In nearly 30 years since founding The Cypress Group, I have encountered a multitude of client-types on both the buy and sell-sides of transactions. Having spoken with colleagues and other industry experts, it is clear that while the unique circumstances of each deal can vary significantly, there are a number of common threads that can either make or break a divestiture or acquisition. In this article we are going to examine the “dos and don’ts” of successfully managing a transaction from both buyer and seller perspectives.
Decisiveness is key when it comes to being a successful seller. It is imperative to thoroughly contemplate all of the major decisions that may come into play in a sale process. This way, you and your working group have a shared philosophy and action plan with which to respond to both the known and unknown. Indecision or deviating from a planned course is one of the top reasons that transactions fail, as it can lead to reevaluating, renegotiating, and retrading during the course of a deal. As a seller, do develop a transaction philosophy and do map your game plan and stick with it, don’t waffle and fall victim to indecision or a significant change in mindset.
It is critical for sellers to have a post-sale plan in place. The best way to establish your plan is to answer the following question: “Why am I selling right now?” The answers to that question are likely numerous, but lead by one or two strong desires. Let’s say the answer is that after a long, fruitful career you are ready to retire. A retiree’s post-sale plan should focus on wealth and life stability. Have you worked with your advisors and tax counsel to understand valuation, net proceeds, and other sources of funds such that you are able to maintain a safe, stable cash-flow to live your life comfortably? Outside of a retirement scenario, a multi-brand operator might be selling to focus on a different aspect of their business. Are you divesting one brand to concentrate on another? If so, then your post-sale plan should address topics such as how your operating platform must evolve to sustain an alternate business model. We’ve often advised sellers of large, stable QSR brands on how to evolve their development, marketing, and training infrastructure to adopt a Fast-Casual development agreement. The two businesses are certainly similar, but the infrastructure needs and cash flow planning vary, particularly in the early years. It is also important to note that all post-sale planning should happen in conjunction with your decision to sell; this way you know up front if you’re trying to sell all of your assets or if it makes more sense to retain some. Do understand your post-transaction operational and financial picture as part of the decision process. Don’t go into a sale blindly and unsure of your future plan.
Know Your Franchisor:
If you are a franchisee looking to sell your restaurant assets, it would behoove you to be aware of your franchisor’s growth and acquisition strategy. Is your franchisor currently selling company-owned restaurants, acquiring franchisees, and/or developing new units themselves? Are they looking to bring new franchisees into the system or expand with existing franchisees? Even if the answers to those questions are not perfectly known, a thoughtful analysis of your business geographies, operational and financial metrics, and development rights will help you prepare for the franchisor’s reaction. It is in your own best interest to be well versed in your franchisor’s approval guidelines and expansion plans so that you may select a buyer accordingly. Do know your transfer rights as a franchisee and do be aware of what makes a buyer attractive to your franchisor. Don’t let the franchisor dictate your process and don’t select a buyer that won’t pass their approval process or provide them leverage to force a less than ideal alternative.
Identify & Own Potential Problems:
It is almost impossible to operate a multi-unit restaurant business without experiencing some issues over time. Store closures, lease expirations and assignment issues, specific unit performance problems, environmental issues, and more will almost undoubtedly affect you and your business at some point. As a seller, it is understandable to feel the need to mask any struggles your company has experienced, but it is crucial that you resist the urge to do so. Any problems concealed initially will surely be transparent during due diligence, which discourages the buyer and hinders the overall transaction process. A constructive business issue identified late in a transaction is more punitive than if it was articulated in advance. Do have any business, operating, and legal issues identified and do have a plan for addressing them prior to bringing a transaction to market. Don’t ignore these issues and think that prospective buyers won’t identify or will overlook them in their process.
Are you starting to see a theme here? As with sellers, it is imperative that buyers operate in a direct and decisive manner. This means establishing what your target criteria is before you begin looking at acquisition opportunities, and then subsequently sticking to that game plan. It is easy to get distracted when confronted with the sheer breadth of options in the multi-unit restaurant industry, so instead of running yourself ragged looking at every deal in the market, set yourself up for success by knowing exactly what it is you are seeking. If you find Casual Dining concepts to be the most enticing, you shouldn’t be wasting your time and energy examining a QSR transaction. Do decide which factors make a deal most compelling to you, and do center your acquisition strategy around these criteria. Don’t start actively pursuing transactions before you have put your decided upon strategy in place.
Most people wouldn’t go to the supermarket without first knowing how they planned on paying for their groceries. While this seems to be common sense, not everyone applies this same logic to the way they seek restaurant acquisitions. Buyers should be mindful of establishing strong relationships with various financing sources before they even begin looking at buy-side opportunities, so that when the right deal does come around, they aren’t scrambling to secure the acquisition capital. Furthermore, a bid that details the buyer’s proposed debt/equity structure, in addition to a signed commitment from a capital provider, is substantially more compelling to a seller than a bid that is lacking these things. Do have a preemptive financing options in place, don’t wait for a sell-side advisor to tell you your bid was interesting, but their client chose the buyer with more certainty around funding.
Know The Franchisor:
Whether you are an existing franchisee in the system or not, it is vital that you know the franchisor that you will be dealing with. What does their current growth strategy look like? What kind of franchisee do they prefer? Are they trying to bring new blood into the system or solely bulk up the operating platforms of existing franchisees? This last question is crucial, especially if you are looking to enter a new brand. Before pursuing a specific opportunity, meet with the franchisor to discuss their approval process and present your operating plan and team. Transactions move far more easily and quickly when a buyer is preapproved and in good standing with the franchisor. Do establish this relationship early, don’t wait until the bid process is complete to find out that the franchisor doesn’t view you as a viable buyer.
In today’s market, restaurant acquisitions are highly attractive, making for an exceedingly competitive environment. Buyers must be aggressive in pursuit of these opportunities. This is especially true in instances where the transaction represents the buyer’s initial investment in a franchised brand. Existing franchisees may have built-in advantages in acquiring these restaurants, ranging from synergies with which to bid higher to strong ties to the franchisor. New entrants be wary: you may have to pay a premium in order to tip that first deal in your favor. Additionally, buyers must always be prepared to move quickly. Delays often cause sellers to get discouraged or re-examine the sale altogether. Another way to anger a seller and potentially lose a deal is to delay the purchase process in an attempt to retrade at a lower price. If you’re actively looking to buy and you come across the right deal, do pursue it aggressively and don’t dawdle and miss your opportunity.
Regardless of which side of a deal you are on, engaging experienced, industry specific investment advisors as well as transaction specific legal and tax counsel is paramount to your success. Acquisitions and divestitures alike have many moving pieces that can seem overwhelming when the owners aren’t receiving proper counsel. To achieve the utmost success, it is necessary to enlist the help of people who know how to plan, position, and execute transactions to your benefit. The resources and intricacies needed to navigate a transaction in the multi-unit restaurant industry are considerable. Do hire professionals with proven insight and transaction expertise in the industry’s inner-workings, don’t solely rely on your everyday business advisors or attorneys.
This is quite possibly the most important concept when it comes to successfully completing a transaction. On both sides of the fence, everyone must be realistic about their expectations for the process: if a seller has an unrealistically high purchase price or multiple stuck in their mind, finding the right buyer will be a far greater challenge than it should be. On the flip side, it isn’t realistic for a buyer to propose a purchase price that is based on a 2009 transaction multiple. Simply put, the market has moved. The most realistic thing either party can do is recognize that every transaction is a constantly moving, two-way street. If you want a deal to be successful, know that the negotiated terms must be satisfactory to everyone involved. Do view transactions in an objective and realistic manner, don’t rely on subjective inclinations or conjecture.