Post-purchase synergies: they come in all types: there are endless possibilities in organizing a multi-brand company that can take advantage of a variety of cost-savings measures that will contribute to the overall profitability of the multi-brand company.

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Over the past 40 years, franchising has undergone dynamic changes. In its infancy, the developing franchise systems were truly entrepreneurial with unique ideas coming in rapid succession to fill the post-World War II vacuum of pent-up demand for services to meet the changing tastes and needs of the American public. Like any other market force, franchising has changed with the times. In the 1970s and 1980s, the concentration was on growth of individual systems. As these franchise systems became more mature, franchise managers found new ways to leverage their acquired expertise. In some cases they developed parallel systems to complement the offering of their flagship systems. In other cases flagship systems were acquired by strategic purchasers who believed that these franchise systems were a good vehicle for the distribution of their products and services.

Realizing Synergies

As franchise markets began to mature and there were more and more similar franchise systems co-existing within a market, franchisors found ways to further leverage their ability to gain market share by co-branding with complementary brands to capture a market segment that the systems felt they were missing. The present-day franchising world finds itself further consolidating Under a common umbrella in an attempt to build efficiencies within a franchise concept and to realize synergies between these multiple systems.

The word "synergy" is of Greek origin, which originally meant working together. Webster's dictionary defines synergy as "a mutually advantageous conjunction or compatibility of distinct business participants or elements (as resources or efforts)". In today's market, franchise systems are combining under a single franchise platform trying to leverage these synergies that will enable the particular franchise group to become effective and efficient brand managers. Now longer are franchisors satisfied in growing a market under the umbrella of a single-service purveyor. Currently franchisors, or their holding companies as the case may be, see themselves as multiple-brand managers that can cross-market segments using their expertise in their flagship systems to leverage other franchise brands.

Private-equity groups and venture capitalists have targeted their franchise investments in different segments of the economy. In seeking out these investments, they look for targets that not only will add consolidated top-line revenues, but also will increase the multi-company efficiencies that will translate into consolidated and decreased expenses thus leading to higher-profit margins. Whether it is in the quick-service restaurant industry or the automotive aftermarket, each transaction will be examined--and even valued--with an eye toward the available synergies, as well as the added sales revenues and cross-market revenue opportunities that can be derived from these consolidations.

Usually when a company markets itself, it establishes a selling value based upon a multiple of its earnings before interest taxes, depreciation and amortization or EBITDA. In addition to this valuation, the seller will often try to increase the valuation of the business by marketing the fact that what he is selling is actually worth more than the EBITDA. Through the sale the buyer will realize certain efficiencies and savings by consolidating some of the functions of the target company with the other franchise companies already in the purchaser's portfolio. These synergistic savings can be of all types. From a very basic level they can include certain nonessential expenses that a selling company shows in its profit-and-loss statement. These basic savings may include items such as club memberships, airplanes and other employee perquisites.

Opportunities for Savings

Beyond these very basic cost savings there will be examined more opportunities for savings through employee consolidation and other items. It is likely in any purchase transaction that the acquiring company's chief financial officer will look at every facet of the two companies to squeeze out non-essential expenditures to realize the best possible synergies. In evaluating a purchase of the company, the acquiring company will value its investment based on the return of investment, more commonly known as ROI, and how long it will take to realize the return of 100 percent of the purchase price. Accordingly, to realize a targeted EBITDA on a post-closing basis the acquiring company will model in its budget the synergistic savings it believes that it can realize.

There are numerous synergies that are available to franchise companies operating under the same corporate umbrella. These synergies can be divided into what can be called back-office and front-line synergies. With respect to back-office synergies, even if the franchise system being purchased offers dissimilar products and services from that of the flagship franchise, there are plenty of synergistic opportunities. Whether or not the franchise systems offer similar products, there are certain administrative functions that beg for consolidation and transcend the character of the products and services within the two or more franchise systems at issue.

Some of the more common administrative functions that are ripe for consolidation are accounting and legal. Every franchise system requires the preparation, renewal and periodic amendment of the franchise disclosure document, formerly the UFOC. It is certainly possible and preferable to consolidate the two legal teams from the separate franchise systems and combine the preparation of legal documents through one coordinated legal group. Likewise, other legal functions that are part of any franchise system, such as trademark management, resales, renewals, and enforcement proceedings can be performed from a single legal department with one general counsel at potentially significant savings.

In the accounting area, the synergies that can be realized also are significant. Franchise accounting functions such as collections, balance-sheet preparation, and budgeting can be done with a combined or single accounting staff under one and not two chief financial officers. Other areas behind the walls of franchising that are primary targets for consolidation after an acquisition would be real estate, customer service and perhaps even franchise sales or development.

Within the venue of real estate, while the parameters of an acceptable location for one franchise system may be different from another, these differences can be easily learned. One caveat to combining this function is to determine if the systems owned by the single franchisor are competitive. If they are, one must be sensitive to the argument that finding a good location for a franchisee of one system may be done at the expense of a franchisee from the other system. Likewise, in franchise development, the franchise sales team must be cognizant of the potential skills of each of the franchisee applicants to direct him to the system where he has the best opportunity to excel and not the system for which the franchise development person maintains his allegiance. Stacking one system with the most qualified franchise leads may be good for that system, but it will leave the other system weaker.

Creating Shared-Administrative Services

Quite often, unless the corporate culture of both franchise companies is integrated, loyalties to one system may prevail over the other to the detriment to one of the franchise systems. Integrating two corporate cultures may prove less difficult if the host franchisor combines these overlapping administrative functions in a separate division such as shared-services. In this manner the employees handling this function are not legally tied to any one franchise system. Moreover, the budget for this division would be based on the servicing of all systems and bonuses or other compensation benefits would be based on the manner that the administrative services are carried out between all of the member companies.

In addition to these shared-administrative functions there are other franchisor functions particular to a single franchise system that may lend themselves to consolidation with two or more systems. However, these very franchisee-visible functions may be somewhat trickier to combine. These frontline functions of operations and marketing, while lending themselves to synergistic combinations, need to be handled with care to make sure that both systems receive services that are equal even if they are not separate.