Yale Case. By: Nathan Shantz / A. J. Wasserstein
The Letter of Intent
Rajgopal and Joglekar pursued the acquisition of a Paul Davis franchise with a $9 million offer. They encountered delays and frustrations with the seller’s broker, raising concerns about competing bidders. They worked on securing SBA loan terms amidst rising interest rates, affecting cash flow projections. Eventually, the seller accepted their offer with modifications to the seller note terms. They initiated due diligence, visiting the operations and planning necessary hires to scale the business.
Surprises from the franchisor
After the LOI was accepted, a key Paul Davis executive expressed doubts about the duo’s financial capacity. Despite this, Rajgopal and Joglekar managed to convince the executive team of their capabilities, securing approval contingent on personal guarantees.
The deal
The business included essential assets and a skilled workforce. The primary revenue source was insurance restoration work, predominantly residential. Margins were healthy, supported by strong insurer relationships, but the business faced risks from unpredictable damage events. Rajgopal and Joglekar recognized these risks and the need for thorough due diligence.
Market dynamics and competition
The restoration sector was competitive, with significant players like ServiceMaster and BELFOR. The Phoenix market offered growth opportunities due to its size and demographics, despite the competition. Rajgopal and Joglekar saw potential for their franchise to capture more market share.
Managing restoration operations
Operational efficiency was key to growth. They planned to hire additional staff, manage projects carefully, and use technology for efficiency. Retention of skilled tradespeople and effective inventory management were critical.
Finding investors
Securing equity was challenging, but they received positive feedback from investors. A strategic partnership with Richard Bi, an experienced Paul Davis franchisee, provided both capital and valuable expertise. Bi’s involvement simplified the fundraising process and strengthened their operational strategy.
Debt process and continued due diligence
They initially secured favorable SBA loan terms but faced setbacks when their bank withdrew support. They scrambled to find new lenders, eventually securing two term sheets offering similar terms. They also identified discrepancies in the new franchise agreement, leading to renegotiation with the seller. They agreed on a revised deal, combining cash and a larger seller note.
Franchisor training school
They attended rigorous training at Paul Davis headquarters, gaining practical experience and certifications. This preparation was crucial for operational success and lender confidence.
Hiccups with banks
In late January 2024, their bank unexpectedly withdrew support, citing insufficient experience. They quickly sought new lenders, facing pressure from the seller to close the deal. They secured two new term sheets, allowing them to proceed with the acquisition. Despite these challenges, their perseverance and strategic partnerships enabled them to move forward with their entrepreneurial journey.
Read the full case in: https://yale.app.box.com/s/ym6w3vm1wi9vnyxp3gq4q17axqsvflfg
