Franchising and Licensing Two Powerful Ways to Grow Your Business in Any Economy_12

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Franchising and Licensing Two Powerful Ways to Grow Your Business in Any Economy_12 F IN AN CI AL ST RATE GI ES318of competing or complementary franchise systems are a viable strategy forresponding to these pressures. Thus, some of the most common reasons thatfranchisors consider a merger or acquisition with another franchisor or whynonfranchise companies consider franchise systems as viable acquisition tar-gets include: ❒ The desire to add new products or services to its existing lines without the expense and uncertainty of internal research and development ❒ The desire to expand into a new geographic market or customer base without the expense of attracting new franchisees into these locations or developing a new advertising and marketing program ❒ The need to increase size to effectively compete with larger companies or to eliminate the threat of a smaller competitor ❒ The desire for market efficiencies through the acquisition of suppliers (backward integration) or existing franchisees or distributors (forward integration) ❒ The need to strengthen marketing capabilities or improve the quality of management personnelThere are numerous complex issues involved in the merger or acquisitionof any company, including both legal and business considerations. This isespecially true for franchisors, however, who must address not only the po-tential issues related to taxes, securities regulation, labor laws, employeebenefits, antitrust, environmental regulation, corporate governance, bank-ruptcy, and antitrust compliance but who also must understand the nature ofthe assets of the franchise system being acquired and the unique relationshipbetween the franchisor and its franchisees. Franchisors that are consideringtheir first acquisition must understand that the transaction is a process, notan event. The management of the process, the quality of the franchisor’s teamof advisors, and a clear understanding of the franchisor’s transactional objec-tives will all go a long way toward ensuring that the completed deal is ulti-mately a success for the franchisor, its shareholders, and the overall system.A key component of the management of this process will also be an analysisof how the proposed transaction may affect the franchisor-franchisee rela-tionship, including the potential dilution of its brands, the overlap of itsterritorial rights, and potential confusion in the product and service mixesoffered to consumers.Key Trends and ObservationsIt goes without saying that the last few years have been very challengingfor M&A transactions from deal offer, deal valuation, and deal structuringperspectives and in getting deals done, especially when compared to the1997 to 2000 time frame. The events of September 11, 2001, have not madethings any easier, but it is premature to throw in the towel in regard to gettingdeals done or in thinking that the near future will not once again be a vibrantSPECIAL ISSUES IN MERGERS AND ACQUISITIONS 319and active period for M&A activity. Set forth below are some of my observa-tions on the current state of the M&A marketplace. 1. The pace and frenzy of M&A deals had slowed—even before September 11th and more recent events and fears, but seem to be picking up slowly. The better deals are getting done, but there are fewer players pushing their way for a place to sit at the table. 2. Capital is still available to get certain types of transactions completed— capital has tightened to weed out the weaker deals—which is part of a natural economic cycle and not necessarily a bad thing, given that many deals in 1999 and 2000 should never have been consummated. 3. Valuations on the seller’s side have become much more realistic, creating many opportunities for buyers who have cash (or access to cash) and the right internal and advisory teams to get deals done. The Federal Re- serve’s active bias toward low interest rates reduces borrowing and transactional costs for the right types of transactions, which lend them- selves to leveraged finance. 4. Reduced valuations have also created opportunities for consolidation; many venture capitalists and private equity funds are very motivated and willing to sell the ‘‘dogs’’ and perceived underperforming compa- nies at a fraction of what they paid, and failed roll-ups are starting to liquidate some of their holdings. 5. Deals are closing within a slower time frame—the rush to get deals done quickly has subsided except in special circumstances and the due dili- gence periods have become extended and issues more complex, ranging from increased litigation, more challenging intellectual property issues, underwater stock option plans, etc.—especially in a post–Sarbanes- Oxley envir ...