Key Takeways From The $9.55 Billion Subway Acquisition: Seller Expectations, Earn-Outs, Break-Up Fees And More

Today, Reuters published an interesting article about the recent $9.55 Billion acquisition of Subway, the global sandwich franchise. 

A few fascinating takeaways from the article:

** Seller expectations: “The families were hoping to fetch more than $10 billion for Subway based on its strong brand and international growth, but the private equity firms countered it was worth less because they deemed “its U.S. business saturated.” 

That's right. What a seller WANTS and what the market will bear are usually two different things. 

The sellers wanted $10 Billion. A nice, round number. We see it all the time. But it was a number that was not realistic.. One bid came in at $8.25 billion, and the other at $8.95 billion. That's the market (buyers) telling the sellers what the business is REALLY worth. The real value was over $1 billion LESS than the sellers wanted.

** Enter the “Earn-out”
According to this Reuters article, “...a so-called earn-out agreement that was key to Roark clinching a deal for Subway.” So the winning buyer threw in an earn out to get the numbers to a deal. But the business has to hit certain milestones before the earnout kicks in. 

“Earn-out structures, while uncommon in the consumer and retail sector, are increasing in frequency in a challenging market for mergers and acquisitions as a way to reconcile price differences.”

Bottom line: In 2023, earn-outs are almost MANDATORY to get a business sold...no matter what size. 

** Break up fees: According to the article, “Roark, which owns other restaurant operators and franchises, including rival sandwich chain Jimmy John's, will pay Subway's owners a break-up fee equivalent to 4% of the deal's value should antitrust regulators thwart the deal. 

In other words, if the deal goes south, the buyer is paying the seller for their time and expense of the acquisition, even if the acquisition doesn't close. Expect to see more of these type of break up fees, even in smaller SMB deals. 

What takeaways did you learn from the Subway acquisition?

#subway #acquisition #reuters #earnout #dealstructure