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5Ingredients for Success from Five Franchising LeadersBy Ab Igram

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It used to be likened to a “marriage.” Now it’s more aptly described as a management team.

The franchise model has evolved dramatically over the past

10 years. No longer are successful franchise businesses driven

by just the relationship of a franchisor and individual

franchisees. Today, scale is absolutely critical to weathering

downturns and capitalizing on opportunities.

So it’s no wonder that multi-unit franchisees — those who own

multiple units within an exclusive territory — now account

for 53% of the franchise units in the U.S. and 76% of America’s

franchised restaurants.1 Nor is it surprising that both banks and

private equity firms’ investment in franchises is accelerating

with $16.5B in restaurant industry M&A deal volume for

FY17 across 115 deals.2 To explore what drives success within

these multi-faceted, multi-unit franchise relationships, we

interviewed five industry leaders representing all aspects of

this dynamic (see sidebar).

The following are the tips they shared for optimizing the value

created by the franchise business model.

Industry experts:• Neal Faulkner, Multi-Unit

Franchisee — a multi-unit franchisee with 29 Dunkin’ Donuts sites throughout New England, a past board member of the National DCP, LLC and a current franchisee member of the brand advisory council for Dunkin’ Donuts

• Karl Jaeger, Senior Managing Director of Argonne Capital Group — the overseer of this private equity firm’s portfolio of companies; his firm is now the largest franchisee of IHOP, a leading franchisee of Applebee’s, one of the fastest-growing franchisees of Planet Fitness, and a franchisor of other growing brands

• Aslam Khan, CEO of TGI Fridays and owner of Falcon Holdings Management, LLC — recognized as one of the industry’s top “turnaround experts” who has served as an operator, a multi-unit franchisee and a franchisor over his illustrious 40-year career

• John McCormack, Senior Partner at Sentinel Capital Partners — a co-founder of this leading private equity firm, which invests across a variety of sectors in such notable franchises as Taco Bell, Checkers, Church’s Chicken, Massage Envy Spa, and Pizza Hut

• Stephen Spinelli, Chancellor Emeritus, Thomas Jefferson University, Chairman of the Board, Planet Fitness — one of the industry’s most sought-after experts, educators and consultants in franchising and entrepreneurship and a member of the founding team of Jiffy Lube

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Leverage the strengths each partner brings to the tableEach of the experts we interviewed may be motivated by slightly different goals and may measure

success in somewhat different ways. But all share a common belief that franchising is a team sport that can only produce winners when each partner’s strengths are leveraged.

The Franchisor. One of the key strengths the franchisor brings to the team is an array of brand-building skills. Karl Jaeger of Argonne Capital Group says the firm’s experience as both a multi-unit franchisee and a franchisor gave it a unique perspective on the critical — and distinctive — strengths each partner has to offer. “Being a franchisor is a huge responsibility. You need to hone the strategy, market the brand, develop the menu, and focus on new product innovation. All while understanding how successfully your decisions can be operationalized by your franchisees.”

Another key strength of a good franchisor is knowing how to empower others to excel. As Aslam Khan, CEO of Falcon Holdings Management describes, “I’m not really in the ‘restaurant’ business. I’m in the people business. My job is to make it easier for my franchisees to succeed. To eliminate the hurdles. To free them from getting bogged down with too many roles so they can just focus on growing their business. I know that if I help them make good money, I in turn make good money.”

“I’m in the people business. My job is to make it easier for my franchisees to succeed.”

The Multi-Unit Franchisee. A good multi-unit franchisee contributes other key strengths to the team. According to Stephen Spinelli, “a successful multi-unit franchisee knows how to optimize both local entrepreneurial capability and centralized scale. They can create value from the dynamic tension that exists between optimizing the performance within an individual unit and achieving scale across many units.”

The Private Equity Firm. It may seem obvious what the contribution is of the private equity firm. But according to Neal Faulkner, a highly successful multi-unit Dunkin Donuts franchisee, PE can bring a lot more than just money to the table. “Professional investors can bring a breadth of perspectives gained from experience across many industry sectors. When they couple a longer-term focus on what’s right for that particular franchise with their knowledge of what has worked for other businesses, they can add tremendous value to the equation.”

“Professional investors can bring a breadth of perspectives gained from experience across many industry sectors.”

The Bank. So what can banks bring to the party? Lenders often bring insights gleaned from working across the franchise sector. John McCormack explains, “Non-compete agreements don’t apply to lenders. So lenders that specialize in franchise financing often work across many systems, with many brands and many operators. They know what’s working and who’s succeeding. That perspective is incredibly valuable to PE sponsors.”

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Clarify each partner’s expectations in key areas Another key to successful relationships is knowing what’s important to each partner, then working

together to clarify expectations of each other — early and often.

Time Horizon. Everyone needs to understand everyone else’s time horizon. Operators may be focused on the next 20 or 30 years. Brands look to create value that transcends generations. But as John McCormack of Sentinel Capital Partners explained, “PE firms, by their very nature, have a limited time horizon. Certainly within 10 years, often within five.”

Agreement Stipulations. All too often, deals can sour because partners don’t understand what will be required from each other. For example, some brands want to require very broad non-compete clauses as part of a financing deal. But the larger the PE firm, the less likely they’ll be willing to sign these broad agreements. “As a PE firm, we’re clearly not going to do anything that would negatively affect a business in which we have an ownership stake,” John McCormack explains. “But we also don’t want to be restricted by one investment in a way that limits other investments we could make as a fund.”

Capital Requirements. Everyone also needs to understand what capital is required upfront — and how those capital needs will be financed. For example, a brand can require that you reimage all your units. That can be costly, so it has to be spelled out upfront and factored into the price you pay or the amount you finance.

Metrics Reporting. The more sophisticated the buyers and the investors, the more critical it is to provide transparency around expectations at both the unit level and at scale. Stephen Spinelli counsels that “If you’re going to attract PE, you need to understand that PE folks are very metrics-driven. The clearer they are about your business model and the metrics that drive it, the more excited they get about putting money in. And that takes the emotional noise out of the relationship, leaving everyone to focus on value creation.”

Keep the lines of communication open — and transparentTurn-around artist Aslam Khan believes that another key to success is the ability to listen well

and the commitment to touch base often. “Every month, I have one-on-one conversations with each of our operators. I always ask, ‘what can I do for you? I’m here to serve you.’ That’s what it takes to build trust. I don’t manage top down. I believe in lifting others up.”

These open lines of communications definitely make for happier, more successful franchisees. But PE sponsors like John McCormack also assert that this type of open communication makes for more investment-worthy franchisors. “As an investor, we conduct due diligence on the franchisor by talking to the franchisees. If they’re happy, that’s a good sign of the health of the system — and its prospects for growth.”

For Karl Jaeger, it’s important to keep those lines of communication open at every level of the organization. “As an investor, we like to really get to know our franchisors. So multiple people within our organization interface with different individuals within their organizations — whether

it be with their ops folks, their attorneys, their CFO, their CEO. Not only does this build more trust, it enables us to add more value.”

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Take shared accountability for solving problems and seizing opportunities

When a franchise system is not doing well, that can trigger finger pointing at the “other” as the cause of the problem. Ironically, the more collaborative the team, the more successful the franchise.

“I’ve witnessed first-hand what can happen when the franchisor and the franchisee collaborate on turning the brand around,” says Karl Jaeger. “The improvement can not only start sooner, but also be sustained more reliably.”

Aslam Khan believes this spirit of collaboration is important between the franchisor and the

equity partners as well. “I keep my partners posted on our progress. I’m always real with them. My philosophy is that if there’s a problem, you shouldn’t sweep it under the rug. You should put it on the table so everyone can help address it. If you sweep your problems under the rug, they belong to you.”

Build your financial architecture with partners who truly understand franchising

Stephen Spinelli stresses the importance of analyzing the nature of a franchise’s capital requirements. Is it working capital? Equipment? Real estate? Acquisitions?

From there, you can choose lenders skilled at solving for the franchise’s specific capital needs. Some lenders may be capable of addressing all of them. But any bank must be comfortable playing on a team — and should be extremely knowledgeable about the unique nature of franchise financing. Spinelli says this requires:

• A sophisticated understanding of how value is created in the franchise world

• A proven ability to communicate clearly and transparently

• An unwavering willingness to collaborate as part of a larger team

“Underfunding is the number one challenge for franchisees.”

Neal Faulkner points out that it’s also critical not to underestimate the risk of underfunding. “Underfunding is the number one challenge for franchisees. Some just focus on how much they need to get started, but not how much they need to weather the eventual storms in the first couple of years as you grow your base.”

It can also be helpful to have a spectrum of private equity sponsors involved in a large franchise organization. As Stephen Spinelli observed, “this can create a mutually beneficial food chain within your organization. Private equity funds often vary greatly in their investment appetites, their capital limits, their exit timeframes, their risk tolerance. But together they can create a continuum of capital that supports ongoing growth.”

And growth is something the franchising world is likely to see even more of moving forward. Analysts expect continued steady growth among franchises — particularly those led by teams of specialists each focusing their strengths on creating win-wins for everyone involved.3

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1 Why Multi-Unit Franchise Ownership Is Now the Norm, Entrepreneur, June 2015

2 2018 Outlook; Catalysts to Start…MCD & Casual Diners Best Positioned, Barclays U.S. Restaurants, January 16, 20183 Franchise Sector Expected to Outpace U.S. Economy-Wide Job Creation in 2018, According to New IFA Economic Outlook Survey, International Franchise

Association, January 29, 2018

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Ab Igram is the Managing Director, Head of Restaurant & Franchise for Webster Bank’s Sponsor and Specialty Finance. He’s been passionate about the world of franchising since his days as an Economics major at Northwestern University and an MBA student in Entrepreneurship/Finance at Babson. Prior to joining the Webster team, Ab was VP of GE Capital Franchise Finance. At Webster, he now focuses on deepening relationships with leading PE sponsors in the franchising sector and expanding opportunities for the bank’s specialty lending practices.