Franchise Transactions Need Quality Financials

For the past several years, Carty Davis, has been a partner with a boutique investment bank that has completed hundreds of transactions in the multi-unit franchise space. But he’s also an area developer for Sport Clips in North Carolina with more than 70 units.

Carty has noticed an extension of timelines for industry-related transactions over the past few years. Everything from multi-unit franchisee approval, franchisee-to-franchisee transfers, and private equity/family office investments, to refranchising and recapitalizations with both regulated and non-regulated capital providers.

He says time kills deals and longer cycles can expose transactions to franchisor approval sentiment, changes in lending conditions, and macro or geopolitical events. But he says the deal process can be handled with the right focus, time, and effort up front.

First up, he talks financials.

• Quality of financial information. If your business is in growth mode, it’s time to transition away from basic accounting systems like QuickBooks, and retain an accounting firm with the industry and multi-unit franchise expertise to upgrade and implement the appropriate systems and controls. There is no one-size-fits-all approach. Some companies outsource everything; others bring most of the needed financial functions in-house; and many, if not most, develop a hybrid approach. Interview several firms and speak with peers in your industry and area who have gone through a similar growth phase. Ensure you have financial integrity and credibility early in the process. Tighten up your finances and associated controls, because once your deal gains traction, the quality (or lack thereof) of your books and records will greatly affect asset valuation, transaction timing, retrading, and overall scrutiny of the deal.