Franchise and IPO 2023

11.08.2021 Update: 11.08.2021

In recent years, you can often find information in the media about companies that have successfully entered the IPO, thereby attracting significant funds to their business and significantly increasing their capitalization. The public offering of shares once turned such famous businessmen as Jerry Yang (Yahoo!) and Mark Kuban (Broadcast.com) into billionaires. What causes such a dynamic scaling of the financial capabilities of promising startups?

Initial Public Offering or IPO is the process of attracting additional funds to the business through the placement of company shares on the stock exchange. As soon as a company appears on the stock market, it automatically turns from private to public, allowing anyone to become its co-owner by purchasing securities. At the same time, the IPO allows you to achieve a synergistic effect by:

attracting additional investments;
strengthening the company's reputation;
increasing brand awareness;
strengthening competitive advantages;
the use of securities as a tool for motivating top management.

However, not every company is guaranteed success with an IPO-the business must meet at least two main criteria, namely:

demonstrate stable sales and profit growth;
work in a promising trending industry.

These two conditions are mandatory but not always sufficient. Companies that are planning an IPO should take into account that the requirements for a public offering are quite strict. A thorough audit of financial statements will be conducted in the process of entering the stock market, and if questionable moments are identified, everything can fail. It is also worth considering that the process of entering the stock market takes a lot of time and requires not only investments but also the introduction of external managers to the board of directors and the elimination of all possible conflicts of interest in the company's management. Therefore, an IPO should be considered as a long-term investment, and not as a way to attract money for growth here and now.

Most experts estimate a public offering as one of the most expensive ways to attract investment if we talk about the amounts that need to be invested upfront. That’s why an IPO is suitable for companies with a share capital of millions of dollars and is absolutely not suitable for young startups with limited financial resources.

Cases of franchised brands that went public in 2021

We offer you to get acquainted with the most interesting cases of entering an IPO this year according to our opinion.

Krispy Kreme

Share price: $17;
Sold: 29,400,000 shares.

The Krispy Kreme doughnut chain initially planned to debut on the stock market, setting the share price in the range of 21-24 dollars, but the sluggish reaction of investors forced the company to moderate its ambitions. As a result, due to the IPO, the company attracted half a billion dollars of investment, selling 29 million shares for $17 apiece.

Krispy Kreme is a well-known seller of the iconic glazed donuts, which began its journey by opening a store in North Carolina in 1937. In 2020, 1.3 billion donuts were sold, which is a record sales level in the company's history. At the moment, Krispy Kreme conducts its business in 30 countries around the world. Net revenue in 2020 amounted to $1.1 billion.

It is interesting to know that the company was already public, having entered the stock market in 2000. Unfortunately, after 5 years, one of its divisions had to file for bankruptcy, which knocked out the company of the rut for a while. The IPO of 2021 is a kind of symbolic return of the popular brand to the American stock market.

The company enters the IPO at Nasdaq. J. P. Morgan, Morgan Stanley, BofA Securities, and Citigroup act as managers for the accounting of the offer.

European Wax Center Inc

Share price: $17;
Sold: 10,600,000 shares.

European Wax Center Inc is one of the largest and fastest-growing American franchisors in the niche of waxing outside the home. As a result of the IPO, the company raised $180 million from Plano, Texas. European Wax Center Inc plans to invest the funds received through the IPO in expanding the waxing franchise to 3,000 points over the next 15 years.

The company was founded in 2004 and operated in the niche of hair removal services in private cosmetology offices. The wax mixture patented by the company provides a painless procedure and gives the skin smoothness. This makes its product competitive in the market. At the moment, the company has 808 franchised stores across America.

In 2018, General Atlantic acquired a controlling stake in the company, investing a lot of money in it. In 2020, the company received net revenue of $486 million. The sales volume for 2020 amounted to 13 million units, which is less than in 2019. This dynamic is undoubtedly due to the crisis of the business providing personal services in the context of the pandemic. Nevertheless, the company's management says that the market is recovering quickly.

F45 Training

Share price: $16;
Sold: 18,750,000 shares.

As a result of the release of the Australian fitness giant F45 Training on the New York Stock Exchange, the company, whose capitalization is estimated at $1.5 billion, managed to attract about $300,000,000. One of the investors is co-founder Adam Gilchrist, who owns a 25.4% stake. Also, the largest beneficiary was the L1 Capital fund from Melbourne, which acquired 7.1% of shares worth about $103 million.

F45 Training was founded in 2013. The bet was made on a special product - 45 minutes of high-intensity functional training. At the moment, the network has more than one and a half thousand franchise points. Despite the drop in revenue to $82.3 million in 2020, the company has demonstrated its ability to adapt to the conditions of the pandemic. 1,415 out of 1,555 points have resumed work at the moment. At the same time, the company is confident that franchise points located in regions where restrictions are still in effect will resume work in the near future.

Xponential Fitness

Share Price: $11,20;
Sold: 10,000,000 shares.

The company, which manages 9 fitness brands, placed its shares on the New York Stock Exchange at the end of July. Xponential Fitness has 1,750 fitness studios that work in such directions as pilates, boxing, yoga, running, rowing, dancing, stretching, barre, and indoor cycling. Despite the pandemic, the company's revenue in the March quarter was $29.1 million. At the same time, the net loss amounted to $4.8 million.

Xponential attributes this to a decline in system-wide sales triggered by the pandemic. The use of the master franchise scheme outside the United States, in particular, in Japan and Australia, allows us to predict that the company will make a profit soon.

Olo Inc.

Share price: $25 per share;
Sale: 18,000,000 shares.

The provider of software for processing online orders, Olo Inc., raised $450 million as a result of an IPO on the New York Stock Exchange, which exceeded all investors' expectations. Founded in 2005, the company has quickly grown to become a leading player in the field of e-commerce SaaS and the restaurant business. Currently, Olo Inc. is developing electronic order processing systems, software products for organizing delivery, and other software for 64,000 restaurants of 400 different brands. The most famous clients are Five Guys, Jamba Juice, Chili's, and Wingstop.

The pandemic provided Olo Inc. with growth due to an increase in the number of online orders. The stunning success of the IPO will only confirm the optimism of investors about the company. Olo Inc states that its competitive advantages are a democratic commission and impeccable quality control. According to Olo Inc., the number of transactions exceeded 1 billion in 2020, which provided revenue growth of 94%. Net profit was $3.1 million.

Devyani International Ltd

Lot price of 165 shares: 86-90 pounds sterling;
Offered for sale: 155,330,000 shares.

Devyani International Ltd was founded in 1991 and successfully operates in the restaurant business, serving 655 retail outlets in 155 cities of India. The company is the largest franchisee of Yum Brands, which works with well-known brands like Taco Bell, Pizza Hut, and KFC. Devyani also has business in other countries. The competitive advantages are inter-brand synergy, a vast network of stores, and a powerful brand portfolio.

Promising future of IPO

It is also worth mentioning the upcoming IPOs, which may be interesting for potential investors. First of all, this is the entry into the stock market of the Oregon company Dutch Bros., which operates more than 400 coffee kiosks across America. Some experts say that this is almost the first IPO initiated by an Oregon company in the last 15 years.

Dutch Bros. was founded in 1992. At the moment, the staff is about 13,000 people. In 2018, Dutch Bros sold its stake to the investment company TSG Consumer Products in order to increase the number of retail outlets to 800. The company has recently filed a confidential IPO application, preferring not to publish data on financial results and other corporate information. Investors are following this case with interest.

No less attention is attracted by the Indian furniture seller Pepperfry. The active growth in demand for Pepperfry furniture, which was observed in the period from 2017 to 2020 inclusive, gave the company grounds for a confident IPO. The company has publicly announced such intentions. Although some investors are skeptical about maintaining 100% annual sales growth dynamics, Pepperfry remains a very interesting case that deserves attention.

Finally, I would like to talk about the Asian company QSR - one of the leaders in the fast-food niche in Malaysia, which also announced its plans to enter an IPO and attract investors' capital of several hundred million dollars. Today, the controlling shareholder of QSR, Johor Corp, has attracted RHB Investment Bank and Maybank Investment Bank for consultations. The near future will show what investors should expect.

How to make an IPO of your company

IPO is a rather complicated procedure that requires not only patience (the procedure takes about 1 year) but also considerable financial costs (from $1.5 million). In addition, the company's management needs to be prepared for additional costs, such as underwriting services, which can range from 10 to 15% of the placement cost. Therefore, it is obvious that only profitable companies with high capitalization can implement the idea of a public offering. A company with a small capitalization or unstable income may not receive the expected investments at best, or it will simply go bankrupt at worst. Therefore, an IPO is a procedure that should be written into the long-term strategy of a large developing company, in which potential investors believe and trust, and therefore are ready to put money into it.

The success of an IPO largely depends on the choice and quality of the underwriter's work. As a rule, this task is assigned to experienced investment banks, which undertake the preparation of securities, communication with regulators, and the organization of promotions to attract investors. The company's management discusses all questions regarding the upcoming IPO with the underwriter, namely the price of shares, their type, and the planned amount of attracted investments. The company's responsibility is to provide all the necessary documents, including financial statements and a biography of top management. You also need to open data about possible legal problems and state the purpose of raising funds through an IPO. It is also necessary to publish a list of current shareholders, which is an integral part of the public offering. Often, underwriters arrange a so-called roadshow. It is an advertising campaign for a limited number of potential investors. The purpose of such an event is to attract funds from large investors before the start of official trading, thereby providing financial support for the IPO and additional promotion.

Despite the fact that the company actually hires an underwriter to perform IPO tasks, investment organizations can compete with each other for the right to service really promising projects. The same applies to exchanges that are interested in listing a new promising company, which definitely increases the total trading volume and liquidity.

At the same time, the initiators of the public offering should also remember the risks, the main of which is the collapse of the share price after the IPO. This can happen for a variety of reasons: unfavorable market trends, manipulations of large investors, etc. The collapse of shares entails problems with the business reputation of the company, which becomes an additional challenge for the business. There are few companies that can start working again after a series of such “surprises”, so it is worth considering possible “pitfalls”.

In addition to the risk of a stock price collapse, you should also not forget that an IPO is a serious expense without a guarantee of success. In addition, the public offering also means closer attention to the company from regulators. It should also be kept in mind when entering an IPO. In general, the IPO should be considered a positive signal regarding a particular company since the fact that the company is maturing to such a method of raising capital indicates a certain level of business development.

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