Deal Valuation and Structuring on Franchises?
October 17, 2024
by a searcher from Harvard University - Harvard Business School in New York, NY, USA
Looking at acquiring a franchise with an exclusive coverage area that's pretty large
High Level Summary
- Proprietary deal (no banker but there is a sell-side lawyer). Dialogue ongoing for ~3 months
- This franchise has been operated for ~20 years by current owner
- Historically done $3-4mm in revenue in last 5 years at ~35% to 45% EBITDA margins (~$1.5mm - $1.8mm EBITDA)
- For 2024, they are on track for Revenue of $5.5mm and $2.5mm - $2.6mm EBITDA
- Made an offer for 5x '24E EBITDA ($12.5MM) structured as 75% cash upfront, 20% Seller Note and 5% Equity Roll
- Seller Note payable beginning 2026 and amortized over 3 years. However, we have tied it to 2025 performance given one-year bump in EBITDA ($1.5mm to $2.5mm). Payable if avg of '24 and '25 EBITDA is between $1.5mm and $2.5mm
- The seller is adamant on an offer of 6x ($15mm EV) and open to creative structures to get there. However, he/she wants as much cash upfront as possible ($10mm+)
- We think we can grow this to $3mm+ EBITDA going forward given large coverage area but also want to protect downside if growth just does not materialize.
Questions
- What's the prevailing rate on franchises of scale ($2mm+ EBITDA)? I'm thinking 4x - 5x EBITDA and have heard some as low as 2x - 3x SDE but I could be wrong
- Given its size, I'd prefer to go the non-PG/non-SBA route but still retain most of the common equity (70%+). Is this possible? Or just a pipe dream? Are there capital providers for this?
- Thinking we layer on an Earn-Out in addition to 20% Forgivable Seller Note but what other creative structures can get us to $15mm for the seller in 3-4 years if growth materializes
- If we go SBA route, is a deal of this size fundable if we eliminate the equity roll?
from Northwestern University in Chicago, IL, USA
1. The multiple is likely depending on the type of the business 2 How much cash are you putting in? Without SBA, probably can get a conventional loan for 3-4x of the EBITDA (~$8m ish) or ~50% of the purchase, whichever is smaller. 70% equity is doable but very much depends on the lender, business, investor agreement 3 Not familiar with this, maybe staged buy out? Also, I'm confused about the seller note payable, it is payable if avg of 24 and 25 EBITDA is 1.5m-2.5m? 2024 is track to be 2.6m, so theoretically if 2025 EBITDA is 0.4m, you will start paying? 4. SBA is up to 5m, SBA Sr + Conventional Jr might get you to 7.5-10m?
from New York University in New York, NY, USA
mildly terrifying. For example, https://acrobat.adobe.com/link/review?uri=urn%3Aaaid%3Ascds%3AUS%3Ac76e9637-1c7f###-###-#### 96c123ee2957