Dunkin’ Brands Group Inc. and Jimmy John’s Gourmet Sandwich Shop recently capitalized on the market’s recent success by offering IPOs to infuse their franchise with capital to stimulate continued growth and execute full or partial exit strategies. Joscelyn MacKay, senior analyst at investment-research firm Morningstar, Inc. called the Dunkin’ IPO,“One of the most anticipated offerings of 2011.”
The Dunkin’ Brand was a complete exit strategy, looking to raise as much as $425 million in an IPO to help raise capital to pay off existing $1.8 billion of net long-term debt. Typical of any investment done by a private equity group, they combined an exit strategy and the infusion of expansion capital to see an increase in value of the business. Counter to the Dunkin’ exit strategy, Jimmy John’s overall strategy was to implement the capital provided by the private equity firm for expansion purposes only. In return, the private equity firm received a percentage ownership in the company, which is still relatively small compared to the ownership retained by founder, Jimmy John.
Dunkin’ Donuts stock did something the Wall Street market didn’t do itself in 2011; experience an increase in value. In the first day of the $422.8 million IPO, Dunkin’ Brand shares rose $8.85, or 47%, to $27.85 in the first day of the $422.8 million IPO. This is reminiscent of the 1993 Boston Market IPO which, after acquisition by a private equity firm, went public at $20 a share and rose 143% to where it closed at $47.50 the same day. Public markets are starting to love franchising and private equity firms are discovering the franchise company as a vehicle fueled with a full tank of leveragable IPOs.
“So many of our clients started out with one or two units, sold a large number of franchises, and have been acquired by private equity groups as a precedent to going public. Investors and the stock market love franchise companies,” says Boroian. Consider: if you purchased 100 shares of McDonald’s stock for $2,250 in 1965, with the splits, you would own 74,360 shares, which at today’s price of $96.39 per share is worth over $7.1 million as of July 24, 2013, according to Donna Rodriguez, McDonald’s Senior Director of Investor Relations.
Not many businessmen “meteorologists” can predict the “perfect storm” developing on the horizon. Many companies, distressed by the challenging economy, find it difficult to borrow the capital needed to become more secure within their market place. Savvy private equity firms acquire the businesses to infuse capital and value, betting on a strategy that by the time they ramp up these companies, the IPO market will be opportune. By mid-2011, IPO transactions had already doubled 2010’s total.
John Jannarone of The Wall Street Journal recently observed Tim Hortons, a Canadian based franchisor, is worth another look. Like Dunkin’, they enjoy higher margins since nearly all of its stores are franchised. When franchising, one can produce up to a 50% margin for profit, while major companies on Wall Street may experience a margin of 7% profit. Franchises offer the further benefits of steady royalties as partial income and, as previously mentioned, are particularly conducive to exit strategies.
“Many years ago,“Venture, The Magazine for Entrepreneurs and Business Owners,” of which I was the owner and Editor-In-Chief, did a study comparing publically traded franchised companies with non-franchised companies in the same industry, and the franchised companies outperformed the non-franchised companies by more than 35%,” said Arthur Lipper. The recent stampede of private equity firms to acquire franchise companies and the IPO of Dunkin’ Donuts have raised eyebrows in the financial community as smart money looks for new avenues of potential dynamic financial success.
It would appear franchising has finally come of age as an investment vehicle. Reaching into all corners of the world, it’s becoming known as a very lucrative industry for all players who want to get involved. “Acquisition mania” is spawning dreams of entrepreneurs who start a business, franchise it, and hope they will be taken public by a private equity firm in shining armor.
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