Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Use Hostile Takeover Defenses
Transcript
- Lucas: You hear 'hostile takeover' and you think of corporate raiders, billion-dollar proxy fights, Carl Icahn going after some giant company. Luna: Right, not a franchisee running a dozen sandwich shops. Lucas: Exactly. But as franchisees scale past 10, 20, 50 units, they often incorporate as a holding company with outside investors, board seats, and real equity. And that structure makes them vulnerable to the exact same kind of aggressive moves. Luna: So a rival operator could try to buy you out without your blessing? Lucas: Happens more than people realize. In 2024, a 50-unit Burger King franchisee in Florida got a letter from a competitor offering to buy the whole company. The offer was unsolicited, below what the franchisee thought the business was worth, and the competitor started buying up shares directly from minority investors. Luna: Wow. So the franchisee was basically facing a creeping takeover. Lucas: Yes. And their defense? They implemented a shareholder rights plan—a poison pill—that diluted any shareholder who acquired more than 15 percent without board approval. It stopped the buyer cold. Lucas: And that's the angle I want to drill into today: franchisees who've built large operations are increasingly adopting the same takeover defenses that public companies use. Luna: Before we get deeper—Lucas, I want to mention something. We keep this show ad-free, and that's entirely because a small group of listeners chips in each month through buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a honest model. No sponsors, no pre-rolls, just people who find these conversations useful deciding to support them. If you've gotten something out of these episodes, that's the way to keep it going. Luna: And to be clear, no pressure. But if you ever think 'I should throw something in the hat,' that's the place. Lucas: Alright, back to poison pills. The Florida franchisee's situation is interesting because it's not just about a single hostile offer. It's about the structure of the franchisee's ownership. Luna: So walk me through the mechanics. How does a poison pill work for a private franchise company? Lucas: In the public company version, the board issues rights to existing shareholders that allow them to buy more shares at a discount if an acquirer crosses a threshold. It makes the target too expensive. Luna: But in a private company, there's no freely traded stock. Lucas: Right. So franchisees use a close cousin: a limited liability company agreement with a triggered dilution provision. If someone buys more than a set percentage—say 20 percent—without board approval, the operating agreement automatically issues new membership units to all other owners, diluting the acquirer's stake. Luna: That's basically the same economic effect. Lucas: Exactly. And according to FranData, a research firm that tracks franchisee financial structures, about 18 percent of multi-unit franchise groups with more than 10 locations now have some form of poison pill in their operating agreements, up from about 6 percent five years ago. Luna: What's driving that shift? Is it just hostile offers, or something broader? Lucas: A few things. One is the rise of franchisee aggregators—private equity-backed groups that roll up dozens of locations. They're aggressive acquirers, and they don't always play nice. Lucas: Second is that many franchisees brought in outside investors during the low-interest-rate years, and those investors have different timelines. When the business matures, some want to exit, and that creates an opening for a buyer to pick off shares. Luna: So the poison pill is a way for the founder franchisee to stay in control. Lucas: Yes. But there are other defenses too. One I see a lot is a classified board, where directors serve staggered terms. That way a hostile buyer can't replace the whole board at once. Luna: Even in an LLC, you can have a classified board? Lucas: Absolutely. The operating agreement can specify that there are three classes of managers, each serving three-year terms, with only one class up for election each year. That's standard governance. Lucas: Another common one is supermajority voting—requiring 75 or 80 percent approval for major transactions like a merger or sale of substantially all assets. That makes it much harder for a hostile acquirer to force through a deal. Luna: So a buyer with 51 percent of the equity couldn't just ram through a sale. Lucas: Right. They'd need that supermajority. And if the founder still holds 30 percent, the acquirer needs to win over a lot of other holders. Luna: Is there a downside? I could see these defenses annoying other investors who want liquidity. Lucas: Absolutely. If you're a passive investor in a franchise group and you can't sell easily because of a poison pill, you might demand a higher return or refuse to invest altogether. It's a trade-off. Lucas: That's why smart franchisees don't implement these blindly. They look at their specific risk profile. If you're a single-unit owner with no outside investors, you don't need any of this. Luna: But if you've brought in partners, raised a small fund, or are part of a franchisee association that could be targeted, it's worth thinking about. Lucas: Exactly. And there's another layer: franchisee associations themselves can face hostile takeovers. I've seen a situation where a large franchisee tried to take over the association board to push through a different supplier contract. Luna: So the association's bylaws could have similar defenses. Lucas: Yes. Staggered board terms, supermajority vote to change the bylaws, even a requirement that any merger of the association be approved by a majority of franchisees, not just a majority of board members. Luna: So if you're a franchisee listening, what's the one thing you should check today? Lucas: Look at your operating agreement or LLC agreement for language about 'unsolicited purchase offers' or 'right of first refusal.' That's the starting point. If you don't have any defense, and you have outside investors, it might be time to talk to a corporate lawyer. Lucas: I think the key insight is that as franchisees scale, they become businesses that look a lot like small public companies. And with that comes the same kinds of risks. Luna: Including the risk of someone trying to take what you built. Lucas: Right. And the same tools that defend public companies can work for you, if you adapt them right. Luna: Alright, good stuff. I'm going to check my own operating agreement tonight. Lucas: That's probably a good idea for a lot of listeners. Thanks, Luna.