Executive Chairman, Stephen Hemsley, gives an exclusive interview to the bfa regarding the early success of Franchise Brands plc’s flotation
You must be happy with how things have started?
It’s exactly what we were hoping for. We priced the issue realistically to hope for a bounce in the after-market. It was very significantly over-subscribed.
Why did you decide to go public versus other investment options like private equity or venture capital?
We’ve done all that. When we brought the Group back in 2008 it was funded by myself and fellow director and business partner Nigel Wray, the rest of the staff and some other shareholders that were previously part of MyHome. We’ve spent the last eight years repaying that original investment.
We had put in place an option scheme soon after the buyout. That option scheme materialised but we couldn’t really issue the shares because it was still a private company. So all things led us to the conclusion that the next stage of the company’s development was a public flotation.
The other thing that it makes easier is acquiring other businesses, and particularly locking in the management of those businesses. It’s difficult to lock people in with equity in a private company but much easier in a publicly listed company.
So with future acquisitions, you’re looking for long-term relationships with the senior people in those businesses?
I’d go further than that – we are only looking at businesses where the management team want to carry on as part of Franchise Brands. Some of the restrictions on their growth may be to do with being privately funded, with some shareholders wanting to exit, but we will only look at those where they have good management that want to stay with Franchise Brands.
That helps you grow in a more controlled and sustainable way?
Exactly. What we’ve got currently is very decent profitable brands and a host of central services; we’ve got the marketing, franchisee recruitment, finance and HR side of things nailed and what we’re looking to do is share those resources with other ambitious people and brands that want to grow. What we don’t have is an army of people waiting to manage someone else’s brand for them.
Some of the things we’re looking at involve some shareholders looking to exit the business and maybe a younger management team that want to be given their opportunity, we will be able to provide the resources and environment to do that.
Alongside that we can show them a few tricks we learned over the years at Domino’s and other businesses that we’ve built up. Marketing is a good example. Our sales & marketing director is Robin Auld, who used to be my sales & marketing director at Domino’s. One of the things we do well is sell the franchisee proposition to the consumer: when we grow our franchisees’ businesses, we grow our business. Take Domino’s: when I joined we had sales of about £30m, this year it will be about £1bn and 25% of that is the food we sell them and 5.5% is the royalties we collect. So our business very much grows on the back of the franchisees’ sales.
That’s important for any franchisor with a long-term focus where the franchisees are the lifeblood of the business?
Absolutely. The fundamental building block of that is the store level economics, as I call them. The basic unit of the franchise, whether that’s a pizza store, repairing a car or cleaning an oven, must be a viable and successful business for the franchisee. If you’ve established that and can do that a lot of times, you take a small margin on each with the ambition that you’ll have lots of people doing it. Lots of small margins add up to a very successful franchisor!
You’ve got personal experience in IPOs at Domino’s and previously. How important was that in the process of the Franchise Brands listing, how big a task is it?
I’ve done it a number of times before and it’s still quite a strain! Julia Choudhury, my Corporate Development Director, has taken a great deal of the load. I also at the start of this process welcomed Andrew Mallows on board, who used to be my finance director at Domino’s. We did the original Domino’s IPO together in 1999. Julia’s been through the process in the past too with her City background, so we had a reasonable amount of experience involved in the process.
But the task itself is not to be underestimated, and it needs to be managed. If you let the advisers manage you, it becomes even more difficult! I had a pretty clear idea of how we wanted this done and the team we needed to get it done. And indeed the timetable, which you mustn’t let stretch too much.
Unfortunately right in the middle of our timetable, Brexit popped up. A funny parallel here: we first bought the business in 2008 and two weeks later, Lehman’s went bust. This time, we decided to float Franchise Brands and then Brexit happens – we haven’t made life easy for ourselves!
Given your previous experience of the crash, how concerned are you about the Brexit impact?
It was definitely unexpected and unwelcome, but I do feel that UK plc will now get on with it. The decision’s been made and I think its being very well managed by the Bank of England and the government, they’re not rushing into any decisions. I think when the button’s pressed on Article 50 there’ll be a period of additional uncertainty, then I think we’ll come out of the other side in a brave new world.
We’ll manage our business accordingly, I don’t think it has serious implications for either Domino’s or Franchise Brands. In some areas life will be more expensive – the exchange rate impacts our input costs for example – but the quid pro quo for that might be reduced regulation. We’ve just gone through the cumbersome market abuse regulations in the IPO so my hope is that some of those kind of things disappear.
You have a number of international operations as well. Do you think it’s fair to say franchising as a business model is robust as an overseas expansion mechanism?
I think franchising is a wonderful business model. It enhances the benefit of a local entrepreneur with the strengths, knowledge, capability and scope of a brand. I am myself part of the master franchise of the Domino’s brand, so I’ve seen it from both sides. Where you’ve got a supportive international franchisor, the benefits of starting up in a new market are huge.
Whilst we [Franchise Brands] have master licences in a number of different countries, it is an expensive thing to do and you have to put a lot of resource into it. For Franchise Brands, our full international potential is still quite a way down the road for us. We’re still quite a modestly sized business. One of my hopes is that one of our acquisition targets may be more advanced in its international development than we are, so we can leverage of some of the processes they have in place.
What kind of franchise businesses are you looking to acquire?
What we’re looking for is B2C brands, where a lot of our expertise is. The second characteristic we’re looking for is a franchise with high added value by the franchisee. Going back to store level economics, the business has to be compelling to the franchisee. The best way of ensuring that is that they add most of the value; in that way most of the profit sticks with the franchisee, which makes their business more robust.
We’re not looking for franchises with a high supply element, with slim margins made by the franchisee on supplies by the franchisor. In our brands, all the value add is created by the franchisee and that’s crucial in our future acquisitions.
Are you actively in discussions on any acquisitions at the moment?
Julia’s been studying the market for the last couple of years, looking at all sorts of businesses, and we’ve refined our search down to a couple of areas. We have target businesses within those areas which, following the listing, we have the resources we need to negotiate deals. I very much hope we’ll be doing our first couple of deals within 12 months or so.
In terms of your existing franchisees already with you, and the prospective ones that will join your brands in the next year, what’s the impact of the IPO for them? Is there one at a franchisee level?
In our business I don’t see any change for franchisees, but in the businesses we’re looking at potentially acquiring I think there are opportunities. Companies can be somewhat cash-constrained and we have the resources to invest in those businesses, which would benefit franchisees – particularly in the areas of marketing and ecommerce. I don’t think some franchisors have invested as much in their ecommerce platforms as they should and that’s something that we’re pretty keen on and will be investing in. It’s important to us that the consumer proposition is as compelling online as it is through other media.
So you’d say it’s a business with big plans but one that’s certainly not taking its eye off what’s put it in this position today?
Absolutely. The way public companies have historically destroyed shareholder value is by paying a fortune to acquire a business that is reasonably successful, then going in and changing everything! That isn’t our aspiration at all.
We’re only going to acquire businesses that are already successful. We want to take good businesses and make them great. We very much want existing management involved, we want to invest in them, and show them some of the things that maybe they don’t know is possible or can’t afford to do at the moment. We want to help them expand their business and their franchisees’ businesses while doing that.
Once you become a listed company you are accountable to your shareholders. Is it fair to say that comes with different strategies and accountability?
I’ve successfully done this for the last 20 years at Domino’s and haven’t found that to be a pressure that’s affected the way we’ve run the business. I think one of the things you must do in a public company is set out your stall – you must tell your shareholders how you’re going to run the business and if they like the way you intend to, they’ll invest.
We’ve always been very clear on this at Domino’s. Sometimes our shareholders might say, ‘Why don’t you have more of the margin, get a little more from the franchisees?’ To which my answer is, what would you rather have – a thousand very successful stores which we benefit from or 500 stores where we’re milking them to death and the franchisees are very unhappy? The answer is obvious. Scale always compensates for a fractionally lower margin.
And when it comes to Franchise Brands, Nigel and I still own 60% of the business, so any shareholder pressure is going to come from us!
The way we’ve run it for the last eight years is the way we’re going to continue to run the business moving forward. The only difference is that we hope to be able to do that with a broader portfolio of brands.
With the acquisitions, do you have specific targets for the next few years? A specific number of franchisees or set turnover level?
No, no and no. I don’t think it’s ever sensible to set ourselves acquisition targets because you’ll just end up doing whatever the best deal available is at the time, not the appropriate deal for the business. We do of course have targets for our existing businesses in terms of growth, which are achievable, not wildly aggressive. It’s very much business as normal. I don’t think franchisees will see any change at all as a result of the IPO.
We floated this business at around £15m. The board’s target is to create a £100m business within the next five years perhaps. We’ve got to find the right deals with the right management that fit with the benefits that we have to offer. It’s growth without compromise on quality or price.