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8/6/2019 Franchise Private Equity Webinar 11 2010
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Your Hosts
Craig R. Tractenberg
Partner, Franchise
Nixon Peabody LLP
M. Avi Epstein
VP, Legal Affairs
Sterling Partners
Darrell Johnson, CFE
President and CEO
FRANData
Christine Friedberg, CFE
Dir of Sales Innovation
FRANData
Daniel F. Dovi
Associate, IP
Nixon Peabody LLP
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Dan Dovi| Associate | Rochester, NY
CLE Information
An attendance CLE verification codewill be
announced at the end of the presentation.Please make a note of it.
CLE documents are downloadable from theAdobe Connect file share box on your screen.
Complete and return your CLE certificate ofattendance and evaluation form to NixonPeabodys CLE assistant (Lauren Gomes
When we receive your attendance verification
form we will issue you a certificate ofcompletion within 10 days.
All attendees will also receive a link to the
presentation slides and a recording.
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Craig Tractenberg | Partner | Philadelphia, PA; New York, NY
Agenda
Private equity landscape: where are we in the cycle?
Why is franchising appealing to private equity?
What kinds of things are happening now?
How do you prepare for private equity funding?
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Darrell Johnson | President and CEO, FRANdata | Arlington, VA
Private Equity Landscape
Where are we in the cycle of private equity investing activities, and whenwill the money become available?
Fundraising
Investment
Exits
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Christine Friedberg | Director of Sales Innovation, FRANdata | Arlington, VA
Fundraising
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Christine Friedberg | Director of Sales Innovation, FRANdata | Arlington, VA
Fundraising Overhang
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Darrell Johnson | President and CEO, FRANdata | Arlington, VA
Private Equity Landscape
Where are we in the cycle of private equity investing activities, and whenwill the money become available?
Fundraising
Investment
Exits
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Darrell Johnson | President and CEO, FRANdata | Arlington, VA
Deal Size
Source: PitchBook*Through Q3
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Darrell Johnson | President and CEO, FRANdata | Arlington, VA
Private Equity Landscape
Where are we in the cycle of private equity investing activities, and whenwill the money become available?
Fundraising
Investment
Exits
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Christine Friedberg | Director of Sales Innovation, FRANdata | Arlington, VA
Exits
*3Q 2010
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Darrell Johnson | President and CEO, FRANdata | Arlington, VA
Why is Franchising Appealing to PrivateEquity?
1. Proven business model: brand or concept has already been developed,successful, and expanded
2. Predictable and recurring revenue stream
3. Underlying demand for brand or concept or product or service
4. Franchisors, and/or existing management teams knowledge of market and
business5. Clarity and transparency in franchise business standards, operations, and
earnings
6. Growth model straightforward to execute
7. CapX needs are usually modest
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Darrell Johnson | President and CEO, FRANdata | Arlington, VA
What Private Equity Firms Look For in aFranchise Concept
1. Market share and/or differentiation2. How make $
3. Opportunity to grow business in 3 to 5 year time frame
4. Proven management
5. Good system support infrastructure
6. Solid unit economics, low adverse unit turnover
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Avi Epstein | Vice President, Sterling Partners | Chicago, IL
Where is the Company in its GrowthCurve?
Private equity firms view the investment opportunity differently based onthe size and trajectory of the potential investment. Important factors:
Early growth stage
Cash flow positive
Differentiated product offering (innovative? how many competitors?)
Does the franchisor have its act together (processes and procedures)
Solid (although lightly tested) thesis on unit economic model
Knowledge of customer base
Larger franchise businesses
Steady income (EBITDA stream)
Proven unit economic model
Quality of franchisee system
Stability in the operating/financial model
Competitive landscape
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Darrell Johnson | President and CEO, FRANdata | Arlington, VA
What Kinds of Things Are Happening Now, andWhat Deals Have Already Occurred?
Franchisor Investor Purchase Price
Burger King 3G Capital $24/share, 9x EBITDA
Papa Murphys Lee Equity Partners Estimated at $180 million, 10x
EBITDA
Massage Envy Sentinel Partners Not disclosed. $2.8 millionEBITDA
ReBath Webster and Sorenson Capital Not disclosed. $5.7 million
EBITDA
Rubios Mill Road Capital $8.70/share, 7.5x EBITDA
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Dan Dovi| Associate | Rochester, NY
Concerns Beyond EBITDA
How should a franchise system prepare for private equity funding?A. Franchise sales dynamic (private equity invests in multi-unit franchisees, or
franchise networks, as well as franchisors)
B. Differences between sales to individual franchisees and large private equity
investors
C. Negotiating control: Equity financing results in some business decisionsbeing made by the investor
1. Private equity is focused on investing not management, but requires a certainamount of control
2. Private equity wants to know when to get in and when to get out
3. Exit strategies and some flexibility in the typical franchise agreement are key to aprivate equity deal and are elements that will affect how franchisors and multi-unit developers operate
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Dan Dovi| Associate | Rochester, NY
Concerns Beyond EBITDA
B. Negotiating control: the private equity investors perspective1. Exit Strategy: key elements for private equity funding in multi-unit
developers or franchise networks
a) Transfer restrictions (when may franchisees exit and who may enter the system)
a) Franchisors right of first refusal and options to buy
b) Restrictions on initial public offerings
b) Development right for additional units or new territories
2. Other provisions particularly important to private equity investors
a) Restrictions on ownership of other brands/concepts, in-term non-competes, post-term non-competes (operating multiple brands, selling similar products)
b) Owner involvement in daily operation of business (non-owner representative)c) Training requirements (certified trainer)
d) Personal guarantees for equity owners (risk exposure and predictability)
e) Clarifying or modifying franchisors sole discretion provisions
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Dan Dovi| Associate | Rochester, NY
Concerns Beyond EBITDA
C. Negotiating control from the franchisors perspective protecting thebrand and franchisor interests:
1. Private equity investors ask how can I grow the brand and exit the
investment after reaching the desired return
2. Franchisors ask how important is growth; is it strategically more important
to focus on brand/concept improvement; how much control should Irelinquish?
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Dan Dovi| Associate | Rochester, NY
Concerns Beyond EBITDA
3. Key Provisions from the Franchisors perspective:a) Maintain control over brand standards and the franchise system (confidentiality,
specifications/standards, image construction, production standards, supplyagreements)
b) Maintain strict control over all IP especially considering the potentialweakening of non-compete covenants
c) In the absence of personal guarantees, negotiate other financial protections
i. Letters of credit
ii. Ensure general partner of the private equity investor has and maintains aminimum investment in the acquiring company
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8/6/2019 Franchise Private Equity Webinar 11 2010
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Getting Ready for the Dance of Diligence
1. Using the bankers and lawyers effectively2. Organizing and retrieving archives
3. Do you need a trade secret audit?
4. Proactive brand and patent management
5. Assessing the role of franchisees in the process
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Thank you! Questions?
Craig R. Tractenberg
Partner, Franchise
Nixon Peabody LLP
M. Avi Epstein
VP, Legal Affairs
Sterling Partners
Darrell Johnson, CFE
President and CEO
FRANData
Christine Friedberg, CFE
Dir of Sales Innovation
FRANData
Daniel F. Dovi
Associate, IP
Nixon Peabody LLP
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On the Nixon Peabody Website
Upcoming webinars
December 14, 2010: False Advertising
Recent recorded webinars
Sustainability for Franchise Systems
Best Practices in Protecting Your Brand in the New Media
Mid-Year Franchise Case Law Round-up
Document Retention and Destruction: Issues for Franchisors
Alerts
California Franchise Relationship Act sets the floor, not ceiling offranchisee rights
Franchise industry receives a jolt from the Small Business Jobs Act
Choice of law and forum provisions in franchise agreements: jurisdictionaldifferences in enforcing the covenant not to compete
Federal judge likens franchising as business to modified Ponzi scheme andholds that franchisor is employer of Massachusetts franchisees
U.S. Supreme Court raises threshold for constructive termination andconstructive nonrenewal
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CLE Information
Attendance CLE Verification CODE:
NPCLE NPCLE 11172010
Send forms to:
Lauren Gomes
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Thank You! Contact us
Twitter: @nixonpeabodyllp
Craig [email protected]
Darrell [email protected]
Christine [email protected]
Daniel [email protected]
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