Negotiating with Private Equity Owned Franchisees - International ...

IFA’s 45 th Annual
LEGAL
SYMPOSIUM

ATTRACTING, AND NEGOTIATING WITH,
PRIVATE EQUITY OWNED FRANCHISEES
• Moderator: Stephen Hagedorn, General Counsel
IFA’s 45
LEGAL SYMPOSIUM
th Annual
Jani-King International, Inc.
• Speakers: Nick DeCarlo, Vice President and Senior Counsel
Marriott International, Inc.
Charles Modell, Partner
Larkin Hoffman Daly & Lindgren Ltd.

IFA’s 45
LEGAL SYMPOSIUM
th Annual
What is Private Equity?
• Investment company with professional management
managing other peoples’ money (and some of their own)
• Invests in the equity of private companies
• Typical investors: wealthy individuals, trusts,
endowments, pension funds, etc.
• Investors seeking a greater return than in publicly-held
stocks, bonds or mutual funds
• Investors also seeking to diversify in investments

IFA’s 45
LEGAL SYMPOSIUM
th Annual
What is Private Equity?
• Larger PE companies can have very diverse
investments/strategies
• Smaller private equity companies typically invest in areas
of management’s expertise
• Often formed as limited partnerships
• Often don’t retain 100% equity
• Frequently have complicated structures

Pizza
Holdings
LLC
QSR Restaurant
Ventures, LLC
Yogurt
Holdings
LLC
100%
IFA’s 45
LEGAL SYMPOSIUM
th Annual
Burger
Holdings
LLC
Mr. Big
(and his partners)
ABC Private Equity
Company, LP
Full Service
Restaurant Ventures, Inc.
Who-ters
Holdings,
LLC
100%
100%
Investors Investors
Hiltop
Holdings
LLC
100%
Hotel Ventures, LLC
Merry Inn
Holdings
LLC
Shera-Tone
Holdings
LLC

IFA’s 45
LEGAL SYMPOSIUM
th Annual
What is Private Equity?
Private Equity Ownership of Franchisors
1. Roark Capital and Bain Capital have a focus on
franchise brands – Roark alone owns Arby’s, Auntie
Anne’s, Carvel, Cinnabon, Moe’s, Schlotzsky’s, Seattle’s
Best, Batteries Plus, Corner Bakery, FastSigns (among
others). Several others own multiple brands.
2. Burger King Corporation acquired in September 2010
(and taken public in 2012).
3. Huddle House acquired in 2012 by Sentinel Capital
Partners.

IFA’s 45
LEGAL SYMPOSIUM
th Annual
What is Private Equity?
Private Equity Investments in Franchised Units
1. Hotels have had private equity franchisees for years.
2. More recently, restaurants, hair care salons, and other
recurring revenue franchises have attracted private
equity.

Benefits of Private Equity Investments in
IFA’s 45
LEGAL SYMPOSIUM
th Annual
Your Brand
• PE Companies have access to capital
• Experienced and sophisticated management
• Consistently motivated for growth
• Well incentivized to attract/retain talent
• They “color within the lines.”

Challenges and Limitations of Working
IFA’s 45
LEGAL SYMPOSIUM
th Annual
with Private Equity
• May not be well versed in franchising (particularly from
the Zee perspective)
• Typically only interested in systems with assets (i.e.
hotels, restaurants, etc.)
• Small or start up franchisors not likely to attract PE
• PE companies will stick to their strengths (e.g. rehabbing
distressed units vs. opening new units)
• Changing rules mid-stream will be problematic.

ABC Private Equity Company, LP
• Private Equity Fund with approximately $800 million
under management
• Focuses on multi-unit franchisee investments
– Current investments:
•Full Service Restaurants (Steakhouse, Wings & Breakfast)
•Hotels
•Quick Service Restaurants (Yogurt & Burgers)
• Wants to expand QSR holdings with an investment
into pizza
IFA’s 45
LEGAL SYMPOSIUM
th Annual

IFA’s 45
LEGAL SYMPOSIUM
th Annual
Best Pizza Franchise
• Established franchise system with a proven
concept
– More than 800 stores in 250 markets
– Franchisees are mostly “Mom & Pop,” some
original owners have grown to multi-unit, but no
private equity Zees
• Primarily delivery or carry out pizza, but huge sales
growth from new hot wings menu items

Potential Investment in Best Pizza
• ABC Private Equity wants to buy 80 Best Pizza
stores in various markets
– Initial interest 40 stores owned by one franchisee
– Future interest in buying out a handful of
franchisees that own 5 to 10 stores in nearby
markets
– Also an interest in opening new units in existing
markets
IFA’s 45
LEGAL SYMPOSIUM
th Annual

Potential Investment in Best Pizza
• Investment vehicle Pizza Investment
Holdings, LLC
• Proposing to finance the transaction by
leveraging equipment and cash flow
IFA’s 45
LEGAL SYMPOSIUM
th Annual

Attracting and Negotiating with PE Owned
IFA’s 45
LEGAL SYMPOSIUM
th Annual
Franchisees
Franchise Agreement Terms that Should Be Off Limits
• Pricing and Fees
• Standards and Procedures

Attracting and Negotiating with PE Owned
IFA’s 45
LEGAL SYMPOSIUM
th Annual
Franchisees
Franchise Agreement Terms That Should Be Open for
Negotiation
• Owner/Operator
• Training
• Restrictions on Minority Transfers
• Financing Restrictions/Lender Comfort Letters
• Personal Guarantees

Attracting and Negotiating with PE Owned
IFA’s 45
LEGAL SYMPOSIUM
th Annual
Franchisees
Franchise Agreement Terms That Should Be Open for
Negotiation
• Non-Compete Agreements
• Confidentiality
• Cross Default Provisions
• Provisions Relating to Financing

Opportunities and Challenges in Ongoing
THE GOOD
IFA’s 45
LEGAL SYMPOSIUM
th Annual
Business Operations
• Rapid Expansion! (More units and royalties)
• Increase revenue and market share
• Take advantage of economies of scale and
market consolidation

Opportunities and Challenges in Ongoing
THE BAD
IFA’s 45
LEGAL SYMPOSIUM
th Annual
Business Operations
• Rapid Expansion! (More oversight required;
problems can snowball)
• PE might require individualized attention from Senior
Executives not typical in franchising
• Expect refinancing or exit within 5-10 years
• PE needs more lead time to plan for systemwide
changes and upgrades

IFA’s 45
LEGAL SYMPOSIUM
th Annual
Final Thoughts
• Everyone needs to be on the same page
• You will need to adjust your typical approach
and mindset
• Franchising with Private Equity can be
enormously beneficial, but it is not without
pitfalls