The good news in all of this is that a profitable large franchisee with, say, 50 outlets up and running, and with rights to open up another 50 in a promising market, may well command a substantial premium in a sale to a private equity group. This is true not only because it costs less to buy 50 businesses from one seller than from 50, but also because a successful large franchisee stands in good position to command financing on good terms, attract professional management, and achieve efficiencies of scale in overhead costs – for example, by building its own warehousing. Similarly, the large franchisee may be less subject to downturns in local market conditions than unit franchisees who depend on particular neighborhoods.

Size, in short, can do good things for the large franchisee’s business in the eyes of a buyer, and although factors unique to any such business will determine how much it will bring in a sale, what is certain is that franchise companies as a whole command higher multiples than non-franchise companies; data from recent transactions show that fast-food franchisors bring multiples of six to eight times EBITDA, or earnings before interest, taxes, depreciation, and amortization, whereas non-franchise fast-food companies bring only four to five times EBIDTA.

It is equally clear that, given the increasing importance of large franchisees in the restaurant industry, they are likely to continue attracting attention from private equity groups, particularly now that a number of franchisors – for example, the Quizno’s and Subway sandwich shop chains, SONIC Corp. of the SONIC drive-in hamburger chain, and IHOP Corp. itself – expect much of their growth to come from area developers.

Private equity groups like this dynamic, and that pushes values up – good news for large franchisees, because it means that, having devoted themselves to building successful businesses, they now stand in good position to realize a profitable exit.


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