Advisory Nov, 17 2010

IPO and M&A: Adding Value To Franchising

Franchising is a proven and tested business model for easy, rapid and cost-effective expansion of a brand. However, Initial Public Offering (IPO) and Mergers and Acquisitions (M&A) are heavily opted by the franchisors to secure financial returns. Explore.

By Ramanjit Kaur
Feature Writer
IPO and M&A: Adding Value To Franchising

In a franchise business, IPO is gaining popularity as a viable strategy to obtain cash and additional leverage opportunities. Today, many companies are taking the IPO road to fuel their franchise business. Also, a company opting the IPO route is susceptible to attract potential partners for mergers and acquisitions (M&A). Taking a franchising company public is a big step and gives the company working capital for franchise expansion. But before, taking it public, it is important for the company to be registered with the exchange that the company's stock will be traded on and appropriate regulatory body of the nation. Besides this, getting started with an IPO also involves other factors like scale of the firm, quality of the management teams and the prospects for sustainable and profitable growth.

IPO in franchising

IPO no doubt is an excellent transaction for franchise companies. A franchisor usually takes the IPO route to meet the demands for the brand in the market. Once a franchisor has decided to take up IPO to leverage his company, a beta site is constructed. The success of the beta site decides the future of the strategy. Beta site is more like a pilot franchise, on the success of which depends the entire franchise expansion plan of the company. The IPO strategy is perfect for a franchising business in terms of its growth and expansion as it provides cash to the franchisor and liquidity to its non-management investors. Therefore, it is essential to market the IPO of company in order to create excitement among the public. This is because IPO to a great extent is a public belief in the vision and capabilities of the company.

Advantages of IPO route

IPO is a latest trend which is set to drive the franchising industry towards new heights. Companies like Jubilant FoodWorks, Cantabil and few more others, have recently announced their IPO plans in order to raise funds for their franchise expansions. The reason behind opting for IPO is because of the following benefits:

  • It strengthens the market position of the brand through promotion and franchising by expanding its operations
  • Provides exit funds to private equity investors who have stakes in the franchisee's business
  • It also helps in clearing present debts of the company and improves debt to equity ratio.
  • It aids in expanding the franchisees’ business in new territories
  • It is beneficial for corporate purposes

M&A offering best deals

M&A apart from IPO is also considered as a best deal that adds value to the franchising business company. Buying, selling and combining companies aid flow of cash and growth of the company. For instance, Yash Birla Group has acquired major stakes in Kerala Vaidyashala and entered into a joint venture to enter the wellness industry. As Yashovardhan Birla, Chairman, The Yash Birla Group says, “We have finalised Kerala Vaidyashala (KV) after scrutinising various proposals because of KV’s 15 years of experience in its field and it has given us the leverage to its existing 20 plus stores and good market presence.”

Mostly companies are acquired for two main reasons:

  • To expand to newer geographies
  • To enter newer product categories

But M&A can be profitable deal if handled with utmost care. It is always recommended to take the help of professionals with considerable knowledge and expertise..In short, IPO and M&A strategies can create wealth both for the franchisor and the franchisees in any franchise businesses if these strategies are structured, evaluated and executed well.

Related: Gate-pass to franchising

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