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Unemployable with Jeff Dudan
Should You Ever Sell Your Own Business? Here’s the Real Answer with Patrick Galleher #222
00:58:31
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- [00:00]
A
Hey, everybody. Welcome back to the unemployable podcast. I'm Jeff Duden. If you grew up in a family golf retail chain, learning the hard lessons of entrepreneurship, was a collegiate golfer at the University of Richmond, attended the London Business School and the center for Creative Leadership in Belgium, and at 29, became the youngest CEO on the London Stock Exchange with the SAS company WI Link and have led the turnaround of Sweet Frog, a great American franchise system and led it to the most successful exit in frozen yogurt history. And today leads Boxwood Partners, a boutique investment bank that has consummated and participated in over $7 billion in transactions since 2008. Your name can only be the one, the only Patrick Gallaher. Welcome, sir.
- [00:50]
B
Well, thank you, Jeff, for that's the best intro I've ever heard. That's incred.
- [00:58]
A
How'd you do it? Is it all true?
- [01:00]
B
It's all. It's very, very blessed. I had had a lot of lucky breaks and, you know, got very fortunate to surround myself with great people. So.
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A
Well, excited you're here. We've been trying to get this together for quite a long time. You're a busy guy traveling around the world, living in Puerto Rico and all of that. But here's an opener for you. Should anyone ever sell their own business?
- [01:26]
B
No, no, that's. It was. I mean, that. That's.
- [01:29]
A
This has been Jeff and Pat. We're done today. That's the end of it.
- [01:33]
B
That's the greatest softball question ever. And, and I think Grant from Riverside answered a great on the panel last week at Springboard, and he said there's a reason why they would never sell a company without an investment bank representing them. So, you know, if it was the right thing for a founder owner to do, you would see private equity firms, you know, selling their own portfolio companies and not hiring us or another great investment bank to help them in the process. So, you know, it's, it's, it's very. You know, I always equate it to going to a gunfight with a knife. You do not want to negotiate and try to get a deal done with a private equity firm or a strategic buyer who does that for a living every day. You know, founder owners do a great job at building their businesses and running them and building value. You know, running the process on a strict timeline and getting the right terms and the right valuation is something you should not do on your own.
- [02:35]
A
What is more important at the end of the day for a founder, operator, seller? Price, absolute price or terms, you know.
- [02:46]
B
From my experience, we have a lot of clients, founder owners, who will opt for the second or third highest enterprise value based on terms and connection with the private equity firm. So you know, we, we run a process, you know, it's, it's, it's a little bit like dating at. Towards the end, we bring in the top eight bidders for management meetings to really, you know, one, it's, it's called a management presentation. But it's just as much for our clients to interview the prospective investors as it is for the investors to get comfortable with the management team. So, and we find at the end of that process quite often the connection and the aligned objectives going forward and the feel for the right operating cadence coming from that private equity group, more might not be the highest bidder, but they might be the best fit for the second bite of the apple.
- [03:44]
A
As an operator for the majority of my career I thought private equity had always been a thing, but in reality private equity really came to its current form in the mid-90s. Can you talk a little bit about how private equity evolved and what purpose it really serves to help business owners release capital, un, unleash, unleash some wealth and then also help companies grow?
- [04:16]
B
Yeah, that's a great question. I mean the original, you know, private equity today is, is more about strategy and helping business owners and families grow their businesses with, with, we call it other people's money. You know, back in the early days, in the early 90s when KKR and some of the firms first started, it was all about financial engineering and you know, the sum of the parts being worth more than the, the whole enterprise and, and that really has changed over the last 10, 15 years. It's all about strategic vision, helping the founders put the right KPIs in place, put, put the right, you know, players on the team and helping, helping the current management from their experience, you know, put the right strategies to work that are going to help them grow, you know, 50 to 100% over the next three to five years. So private equity now is much more of a partner than an owner. And a vast majority of the deals that were involved with the private equity firm after the first 90 to 120 days is really just, you know, part of the board and helping from a vision standpoint and you know, putting the right parameters in place on a day to day basis. So a lot less scary than it was 20 years ago. When I, when I did my first IPO in 2000 and then I did a private equity deal in 06, you saw the Private equity firms that were more about financial engineering really got annihilated during the 0809 recession. And the firms that lasted and are really flourishing today, like the Riverside Company and Princeton Equity and Susquehanna and those firms are really all about helping current management grow the business and not replace management and not change the strategy. So that's where our process, where we narrow it down to eight final. Private equity firm really self selects and, and aligns management with the potential buyers. So by the time we get to loi stage, everyone's pretty aligned with where they think the business is going to go.
- [06:31]
A
All right, let's deconstruct something. You said, you said that they were people that were looking at it for the sum of the parts, right. So there's the, was it RJ Reynolds that was featured in Barbarians at the Gate where there was a leverage buyout and then they, they wanted to deconstruct the company, buy it at a low price, deconstruct it, sell it for a sum of its parts and then basically make money on that. And it was called Barbarians at the Gate. And how they tried to hold them off, I don't know. You know, it was a big thick book. I never got to the end of it. So I don't know what happened there.
- [07:04]
B
But you know, that, that, yeah, that really, you know, especially in the sub 500 million prize value, we, we don't see anyone, especially in the franchise industry. I mean no private equity firm, firm is paying 10 to 15 times cash flow to deconstruct the company. It's all about growth. It's all about strategic fit and it's all about how can that private equity firm add value from a marketing standpoint, from a finance perspective, you know, how can they assist the current management team in getting that, you know, getting that company to the next level? So, you know, the barbarian of the Gates and then those type of episodes in private equity, they still do exist, just not especially out in the franchise space.
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A
Right. And also the antagonist or protagonist and Pretty Woman.
- [07:56]
B
Yeah. No one's buying Blue Star Airlines anymore to, they're separated out. So it's, that's, those are great movie, movie lines and movie plots, but that, that's no longer the current private equity environment.
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A
Great. When I think about private equity, I kind of think about it as a ladder. Right. You've got some people or some firms that are going to operate in the lower market and they're going to be, they're going to have a certain size fund, they're going to invest in Certain size businesses, maybe a platform company that's healthy and maybe they're willing to pay a good multiple for it. But then their goal is really through organic growth, through strategic partnerships and through accretive acquisitions to take that business and add on to it. And basically one plus one equals four or five. Because when you move it up to the middle market and there's funds that say I can't write a check less than 30 or $50 million, those companies are going to be writing bigger checks. And ultimately the higher the EBITDA is or the cash flow minus certain things, then the larger the multiple genuinely is. So, so it's kind of this game of, of, of taking an asset and then figuring out how to enhance the asset for its benefit and for the benefit of any of the other assets that are put with it. And that's how extra capital is generated. And then of course, there's always some, there's always a bigger fish that if you can build it in the middle market and you build it to a 50 or $100 million EBITDA business, then there's going to be somebody else at Latwevos is looking to make those types of investments. Is that something that most business owners that you engage with understand the concept of or is it even important for them to do so?
- [09:55]
B
It's part of when we take on a new client and during the process of onboarding a new, a new mandate, you know, we really spend a lot of time with the client trying to understand do they want to be the platform, do they want to be part of a platform? If you become part of a platform like Empower brands or Neighborly or Authority brands in the franchise space or an Unleashed Brands, you know, that's a different second bite of the apple. You know, our client's going to get, you know, shares or roll forward into a diversified portfolio of franchisors versus just being, you know, a single franchisor investment. So there's a lot of benefits to becoming part of what we call a franchise or aggregator. But there's also, you know, you're diversifying your upside and your risk by, you know, your firm isn't going to be the sole determiner of future value on the next exit. So, but there's been, you know, the great thing about the franchisor space is, you know, even KKR and KKR owns Neighborly now. And you know, 10 years ago KKR had no interest in the franchisor space. So you're seeing much the largest of the large private equity firms invest in franchising, Blackstone has an effort now. You know, they've made some, some big acquisitions in the franchisor space. And you know, so you're seeing, you know, all the way from the smallest private equity independent sponsors all the way up to the Blackstones and the KKR and the Susquehanna's, you know, putting real money behind the franchise industry.
- [11:30]
A
What is it about the franchise model that they like so much?
- [11:33]
B
Predictability, you know, we, you know, we, we always term it internally is, you know, a lot of our clients are recession resistant and pandemic resistant. So we have a lot of clients who did very well during the 08 09, 2010 recession because corporate refugees as they got laid off at the, you know, some of the big GE and some of the big firms, they went out and bought franchises in residential services business, you know, low cost, no lower, lower initial cost franchises and bought themselves new jobs making 150 to 250,000 a year. So we've been able to prove to the private equity industry that through the recession of 08 to 2010, a lot of our clients did extremely well. And then during the pandemic, once again, franchisors did extremely well, excluding restaurants. But franchisors and residential services specifically did incredibly well during the pandemic because more people were staying homes and they wanted to spend money on new fences and new roofs, new siding, new carpets. So, you know, you know, franchisors have proven time and time again to have high predictability of royalty streams and future cash flow. And there's very low capex at the franchisor level. So your free cash flow from EBITDA to free cash flow is a very high conversion. And so the ability to service debt. And the lenders love franchisors, so it's really proven to be a great industry for private equity to get behind.
- [13:10]
A
If I'm an operator listening to this, you've just started speaking the language of finance and you helped us, I believe we were one of your first deals in franchising with my business advantaclean back in 2018 through the year and then closing January 1, 2019. And what was apparent to me that was not apparent before is that finance is really a foreign language. And no matter how intently I listened, if I didn't have the underlying fundamentals of finance, how, how the businesses are being evaluated, what the ratios are, how private equity firms evaluate risk inside of a brand, what they give weighted credit to, what they take credit away from, and really, you know, navigating that to your to your extent, if you don't speak the foreign language of finance and you're an operator that's been doing painting or restoration or one of these things and you're going to get into a room and think that you're going, it's, it's like dropping in Portugal. And you, you haven't spoken a word of Spanish your entire life. You know that the Octopus is great, you love the coast. I mean, there's things that, you know, you'll recognize words occasionally like bathroom, but at the end of the day you don't have a chance. So you know, talk to me a little bit about, you know, some of the, some of the do's and don'ts. If you're, if you are a franchisor or if you're a direct business or if you're even a franchisee, which I'm going to want to talk to about what's happening in the boxes, as we say in the franchise industry, going through the brands into the boxes and the consolidation that's happening there. But I mean, right off the bat, what are some of the do's and don'ts that you can give value to our listeners here? Because we have a huge audience, I've found out in franchising with brands and with business owners. So what do we stay away from?
- [15:06]
B
Well, one thing is I would never share your internal financials with a private equity suitor before. We've actually evaluated them and gone through and cleaned them up. And you know, that's the, one of the number one mistakes we see is, you know, we'll take on a client, we'll, we'll put together their, their new P and L that includes adjustments for one time expenses. And say you hired a new CFO and you, you spent 100,000 with the recruiting firm to, to find the CFO. That's a non ongoing operational expense that, that we eliminate in the P and L that we put together. And then two, we create a maturity curve on sold bayot open and locations that are going to open less than, let's say a two to three year maturity curve. And we'll run that out and create an embedded EBITDA based on all the locations sold but not yet to maturity levels. So when you hear a franchisor got 20 times EBITDA, it's probably because it's 20 times their initial EBITDA. But the buyer or the private equity firm hasn't, has, has paid 12 times EBITDA based on the pro forma adjusted EBITDA that we've presented to them. So you just gotta be very careful. It's very hard for us to convince a private equity firm that's already seen that you're at 5 million of EBITDA that you're now 7 and a half. Once we're done all of our work, it's much better off if they've never seen your internal financials at 5. So that, that's a big mistake. And then, you know, I, I think having, making sure that you have good legal advice. We see too many emerging franchisors trying to save money on their, their first FDD and franchise agreements and, and not really spending the time and effort and money to get their FDD and their documents right up front and then being too open to making changes to the franchise agreement just to get a franchise fee. You know, on those first 10 to 20 units, we, we see a lot of messy franchise agreements in the initial, the kind of, the first 20 units of most systems because they're, they're desperate or eager to, to start making progress on the franchise development side.
- [17:32]
A
So many mistakes are made. As, as you're aware, I was a participant in building a franchise sales organization called Fran Devco and through the course of that, during that, that was my Covid project, right. I had sold my business and yet all day to be on zoom, and I was on Zoom 12 hours a day during COVID It was unbelievable. But interviewing companies to or representation by our franchise sales organization and more often than not, they had had some success. Their program may have stalled out. So they're trying to find a solution to relaunch or reinvigorate their franchise sales. And they would send us their documents and they had given the entire tire state of Texas away to a franchisor. Their territory model. I believe I've seen, I have seen some franchisors basically cap their outcome to 50% or even 25% what it could have been because of the construction of their program. And then unfortunately, they had success. So now they had 20 or 30 or 40 franchise owners out there. All the good territory was gone. They didn't have performance incentives in there, like I say, or, or things that would force consolidation or encourage people to spend the right thing. So you, you look at these, at these documents and now they've got to reel it back in. But that's really not that easy. In Franchi, a deal's a deal and they've got to go through a cycle of renewals and stuff. So they, they took what could have been a five to seven year journey and they've just made it the 12 to 15 year journey really to get the value out of it. And I, I'm not trying to over dramatize it, but it's, it's true. I mean the, the genius attacks that people have in creating their franchise program without getting proper guidance or strategic disclosure documents. Not, I mean you can get a legal disclosure document from a lot of franchise attorneys, but they're not necessarily going to be strategic. And I think at home front brands, one of the things we did was before we ever went to market, we brought in the chief legal officer who had been at Service Master, he'd been at servpro, he'd been at Valvoline, and his property service experience really helped us. There was things that we were able to put into our documents, I think for the benefits of the franchisees and the franchisor that I just didn't have visibility into. So, you know, really good, really tight. They've been, you know, they, they've held up and they've aged extremely well and I think, you know, but again, this was my second time around or probably more like my tenth time around by then with all the brands that I helped or participated in during 2019 and 22. But, but for many people it's like, you know, I think that's, that's a critical advice is if you're still young in your franchise journey or if it's just starting proper strategic advice from somebody who's actually built a brand or actually helped somebody sell the brands. Because there's lots of people giving advice out there. But I will tell you, probably 95% of them are going to take some money from you and give you, you know, some sort of a templated deal. So it's hard, it's actually hard to get the good advice early in franchising. I think it's one of the challenges in our industry.
- [20:50]
B
Yeah, you know, far too many brands, you know, I have made very poor decisions when it comes to area developer agreements and oh yeah, just to get some quick cash in, in the first couple years of the franchisor journey. And then those area developers, you know, sit on them and don't, don't do anything to produce additional royalties and you know, then you got to, you got a great brand sitting there and you know, no ability to push new locations or new territories being sold in those areas. And it just really is a limiting factor and it does hurt the, the future enterprise value of, of those brands. So I'm always very consistent when I'm speaking to emerging franchisors about, you know, getting the territory or protected, protected territory on a four wall location franchise. You know, make sure you're getting that sizing correct because you don't want to sell out the all the good white space and not get the royalty benefits from that. So.
- [21:56]
A
What are some dues in terms of preparing for a sale of your business 24 to 36 months from now?
- [22:05]
B
Focus on validation and franchisee health. I mean that, you know, when it comes down to are you going to get 8 times EBITDA or 18 times EBITDA, everyone is going to want to speak to the validation. You know, how many of your franchisees are profitable enough that they're buying a second or third location beyond the first franchise agreement. You know that that is one of Those kind of KPIs key success factors of a franchise system that really gets private equity excited. If your franchisees can easily afford to add a second third location in year two and three, you know that, that that's what's going to drive value and drive, you know, you have good operators making money, they're validating well and they're opening new locations. Yeah. So really focus on, you know, are my franchisees healthy, are they doing the right things and that's going to pay a ton of benefits down the road when you go to sell or bring in a private equity investor, you know, selling more locations that you can support and that aren't in good locations and aren't sized correctly isn't going to drive value. Getting locations open, getting the ramp curve, the maturity curve as quick as possible launched, those are what really drives value in the franchise industry.
- [23:30]
A
When we did our deal together on my brand, Boxwood did an exceptional job. You exceeded our expectations. We received 131 indications of interest. We received 35, Lois. We picked 10 groups and we made them buy us steak and wine and we met with them, we narrowed it down to three. That is where the money is made, in my opinion, with your investment bank. That's when somebody needs to stand tall in the pocket and not blank and be able to really understand the landscape of each of the potential suitors. Where they are in their fun life, what they're looking for, what's their buying patterns and other deals, what are they willing to pay for? Have they lost out on a few deals leading up to this and they've got to buy something, you know, so, so you know, that's where you pat observationally really brought the value in because when you get those last three people, it gets dicey. And I think every deal dies three times and you have to stay calm and you can't, you can't put yourself in the car like you've already got the big bag of money. You just really have to, have to sit there and let the professionals do their work. At the end of the day, it was my decision. You said you can do this or you can do this. But the choice seemed clear at the time. And again, right at the end of it was where somebody that is operating in the space needs to really bring the value and hold people not to retrade on their loi or get something extra out of it with great integrity, not play these against each other, but to give them the information that they need to make an informed decision. And because there's always, there's going to be another deal. So you've got to have credibility in the industry. You, everything that you say has to be true because it'll all come out later. But yet sometimes people need information to make the very best decision that they need to make. So, you know, I, I think it was, you know, very professionally done, fair to all parties with, with great integrity in that situation. And even from the beginning of the process, you never told me a number. You were very careful not to anchor at something that I could then potentially get disappointed from. You didn't even really bracket. So how do you manage expectations of a seller, first time seller, who's probably jittery and panicky and excited, it all wrapped up into one and then what makes a good seller in terms of seller behavior, seller discipline for you to work with?
- [26:23]
B
Yeah, great question. Well, first off, we have a sign in our office in Richmond, Virginia that says trust the process. So I always remind our clients to just trust the process. It takes seven months, seven to eight months to run it from start to finish. It allows us multiple points in the process to make the potential investors stretch on their terms and their valuation. They generally know and accept the fact that if, if we're involved in the process it's going to be competitive and they're not going to be able to retrade or if they do retrade, they're, they're really risking losing the deal and they've got to, you know, and, and I'm always very upfront with potential buyers in our process. You know, at the end of the day, by default you're overpaying for the, for the asset because you're outbidding 100 and 200 other firms. So you know, you're, you've gotta, you Gotta be the outly outlying bid to win a process, you know, from boxwood. So if everyone else is bidding 85 million and you know you want to win it, you gotta be 95 or 100 million. And you know, it's part of the poker process of investment banking where, you know, they're, they're trying to see how much we're bluffing and they're trying to test us to how competitive the process is. And, and you know, we've got to, you know, stay firm that, you know, it's uber competitive. And these are all the reasons why people are willing to overpay for our client. And you know, if you want to win the deal and partner with them, you got to be, you know, you got to be willing to accept the fact that you're, you're going to pay more than everybody else. So, and you got to stay true to the terms. I mean, if our client wants to own 35% going forward, not 25%, and they want the management team to get 10 to 12% of options in the new code, you know, we put all that in the LOI instruction letter right up front. So when we get a headline number as many of the variables and the areas that could be retraded or taken out at the LOI stage. So, so the, the investors slash buyer, you know, they, they've literally got a retrade to change any of the key objectives that our client had going into the process.
- [28:43]
A
Going through a process can be disruptive. Everybody's thinking about what's going to happen to them. How deep into the organization should the information that there's a process going on be shared? Is it the management team? Is it the CEO and the cfo? What's your best advice for keeping this confidential? I've been in a situation where I was inbound to buy a company and I walked into a meeting with the owner and the entire company was sitting in there. And she said, we all, I, I, she said we don't hide anything from each other. We all make the decisions together. And it was that it was at that point I knew that deal would not close.
- [29:25]
B
Yeah, so that's a great question. And it's very different in certain circumstances and different companies. You know, we've, we've had very confidential processes where only, you know, two or three PE people internally were inside the tent. And then we've had other processes like that where we've done factory tours and you know, everybody on the floor knew that they were, you know, taking on a private equity round and you know, private equity, this stage, you know, on 100 to $300 million deal, 20, 30 years ago, that was an IPO and everyone would get up and ring the bell and be excited about going public and we're almost there with private equity that it's kind of the next stage when, when a franchisor specifically hits 100 to 150 million of system wide sales. It's kind of that, you know, tick box that now the franchisor is, is well established enough to receive a private equity investment to take it to the next level. It's kind of a, it's not as scary as it was 20 years ago. As we started off the conversation, it's really all about growth and making sure the founders are able to take some chips off the table and then really focus on growing the business versus growing their personal wealth. And you know, that's, that's good for all employees. I mean it's, it really is. I've seen so many circumstances where the employees of the franchisor benefits greatly from that next bite of the Apple, that 10 12% management option pool that gets put into place and it's, it's amazing to see the wealth that's created on the next bite of the Apple for the average employee or the management team that wasn't one of the founders of the, our client at the time they did the initial deal.
- [31:15]
A
When should the management team or founder stay and in what situations should they gracefully get out of the way?
- [31:25]
B
You know, once again that, you know, that we, we try to determine that very early on in our engagement is, you know, it's during the initial meetings, you know, what, what is the objective of the founder? Are they looking to retire? Do they want to, you know, build a platform and buy three or four other franchisors and become the platform or do they want to join, you know, an aggregator like Empower Brands or Authority Brands and become a brand president and really ride that next investment until they have their next exit. Neighborly has now done five private equity deals and the management teams have done extremely well on each one of those exits. And actually they Neighborly exited to Riverside twice. Riverside bought it, sold it, then bought it back and then sold it again to Harvest and then Harvest sold it to kkr. So you know, you have a lot of scenarios that, you know, our clients could see the different outcomes and we, we try to help our clients kind of think through that next five years post deal. And you know, we've, we've successfully navigated clients changing their minds A week prior to close, we, we, we, we had one client who the whole time wanted to stay on and build the platform. And then a week prior to close, he said, hey, can you call the buyer and tell them that I want to actually go start another franchisor the day after close and see if they're okay with it? And, you know, I, I, I told them there's no chance they're going to let you do that. You know, you're going to bust the deal. And, you know, after several conversations with the buyer, we were able to negotiate a exit for our client the first week after the transaction. And he successfully went on and started a new franchisor. And it all worked out really well. So it's, everything's possible. It just takes a, you know, it takes us understanding what our clients want, and it's usually better for us to know up front in the process. Not, not, not a week prior to close.
- [33:26]
A
Well, with my experience and then observationally and other deals, occasionally the benefits of a founder staying in place is that founders, whether they realize it or not, they have this presence or pressure over an organization that kept behavior to a certain place by the executives they were on. Executives weren't able to grab power. They weren't able to be unreasonable. There was, there was a performance expectation, sometimes a cultural expectation that was happening. And then on the other hand, many founder operators are not going to do well being managed by a private equity reporting to a board. So it's this, and then you have situations where they want the owner to stay on as a figurehead and a chairman, but then he goes and sits in the board meetings and people just, you basically put them in the corner, give him a cup of coffee and don't, don't even, don't even give them the microphone to say anything. So it's more of a ceremonial thing. And I would think that if I'm a private equity firm and I'm investing $100 million or $200 million in a brand, that I'm going to want to be darn sure that whoever's leading that brand is private equity proven and private equity tested and that they understand how to report, they understand what people are looking for, they understand the level of accountability that's going to be required in that situation. And I, I think we both could point to a few situations where the founder stayed on as a brand president. And it just, it didn't work. It just, it doesn't work. So I think on both sides, if somebody's motivated to stay on and participate and take an active role in the business. I think it's, I think it's prudent for both sides to have a way out if it's not working. And, and maybe, you know, maybe it can, maybe it can be a, let's see how it goes. And if it goes well, it's going to be this. And if it doesn't go well after six months, you can ride off into the sunset and, and do that. But I don't, I mean, have you ever been on a deal where you had to just tell a founder that, like, you just need to get out of the way and, and take the money and take what you've got and, and let them have this business because you're just not going to do well in that situation.
- [35:56]
B
You know, that's, that's where a trust, the process really comes in. I mean, by the time you've sat in eight, eight to 10 management meetings and met different, different private equity firms and, and every, as we spoke about earlier, every private equity firm has a different operating cadence and different style around helping the current management succeed. And you know, we, we don't see a lot of, you know, CEOs parachuted in. You know, we do see maybe a new CFO coming in to help structure the financial models. And, and you know, that, that tends to be a place where the private equity community, you know, you know, in a lot of these, you know, deals tends to be the first institutional debt in a company. So managing a $50 million debt facility with a private credit fund is, is a lot different than, you know, kind of treasury services at a commercial bank. So, you know, we do see some, you know, upgrading of the, the finance department at most of our clients post deal. But, you know, usually the private equity firm has a pretty good understanding of the founder, owner. And you know, we usually do several dinners where, you know, everyone has a chance to talk freely about, you know, what they want post deal after they get to know one another. And so, you know, post close, we don't see many surprises come up on, you know, if a founder decides they want to leave after six months, the private equity firm probably had a pretty good feeling, you know, about that. And they, they, you know, they've worked through the kinks. And it's, it's, I can't think of a scenario where it's been, you know, you know, kind of, it's been a tenuous exit. It's, it's, it's usually the, our clients have a pretty good stake in the, in the company. Going forward and it's worked out really well.
- [37:51]
A
Great point. If I was going to exit 24 to 36 months from now, I would definitely look at upgrading my finance team because post close somebody's got to fill up those spreadsheet cells for that 28 year old kid from Cornell that's actually running the business now.
- [38:05]
B
Yeah, it's AI is doing a good job though. So it's, it's going to be very interesting over the next six months to see how some of the AI models and yeah, AI is coming on fast and a lot of our clients and even on, you know, reviewing Lois and reviewing the FA's, you know, some of the AI tools now are very good at, you know, what used to take law firms days to go through the FA's and create charts on where amendments have been made. Some of the AI tools can produce that in, you know, a minute now. So it's. The due diligence effort using AI is definitely changing by the day. At this point.
- [38:47]
A
We've spent the year uploading all of our contracts, vendor agreements, franchise agreements, everything into an AI powered contract management legal software. And now we just simply ask a question and it will go get everything with certainty. And you know, you know, the answer we usually get back from it is, you guys are the best I've ever seen. But then after that it tells us, you know, what we're looking for, you know, it's pretty good for a human is what it, what it comes back to me with. But. So current state private equity interest rates have bumped up over the last few years. We were in this false time of being able to borrow money at 1% against our LMA for years and, and they would pay you to take money. But now interest rates have normalized a little bit, which is going to have an impact on the, on the financial model, which is going to have an impact on the multip. Some downward pressure there, but it seems like multiples have remained high. But what's the current state of PE today with we've got tariffs, we've got interest rates, we've got a really polarized political situation, but yet it seems like private equity has more dry powder now than they've ever had. Yeah, what, what do you, what do you view as private equity over the next 36 months in terms of their aggressiveness, in terms of putting capital to work?
- [40:17]
B
All signs are to, you know, I mean there's over $3 trillion of callable capital out there within the private equity community. So there's.
- [40:26]
A
Can I say real quick Can I say something real quick? I met you like in 2016 maybe, and, and the first 10 times I talked to you like, hey, you know, multiples are going to go back to five at some point and it's never happened, sir. I guess it will, I guess at.
- [40:41]
B
One point they will, but at some point they will. And it's, we're, we're blessed that, you know, the, the, the private equity community does have to put that money to work. There were a lot of funds raised right before COVID 2019, 2020. And they basically sat on that callable capital for three years during COVID and now they've only got two to three years left on a call cycle. So that money all has to be put to work by 2027. So there should be a really strong private Equity Drive over 2026. And we're seeing it in the fourth quarter. We have eight seven day deals under Li right now. So we, where we're seeing a lot of deals coming to the finish line here at the, in the fourth quarter. So it's, we're seeing no slowdown. I think 26 is going to be a great year in the M and A markets in and outside of franchising. But you know, specifically franchising. You know, the multiples have come down as rates have gone up, which, you know, makes sense from a financial model perspective. But you know, we've also seen softness across quite a few businesses that we monitor and communicate with that the economy is a little softer at the moment than I think some of the federal stats are showing. And so that has caused some multiple depression because year on year growth rates are definitely slower in 25 than they were in 23 or 24. So for a company still growing at 15, 20%, multiples are probably pretty similar to where they were. We're just seeing less companies have the growth that they had in, in 23 and 24. So it's. So multiples have come down a little bit, but in, in mostly, you know, in response to slower growth rates.
- [42:38]
A
That's fair. You've talked a lot about franchisors. Makes sense that's you're the number one investment bank in franchising. If, and I'm putting that on you, you didn't say it, but I, that's my view and probably, probably by the numbers as well. Where are the opportunities for franchisees? We talk about outcomes at Homefront Brands and we focus our entire internal team on at getting franchise owners the outcome that they're willing to work for and the outcome that they deserve and clear, making it, making our programs, making our models specific, simplifying the models, emboldening them with technology and insights, and letting people, clearing the obstructions from people so that they can run and build big operating franchisees play Monopoly. We want a smaller number of large franchisees, and it's out there in, in the best systems. Now the challenge is it's taken a lot of these systems 25 or 30, 40 years to get franchise E's that are doing 50, 60, $70 million and putting $10 million of EBITDA to the bottom line, but they're out there. And so our thesis was, how can we, how can we accelerate intentional consolidation or accelerate growth so that our franchise owners can participate in this economy where private equity is looking to aggregate the boxes owned by our wonderful franchisees. What's going on in that space and where are the opportunities?
- [44:19]
B
Yeah, it's definitely a trend we're seeing and we've been very successful at transacting with larger franchisee groups, kind of, you know, let's say seven and a half to 15 million of EBITDA franchisee groups. And what we've really pushed at Oxford over the last three to five years is bringing private equity into the Resi Services franchisee market. You've always seen it in the restaurant space. You've always seen it in the Fitness Planet Fitness franchisees in Arms Club, Pilates. You've always seen private equity in the fitness and the QSR space on the franchisee side. But more recently, we've been really pushing hard to bring private equity into the franchisee of some of the top Resi services brands. And very successfully. It's, it's, it. If you asked me 10 years ago whether that was going to happen, I would have said no. And I also would have said multiples come down to five. But we've, we've successfully gotten franchisees, you know, eight, nine, ten times EBITDA multiples, you know, where traditionally they were used to selling, you know, through a business broker for three or four times ebitda. So it's, it's, it's been a great market. Private equity is really excited. We have a lot of private equity firms that have lost out on some of the transactions who are aggressively looking for franchisees in the resident services space. So I, I think that's a trend that's going to continue in 26 and 27, and we've got several transactions coming soon here that are going to even more solidify the acceptance of private equity within the franchisee space.
- [46:07]
A
That's what we want for our owners at Homefront Brands. We care deeply about them. We wanted them to be as successful as they deserve to be, as they want to be, as they're willing to be. And the beautiful thing is that there is a marketplace now for them where they don't have to just sell to a neighbor or to some other corporate executive. There's a, there's a strategic element to roll ups and consolidation that good franchisors find a way to allow within their systems. And you as a franchisor, you have to understand that you know private equity firms, how they grow and if they get inside of your system and they own Atlanta and Chicago, then they're going to be looking to add more cities and they're going to be looking to be very, very aggressive. And those are, it's very, they will pay attractive, attractive prices for these franchises to accomplish their goals. So I think within, with allowing private equity to come into your system, there's got to be some guardrails that good franchisors have learned to establish so that it can be a win for everybody.
- [47:14]
B
And Jeff, that you hit on a great point. It's one of the first things we do when working with a franchisee wants to transact is we try to get a memo of understanding with the franchisor in place so we can properly brief the private equity community during the process on are they allowed to buy five more territories, are they allowed to buy 20 more territories? Where are those guardrails going to be put in place? And really get that on the table up front. So the last thing you want to do is bring in a private equity firm to buy a franchisee that has 5 million of EBITDA and then be told you can't buy any more, you're already too big and we don't want you owning more than 5% of our system wide sales. So we try to make sure that we get those guardrails in place up front, get an MOU designed and agreed with the franchisor before we take on the client and before we go to market. So that way, you know, when we're getting bids, you know, we know exactly what's going to be allowed by the franchise or going forward.
- [48:19]
A
Well, just look what happened with Blackstone's investment in Surf Pro. Is that correct? Was it Blackstone in Surf Pro?
- [48:29]
B
Yep.
- [48:30]
A
And maybe a billion and a half dollar system and then four or five years later they're a six billion dollar system. So the, the right private equity partner can really accelerate growth for the franchisor and, and a lot of that growth was some of the strategic maneuvering that was done allowing private equity to come inside of that platform. So look, it's, it can be a win win, but again, good agreements up front, head off bad disagreements down the road.
- [49:02]
B
Exactly. You gotta, you gotta get the rules set up front and you, you, yeah, and, and I think the, the restaurant franchisee groups and the fitness franchisee groups, you know, Planet Fitness did a great job with that and you know, those type of mouse have been used in the QSR and the fitness space for years and really, you know, it's really helping us accelerate the franchisee movement in resi services.
- [49:30]
A
Pat, I've always been impressed and fascinated by the way you operate. You've been an operator of a publicly traded business which had an incredible story. I think it was public and then it went back private. And you, you know, you played, you were in the CEO seat while all of that was going on early in your career, late 20s, early 30s, so what a great experience. Then you get inside of Sweet Frog and I'm not sure exactly, I know, I know that, that it was a, it was I think a distress situation where a group of people came into it. But again operated that business, became one of the only successful exits in Froyo at the time, which was a great job for the franchisees there on your behalf and then starting Boxwood along the way. And I also know that you're an avid investor is wherever and a disciplined investor in operating businesses. What philosophies could you share for our early stage entrepreneurs? Maybe they're a franchisee for the first time. Maybe they come out of corporate America. I mean you've done all of this business building, you've been very smart from a finance perspective about what you've invested in and creating wealth. And then you've also moved to Puerto Rico and that's where you currently live and you run your business from there. So what advice could you share? What philosophies do you have any hard business entrepreneurial philosophies that you try to follow to make sure that you are on just the right opportunities and making just the right decisions?
- [51:06]
B
Yeah, I mean that's a, that's a great question. I, I, I think, you know, and it's funny, I got, got an email today from, from my mentor in business, lives in Stockholm now and he, he was formerly one of the heads of McKinsey Consulting and you know, he always had a phrase, you know, numbers don't lie and people do but numbers don't. And so really trusting the numbers and making sure that you understand, you know, what they're telling you. And you know, you also told me you can, you can make numbers tell any story you want. So you need to know what story you're trying to tell when you're displaying numbers. But, you know, you really follow the numbers. You know, if, if, if a system doesn't validate well and, but you're in love with it, there's probably a reason system doesn't value validate well and you know, doesn't matter what's in, you know, the fdd, you know, it's, you gotta, you gotta really look at the numbers, you gotta trust the number, you gotta understand the numbers. And I think, you know, that's been a common theme throughout my career is when I first invested in Sweet Frog, I invested, they had 15, 20 locations and the numbers were amazing. They, they, you know, on a per location basis, the revenue was awesome, the gross margins were incredible. And you know, so the numbers help support us growing to 380 locations in 41 states. And you know, the numbers didn't lie. There's a lot of other issues that were behind the scenes. It started off as a license model, had to, had to transform into a franchise model quickly, especially in the state of Maryland. And so we definitely put in place a great law firm in place to help us with Sweet Frog. But the numbers stood the test of time and we're able to exit that investment in 2018. But we really, when we evaluate a new franchisor to take on as a client, we spend a lot more time on the numbers than other investment banks. Before we accept the mandate and run a process for a client. We spent a lot of time deconstructing the numbers and making sure that we can tell the story with those numbers. That's going to get the private equity community excited. We're lucky enough that we can pick and choose our clients probably better than other investment banks. And we spent a lot of time making sure that we're, we're taking on the right clients that are going to, you know, we're going to be able to meet their expectations and exceed them in the marketplace.
- [53:58]
A
Well, my experience with Sweet Frog was that a frozen gummy bear pulled off my crown. So that was, that was it. But I, you know, you guys denied the claim, so I just went and slipped and fell on. On your front steps, but for franchisee. Yeah, exactly. Well, hey, so it's a wild world out there now. It's great products Great food. None of that's true, but great product, great food. All right, Pat, we're gonna, we're gonna tug gently on the reins of this podcast. We're going to turn it towards the barn right now. I do have two questions for you. I've got a curveball for you and then I've, then I've got a fastball straight down the middle.
- [54:39]
B
Okay.
- [54:41]
A
Before that, can you tell people how to best get in touch with you?
- [54:45]
B
Best way to reach out is my email address pgallaherboxwoodpartners.com or just go to our website, boxwoodpartners.com and there's a contact us form and you know, shoot us an email and we'll be back in touch, you know, incredibly quickly.
- [55:02]
A
All right, here's the curveball. You're sitting on the beach and in Dorado, Puerto Rico, Hawaiian sling, slash spear, fishing rig pointed at your head. And you have to start a business in the next 30 days. And it can't be a business that you're currently in, in any way, shape or form. What business do you start? Where is the opportunity in the market today that you see?
- [55:29]
B
That's, I get that question a lot. And I love the low cost franchisor models. You know, I wish I was Kevin Wilson and started Mosquito Joe or, you know, Chris Grand Prix with Mosquito Squad. I love, I love that model. I love the, you know, once you, once you go to spraying for mosquitoes in your yard, you're never going to stop that monthly invoice. That recurring revenue is, is high multiple on an exit. We sold Duty Calls, which was Project Deuce. And once you, once you have someone coming to pick up your dog, pick up after your dog in your yard, you're never going to cancel and say, I want to start doing that again myself.
- [56:17]
A
So it's, he cleaned up on that deal.
- [56:20]
B
The client retention and the customer retention and being able to amortize the lifetime value of those new customers on marketing spend and make them incredibly attractive businesses. And you know, I wish I was invested in, in those. And you know, I, I just have always liked that type of recurring revenue, low cost franchisor, especially going into a potential recession at some point here in the future. The corporate refugees buying jobs, those type of low cost franchisors are going to do extremely well.
- [56:58]
A
Awesome. All right, fastball right down the middle. Last question. If you had one sentence to make an impact in somebody's life, what would that be?
- [57:10]
B
Well, I think you got to enjoy every day. I lost my father early on in life. I was 19 when he passed away, and there was a lot of things he talked about doing that he never got a chance to do. And so I kind of. I live my life every day. Like, you know, you never know. You're not guaranteed tomorrow. So it's. I think if you're stuck in a miserable job and you hate it, you know, try to find a franchise that's going to make you happy. There's. I think there's a franchise system out there for, for everyone. I mean, if you, if you, if you like talking to people, if you don't like talking to people, if you like managing people, if you don't like managing people, you know, there's, you know, a thousand great franchisors out there that have great business models and great support systems that, you know, can help you find what makes you happy in life and what makes you want to get up in the morning and, you know, and go to work. So it's, you know, don't. Don't spend your whole life working until 60 or 60, 65 to retire. If you're miserable every day, go, Go find something that, that you enjoy doing.
- [58:18]
A
Perfectly said. We'll end it there. Thank you, Pat.
- [58:21]
B
Thanks a lot, Jeff. Really enjoyed the time.
- [58:24]
A
I'm Jeff Duden here with Patrick Gallaher, and we have been on the unemployable podcast. Thanks for listening.