Mergers & Acquisitions (M&A) by Franchisees?

[gottheworm]

When I typically see growth by franchisees, it seems they are opening new franchisee locations (i.e. existing Dunkin Donuts owner, opens new 2nd DD etc.) or they are merging with existing locations of the same business.

I was interested in examples/case studies of franchisees who grew by acquiring other non-franchised businesses in the same industry or even competing franchises in the same geographic area and converted them. For example a cleaning company from franchise A acquiring a cleaning company from franchise B and losing all the franchise B branding but keeping the clients, employees etc.

Are these deals somehow harder to do or are there some examples of people who have had success along these lines? Thanks!

 

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[DaveC]

Much of this comes down to franchise agreements and non-compete agreements. Often times you can't just buy an existing franchise, get the training and procedures down, and then just kill the agreement and run your restaurant as "McDowell's" while marketing to the same clients. Also, you would be losing the branding so that could hurt you as well. I think a better approach would be to buy or partner with related businesses, which is what is happening. Dunkin Donuts putting a 31 Flavors in the same building, Subway in the BP gas station,etc....

 

[gottheworm]

Much of this comes down to franchise agreements and non-compete agreements. Often times you can't just buy an existing franchise, get the training and procedures down, and then just kill the agreement and run your restaurant as "McDowell's" while marketing to the same clients. Also, you would be losing the branding so that could hurt you as well. I think a better approach would be to buy or partner with related businesses, which is what is happening. Dunkin Donuts putting a 31 Flavors in the same building, Subway in the BP gas station,etc....

Thanks DaveC. Just so I am clear, I am contemplating, as owner of franchise A, buying specifically a competitor's employees/customers (from franchise B) and jettisoning franchise B agreements, not mine (from franchise A). I assume this may undervalue the business from the other owner's perspective. I am not sure franchisor B can do much about that from a legal perspective unless their contract controls the franchisee's clients somehow (say if the franchisor provided leads/business directly to the franchisee). If franchisee B got all the clients on their own accord, I am not sure the franchisor can exert much control. I did talk to a franchisor about this and they confirmed this - but I am not sure why you don't see it happen more? Either its case really case specific to make sense, its happening but not too publicly, or maybe because of all the confusion surrounding the issue most people don't do it.

 

[DaveC]

Yeah I'm not sure about the legalities of it. Usually I've seen this acquisition strategy under the same franchise name, my friend is doing this with a sign franchise right now and just trying to roll up other stores in the area. Can you jettison franchise B agreements and replace with franchise A agreement? Usually the franchise corporate has to approve a franchise sale, and given that you own a competitor, that may be frowned upon. Maybe you can word the transaction so it is customer contracts only, or something, and then shut down the Franchise B agreement, but IANAL.

 

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[lilrikki29993838]

From an investment banking standpoint, I have worked with some private equity firms who had this strategy. They would acquire a smal portfolio from a franchisee (5-10 units), then begin acquiring other franchisees and non franchised units. This strategy works very well for certain industries that have not had much consolidation and have a large mom and pop presence. One industry that comes to mind is auto shops. There are several mom and pop shops, and being able to "pitch" the benefits of joining a franchise group can bring economies of scale to them. Side note....the 3 firms I have worked with have had internal legal counsel. Also, the franchisors they worked with loved the consolidation and encouraged it and gave favorable royalties, and of course, it helped grow their top line.