm that works with companies of your size-and that fits your culture and personality. You will spend a lot of time with this group over the next several months or more.

1. Hire the banker to prepare the Confidential Information Memorandum (the "Book"). Most bankers charge a negotiated retainer fee to cover the preparation of this document and to allocate the necessary time to the project. This cost is your exposure in case you decide to stop the process.

1. Market the deal. This can take one to four months, either through an auction process for larger operations, or through the private sale venue (silent auction). Some bidders request meetings with management and/or a review of additional information not covered in the Book.

1. Receive offers (Letters of Intent). When multiple offers are submitted, negotiate the best terms and select an acceptable LOI. If the final bid is not in the price range the seller expects, stop the process. If it is, sign the LOI, which is a non-binding agreement spelling out the general terms of the deal.

1. Due diligence-buyer. In this phase, the buyer and his lawyers will request an exhaustive list of documents, store visits, interviews, etc. During this phase, the buyer is simultaneously working on five key steps:

• Due diligence, which has a defined length of time spelled out in the LOI.

• Preparing the Asset Purchase Agreement (APA), generally a 30- to 60-page legal document.

• Raising the cash to pay for the deal (removing the financing contingency) by soliciting the bankers and equity participants in structuring the capital raise. The seller may not know the exact structure of the buyer's deal, but does need to know what arrangements the buyer has made to purchase the deal, in order to see if it is overly leveraged or if the buyer is having difficulty arranging the financing within the prescribed time frame. Remember: time kills deals.

• Gaining approval for liquor licenses, if applicable.

• Gaining approval by the franchisor. Generally the franchisor has the right of first refusal, which means that the buyer will request a break-up fee to protect his interests if the franchisor exercises the right to purchase the units.

1. Due diligence-seller. The seller works on providing the due diligence information, continuing to run the business, notifying the franchisor of the terms of the deal, and preparing to transfer the leases (lease estoppels) and liquor licenses, if applicable.

1. Negotiate terms of the APA. The buyer presents the APA, which may include any proposed revisions to the price based upon the due diligence process. Hopefully, the terms in this document can be negotiated to be acceptable to both buyer and the seller. Many deals collapse at this point in the process, or the buyer is unable to remove the financing contingency.

1. Execute the terms of the APA. This is the tedious procedural step in which all the terms of the sale are satisfied, including approval by the franchisor to give up the right of first refusal and accept this new franchisee. Leases are transferred, a final walk-through is scheduled, and a closing date is set.

1. Close the deal. Celebrate that the process is complete and the proceeds are wired into your account.