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Mr. Lube finds the ideal buyer for the nationwide oil-change franchise business.
When Mr. Lube Canada Limited Partnership (Mr. Lube) started looking for a buyer for the business, it kept its options open.
The owners, who included a mix of family interests along with George Melville and Jim Treliving, Co-Founders of restaurant chain Boston Pizza, were looking to monetize their investment and position Mr. Lube for future success.
The main criterion for the Vancouver-based company, which runs 170 quick-service oil-change franchises across Canada, was to find a buyer that would help it to expand across new and existing markets.
After looking at a range of potential buyers, including private equity firms and strategic players, Mr. Lube struck a deal with Diversified Royalty Corp. (DIV), a publicly listed Vancouver firm that purchases intellectual property and trademarks from privately held franchised businesses and licenses them back to the franchisors in exchange for an annual royalty payment.
“I've had about a 10-year history in Mr. Lube…you get connected with the management team,” Melville says. “You get connected with the franchisees. It’s like taking a family and giving it to somebody else. We really wanted to make sure they were going to a good buyer. It was very interesting to go through the process.” Melville credits the successful outcome to strong communication with management throughout the process.
Finding a buyer
For Pamela Lee, Chief Financial Officer of Mr. Lube, getting to the final deal was a long and exacting process. The company began by contacting banks and other firms it had relationships with and asking them to submit a proposal to support the sale. “We basically gave them some guidelines, and we told them what our target valuation was,” Lee says.
Mr. Lube also asked each potential adviser for detailed information on three key areas: 1) ability to deliver the target valuation; 2) buyer knowledge, access and relationships; and 3) relevant experience.
PwC Corporate Finance was selected as the financial adviser based on its credentials, including the successful sale of a Mr. Lube competitor 18 months earlier for a favourable valuation, and its demonstrated buyer knowledge and access.
“We knew that they understood the industry very well and had good market knowledge,” Lee says of PwC. “I think what impressed us most, though, was the fact that they were very strong on their buyers’ list. They not only gave us a list of buyers, but they took it many steps further. They showed us the depth of the relationship that they had with each of these buyers.”
Lee says her opinion of who might make the best buyer changed through the due diligence process: “It became quite apparent that all buyers are not created equal.” She recalls that one suitor was interested in complementing the company’s current system; another wanted to see where headcount and expenses could be cut, which wasn’t part of Mr. Lube’s plan.
“My preferences started gearing toward the companies that I felt had our goals and our best interests in mind, whether it was strategic or private equity,” Lee says.
Getting to yes
After about nine months, Mr. Lube closed a deal with DIV, which bought a topline royalty from the company. This agreement allowed the existing partners to monetize much of their holdings while retaining overall ownership, Lee notes. The two parties were also on the same page when it came to growing the business.
Lee is optimistic about the company’s future. “One of the things that I’m very excited about, and the reason I’m very happy with the sale to DIV, is that our goals are completely aligned,” she says. “They want growth in the system so that they can continue to see higher royalty payments. We want growth in our system, and our franchisees want growth in the system. So continued growth is definitely on the horizon for Mr. Lube.”
Lee was warned that the deal-making process – from searching for a buyer to narrowing down options and doing due diligence before striking an agreement – would be like having a second full-time job. That was largely true, but she also found the experience rewarding.
“You really have to go through that journey to come out and appreciate it on the other end,” Lee says. “You have to go through all those pieces, sit in all those meetings and understand what was going on in the transaction to really appreciate the outcome.”
Choosing advisers who work well with the management and ownership team is vital. For instance, by providing background on each would-be buyer, PwC helped Mr. Lube’s management team better understand their motivation, Lee says.
“If they were a company that was really interested in our fleet business, we would spend more time talking about the fleet operations,” she explains. “If they were a strategic company that was looking at complementing their footprint, then we would talk a lot about our network and where our stores were located. I think that worked really well in making sure that our presentations were relevant and meaningful to the buyer. I also think we came out of that process feeling very proud of our company and also developing a very deep level of respect for each other.”
Lee’s advice to other businesses working on or considering a deal:
1. “Run your business as you normally run it, because you never know what's going to happen. Things can take different turns, which is what happened with us.”
2. Don’t count on an unsigned deal to close. “A deal isn’t a deal until it’s done,” Lee warns. “Throughout the deal process Mr. Lube not only met but actually surpassed forecasts, which is a credit to the management team.”
3. “Have fun, because this can actually be a fun process. It doesn't happen all the time. It's great to have the opportunity. Enjoy it.”