Modern generations have been thoroughly exposed to companies going public all over the world. The most successful start-ups from the likes of Tesla to Facebook have gone public in the last decade and while those companies were already on a stratospheric trajectory, they seem to have significantly increased these companies’ capacity and likely brought targets forward.
‘Going public’ comes in the form of an initial public offering (IPO), whereby the company operations and ledgers have been forensically audited, and the company can be owned by as many investors as the number of shares issued.
An investor purchases a share for a certain amount, for which the investor has the right to a small share of profits in the form of dividends, if the company made sufficient profit. The money paid for a share goes to the company during the IPO, which the company often uses for rapid scaling up.
While some franchisors have seen it as the way forward, most haven’t. Most franchises remain privately owned, many by private equity firms and larger franchisor groups after being acquired.
Franchises are unique business models, and are a world apart from most on any exchange. Franchises tend to push the risk of running the business onto franchisees, making them more stable and attractive investment propositions once the brand and its processes have grown and crystalized sufficiently.
Why go public and what are the advantages?
Going public opens a company up in all ways imaginable. For most of a company’s life, accounting figures remained largely private and outsiders had no right to peruse a firm’s books. That all changes during the process of going public, and while a company is public.
“When you go public, you want to be in a position where your company’s about to see an explosive growth,” said James McInnes, CEO of OddBurger.
There are numerous reasons to go public, but it mainly boils down to one: capital.
Share-holders own a company. When a company launches its IPO, it assigns a certain number of shares, of which the company will sell a certain amount to the market. Before the IPO, all those shares are owned by the broker/investment bank and the company will receive the money paid to buy each share, minus the broker/bank’s fee. The vegan fast food burger brand, OddBurger, went public on the OTC, a New York-based financial market.
“I think the biggest benefit is access to capital. The biggest challenge for franchisors is, whenever you’re a growing company, how do you access capital? The great thing about the capital markets is that it gives the everyday investor the ability to support your business,” said McInnes.
“I think you’ve got a lot of people investing, because they believe in the vision of the company, and where it’s going to go in the future. I think it’s actually a more long-term strategy.”
After a company has sold off a number of shares, it can now spend the money received. For a franchise, this can involve the acquisition of a new competitor brand, or the buy-back of franchisee locations.
Strengthen brand reputation and awareness
Listing on a public exchange forces companies to disclose more financial information and future plans than when private. If this information is stable, consistent and plans followed through, it immensely increases a company’s reputation. It proves that the company’s model is working and that the company can be a safe, long-term investment.
“We believe that we’re the leader in the plant-based vegan fast-food sector. I think making that kind of statement that we’re the first publicly traded vegan fast-food chain, I think that was part of our motivation because it shows leadership,” said McInnes.
Companies listed with major exchanges like the FTSE 250 or indexes like Dow Jones are either household names or ubiquitous in the wider business world.
A brand immediately benefits from the awareness and perceived competency gained from listing on a public exchange, but companies often use the capital raised to increase their advantages. For a franchise, this can often come in the form of brand acquisitions and scaling up efforts. Though, companies can often find unexpected benefits to going public.
“It’s actually had a real estate effect that we didn’t expect, where franchisees are going to get real estate. The landlords are happy that the franchisees are backed by a public company,” said Anthony Geisler, CEO of Xponential Fitness, which went public on the New York Stock Exchange (NYSE) in July.
A franchisor can also deepen its hold on a market or enter a new one by acquiring a rising or established brand, and the capital that comes from an IPO often makes it a reality.
Motivate management and staff
When a company goes public, senior executives are often given incentives to increase performance. These incentives normally come in the form of equity, giving senior executives a small piece of the company for reaching certain targets.
“If you are a public company, you’re attracting high-level talent, and they may be getting equity as a part of their compensation,” said Geisler.
Employees also enjoy the prestige of working for a publicly-traded company too.
“It’s great for employee morale, everybody feels that they’re a part of something bigger and more well known, whether that’s the franchisee, the franchisor or the employee. It has a lot of those benefits, and builds a lot of competitive, exciting energy,” said Geisler.
How does a franchise go public?
Before a company even contemplates going public, it should consider:
- The size of market it’s selling to
- Whether it has a unique/product service with a competitive advantage
- Strong financials; revenue, cash flow, future earnings
- Experienced management team
- Established track record
- Whether the prospect for strong sales and growth is there.
If a company falters on any of these criteria, it should likely halt the process and realize there are no advantages to going public in the long term.
Once a company has passed a stage of running internal checks, the company’s books must be made available for an audit, to confirm the veracity of its books. A knock-back here could mean the end of the IPO process. The stock exchange itself will review a company’s application and can either accept, reject or suggest amendments to allow the listing process to go ahead. This is often the lengthiest part of the process, especially if a company’s books are not in order.
“I would say it [the IPO] has a big accounting, finance, audit and legal component. It definitely takes its toll on the team, but the process is robust and formulaic. You have to do step one, step two and step three, but it’s expensive and time-consuming,” said Geisler.
“But there’s a process to follow. You’re not trying to figure out how to go public, they spell it out for you, you have to do the work.”
After the exchange has approved the application, a company must seek out an underwriter, normally in the form of an investment bank. It’s the job of the bank to make two key decisions: the number of shares that will be made available and at what price. The bank will also look to register prospective investors and generate some interest in the IPO by producing prospectuses that detail the stock’s expected price and when they will be listed.
At this point, the shares will be listed on the stock exchange. Private, retail investors can finally purchase shares of a company on the primary market – there is no longer the need to go to the secondary market where shares are traded amongst investors.
Once going public, a public company has deepened obligations to its shareholders and to whichever regulatory body that oversees it. Financial statements will have to be more meticulously prepared with the possibility of fines if any rules have been violated.
“It’s not for every franchisor because, first of all, it takes a lot a lot of way from the management team because you’re also running a public company,” said McInnes.
Investor confidence will play a significant part in a company’s valuation, especially since the company’s public image will now have a direct effect on its value. Therefore, it’s essential that companies maintain confidence in their stocks to prevent any long-term damage and support growth strategies.
Recent entrants to the stock market
While the company is no stranger to public exchanges, the brand had to go private in 2005 after a division of the company went bankrupt. Krispy Kreme issued 29,400,000 shares which sold at an average price of $17.
The franchisor of boutique fitness brands was listed on the NYSE in July of this year. Xponential issued 10,000,000 shares which sold at an average price of $11.20.
European Wax Center
The waxing franchisor began trading on the NASDAQ in August of this year. The brand issued 10,600,000 shares which sold at an average price of $17.
The 45-minute fitness franchisor was listed on the New York Stock Exchange in July of this year. F45 issued 18,750,000 shares which sold at an average price of $16.
With smaller franchisors like OddBurger venturing into the stock market, it’s likely more will follow suit onto similarly smaller exchanges to generate capital and diversify the investors in the business.
Every franchise is different
Going into a public exchange is not something a franchise needs to undertake, but can benefit from if there is a strong track record and prospects for growth. Attracting investment can be easier with a well-performing share price and creates good practice in companies, especially financially since companies’ books are so exposed to regulators and the public.
However, it might not be worth it for many. Franchises that register losses year after year can still attract investment if the concept is strong and if profit is on the horizon, without the regulatory oversight and reporting obligations demanded by many regulatory bodies around the world. They won’t be as exposed to the wider goings-on of the world and can insulate themselves better against external shocks.
Ultimately, it’s a very personal decision for each brand, and the brand must make unique considerations before embarking on the long journey to an IPO.