In my last column, I addressed the increasing phenomenon of franchisors being acquired by private equity concerns and analyzed the extensive due diligence that franchise counsel are well positioned to perform to ensure that the franchisor's last 12-month earnings before interest, taxes, depreciation and amortization (LTM EBITDA) are reflective of what the future will bring—or whether they will merely be a memory of more pleasant times for the subject franchise network.
Today I address a critical issue in private equity acquisitions of franchisors—acquisition pricing. Before turning to the determinants at issue, I must emphasize that in most private equity transactions, the acquiror will not pay the full purchase price up front. Instead, the private equity concern will most often initially acquire 70-80 percent of the franchisor's equity and either purchase the balance later and/or permit the original equity owner to retain such balance and cash it in when the private equity concern exercises its exit option. (That is generally through a subsequent sale of the franchisor or, if the franchisor is large enough, taking it public, in either event usually five to seven years following the initial acquisition.)
