Due Diligence in Merger & Acquisitions and Loan/Equity Transactions
Mergers and acquisitions are not uncommon in the franchise world and financial transactions of many different types occur regularly. Many of these involve substantial eight figure transactions, and sometimes even higher. As part of the normal due diligence process a complete financial and legal review takes place. But in most instances, perhaps the most important element of the due diligence process is overlooked.
The success of any franchise company must depend on the success and relationships with their franchisees. It is the build up and continuous growth and security of royalty streams that make franchising profitable for franchisors. Additionally, many franchisors sell products and services to their franchisees which also represent significant profits to them. As such, the value of these revenue sources provides much of the value of a franchising company. It logically follows that having mutually satisfactory relations with franchisees is essential, yet in most cases of merger or financial transactions, the due diligence process does not include an evaluation of that all important franchisor/franchisee relationship.
Having performed evaluations of franchisees and how they perceive their relationship with the franchisor has been one of our most enlightening experiences. It has given clients a perspective they never would have had and it has influenced decisions not to proceed, to proceed with knowledge of certain problems, or potential problems or to succeed with confidence that all is well in the franchise relationship. We have seen deals restructured because of our findings and we have provided significant data and recommendations to franchisors that allowed them resolve different problems.
It is hard to conceive that a thorough due diligence process involving a company involved in franchising with millions of dollars at stake would not include a confidential and professional assessment of the franchise relationship. A process that few understand as well as we do and that few have had the experience and achieved the results that we have for our clients.