How to Negotiate a Brand Purchase

In recent years, multi-unit and multi-brand development has become a major trend in the franchise industry as investors and private equity firms take more interest in scalable revenue. As a result, there are an abundance of multi-brand franchisor portfolios that offer prospective franchisees a wide array of concepts under their umbrella. 

But, as a franchisor, acquiring a new franchise brand to include within that portfolio is a multi-faceted endeavor that requires a deep understanding of economic fundamentals and the brand's market position. In addition, you need to be able to negotiate effectively to ensure the investment aligns with your growth and profitability goals.

Here are some tips to help you properly negotiate a franchise brand purchase. 

Understanding the Brand and Its Market

Jeff Dudan is the Chairman and CEO of Homefront Brands, a platform that oversees five property services franchises, each of which was acquired by the company. 

Dudan emphasizes the importance of thoroughly understanding the underlying business and its economic model before proceeding with an acquisition. This includes analyzing the total addressable market to identify the core customer base and assess the cost of customer acquisition. Knowing who the customers are, why they buy and how to reach them is also crucial for determining the potential for territory expansion and ensuring responsible growth, Dudan says. 

“From there, you want to determine how many territories are available across the country and the growth potential,” Dudan told 1851. “You have to be able to expand the franchise. You also need to know — what is going to be your hold period on that brand? Are you going to be able to lead a certain number of territories for the next person to develop?”

Perhaps most important of all, a prospective buyer should assess whether the franchise concept is conducive to success for its franchisees, Dudan says, emphasizing systemization and unit level profitability.

“What are the real economics of the business? What are the margins? How much can somebody make? What are the total costs to get into the business? How long is it going to take for a franchisee to get their investment back? There are all very important questions to ask because they are markers of the quality of the franchise,” Dudan said. “The characteristics of the business are going to tell you the likelihood of whether franchisees will want to buy. When you step back, you have to ask the most important question: Is this franchise a business that is good for people?”

Scott Sutton, CFE, is the Chief Development Officer of Empower Brands, another multi-brand franchise platform consisting of 10 industry-leading commercial and residential home services brands. He says that prospective buyers should leverage data and insights to answer two key questions about the brand they are considering: Can this franchise continue to achieve success and am I going to get an appropriate ROI? 

One important aspect that will help answer these questions is evaluating the category the brand operates within. “We have brands in the Empower portfolio that offer essential services — things that people need to fix if something goes wrong,” Sutton told 1851. “Other home services are purely cosmetic, which means in times of economic downturn, homeowners won’t make them a priority. If the market conditions in a category are favorable, that increases the value of a franchise brand.”

Sutton advises looking into the brand's ability to sustain success and deliver appropriate ROI, considering factors like market demand for the services offered and the level of franchisee satisfaction. Moreover, understanding the culture of the company and how it treats its employees and franchisees is paramount, as culture plays a significant role in post-deal success.

“As a buyer, it is important to survey, engage with and understand the relationships between the franchise and the franchisee,” said Sutton. “Do they feel supported? Are expectations being met?”

Tips for Negotiating the Deal

When it comes time to set a price for the acquisition, Sutton says the key is utilizing partners in the market who have done deals and understand the typical valuation ranges. 

“There are a number of intermediary firms that are there to help match buyers and sellers,” said Sutton. “These are folks who spend a lot of time in the franchising sector, and they have a lot of data about valuation multiples, across various deals that may be similar to this one.”

In terms of financial value, Sutton recommends focusing on historical performance rather than future projections. “When businesses go up for sale, it is not uncommon to see the future years represented as rosy and bullish — the ‘hockey stick’ projection,” he said. “So, as buyers, you need to determine whether that growth is actually going to happen. Is it only expected to happen because of you, the buyer? If so, you shouldn’t have to pay for that.”

At the end of the day, while buyers can strategize forever, Sutton sums it up by saying, “Culture eats strategy for breakfast.” 

“What is really hard, when you think about any kind of a transaction, is what you can’t see on a balance sheet or on an income statement,” Sutton said. “If you are looking at acquiring a business, make sure to spend some time to really understand the culture of the company. Even when the numbers make sense, don’t forget the impact of culture. It is, in my opinion, the biggest factor in ensuring post-deal success in an acquisition.” 

Check out these related 1851 Franchise articles:

• 7 Franchisors That Offer Multi-Brand Opportunities
• How to Catch the Big Fish: Finding Multi-Unit Franchisees
• 5 of the Most Successful Franchise Owners to Know