Acquisitions of other businesses, to strategically grow an existing business or as a financial investment aimed at earning a good return, have been around since the beginning of modern commerce. However, historically, franchise companies grew organically, with traditional financing, as needed. Exit strategies for the entrepreneur-franchisor were often very low on the strategic plan. Today, with the increasing number of boomer-franchisors heading for retirement, the amazing growth of the franchise sector, the acceptance of franchising as a viable business model, a great deal of under-deployed capital waiting on the sidelines for good targets and more and more examples of successful franchise system growth, it is no wonder that we are witnessing today an incredible increase in franchise mergers and acquisitions. Adding to these factors is the growth of private equity pools of money and the realisation by these funds that franchising presents an excellent investment because of predictable and steady cash flow through royalties, great leverage from deployed capital and existing assets and almost unlimited possibilities for rapid growth (domestic and internationally).
The size and sophistication of some of these franchise systems and the transactions that evolve are impressive and often rival the traditional businesses as to scope and complexity. Certainly, many of the issues, challenges and approaches are the same in franchise and non-franchise M&A transactions. However, for a variety of important reasons, franchise M&A has an additional layer of complexity and risk.