424B4
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-251615

 

31,818,182 Shares

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Driven Brands Holdings Inc.

Common Stock

 

 

This is the initial public offering of Driven Brands Holdings Inc., a Delaware corporation. We are offering 31,818,182 shares of common stock.

The initial public offering price is $22.00 per share. Prior to this offering, no public market exists for the shares. Our common stock has been approved for listing on The Nasdaq Global Select Market (“NASDAQ”) under the symbol “DRVN”. Following the completion of this offering and related transactions, our principal stockholders will continue to own a majority of the voting power of our outstanding common stock. As a result, we expect to be a “controlled company” under the corporate governance rules for NASDAQ listed companies and will be exempt from certain corporate governance requirements of such rules. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock” and “Principal Stockholders.”

We are also an “emerging growth company” as defined under the U.S. federal securities laws, and as such may elect to comply with reduced public company reporting requirements. Please see “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” that are described beginning on page 28 of this prospectus.

 

 

 

      

Per Share

      

Total

 

Initial public offering price

     $ 22.00        $ 700,000,004  

Underwriting discounts and commissions (1)

     $ 1.21        $ 38,500,000  

Proceeds to us, before expenses

     $ 20.79        $ 661,500,004  

 

(1)

See “Underwriters” for a description of all compensation payable to the underwriters.

We have granted the underwriters an option for a period of 30 days to purchase up to 4,772,727 additional shares of common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock against payment on or about January 20, 2021

 

 

 

Morgan Stanley   BofA Securities   Goldman Sachs & Co. LLC   J.P. Morgan   Barclays

Baird

 

Credit Suisse

  Piper Sandler   William Blair

Prospectus dated January 14, 2021


Table of Contents

TABLE OF CONTENTS

 

Prospectus Summary

     1  

Risk Factors

     28  

Cautionary Note Regarding Forward-Looking Statements

     66  

Use of Proceeds

     68  

Dividend Policy

     69  

Capitalization

     70  

Dilution

     71  

Unaudited Pro Forma Condensed Consolidated Financial Information

     73  

Selected Historical Consolidated Financial and Other Data

     89  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     91  

Business

     117  

Management

     139  

Executive Compensation

     146  

Certain Relationships and Related Party Transactions

     158  

Principal Stockholders

     162  

Description of Capital Stock

     164  

Description of Material Indebtedness

     172  

Shares Eligible for Future Sale

     177  

Material U.S. Federal Income Tax Considerations

     179  

Underwriters

     183  

Legal Matters

     191  

Experts

     192  

Where You Can Find More Information

     193  

Index to Consolidated Financial Statements

     F-1  
 

 

 

You should rely only on the information contained in this prospectus and any related free writing prospectus that we may provide to you in connection with this offering. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations, and prospects may have changed since that date.

For investors outside the United States: neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

Through and including February 8, 2021 (25 days after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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TRADEMARKS, TRADE NAMES, AND SERVICE MARKS

We use various trademarks, trade names and service marks in our business, including ABRA®, CARSTAR®, DrivenBrands®, Fix Auto USA®, IMO®, MAACO®, Meineke®, PH Vitres D’Autos®, Spire Supply®, Take 5 Oil Change®, Uniban® and 1-800-Radiator & A/C®. This prospectus contains references to our trademarks and service marks. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by any other companies, including with respect to Fix Auto USA®.

INDUSTRY AND MARKET DATA

We include in this prospectus statements regarding factors that have impacted our and our customers’ industries. Such statements are statements of belief and are based on industry data and forecasts that we have obtained from industry publications and surveys, such as the Auto Care Association’s 2021 Auto Care Factbook, CarWash.com, IBIS World Inc.’s Report, International Car Wash Association’s Total Conveyor Locations and National Oil and Lube News’ Industry Rankings as well as good faith estimates of our management which are based on such sources and internal company sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of such information. In addition, while we believe that the industry information included herein is generally reliable, such information is inherently imprecise. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption “Risk Factors” in this prospectus.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Driven Brands Holdings Inc. and its subsidiaries. On July 6, 2020, RC Driven Holdings LLC converted into a Delaware corporation pursuant to a statutory conversion, and changed its name to Driven Brands Holdings Inc. (the “Corporate Conversion”). As part of our Corporate Conversion, our direct parent, Driven Investor LLC, received all of our common stock in exchange for our equity interests. Prior to the closing of this offering, we will effect a stock split and Driven Investor LLC will be liquidated and all of our common stock will be held by our Principal Stockholders, current and former employees and management and board members. In this prospectus, we refer to the foregoing Corporate Conversion, stock split and related transactions as the Reorganization. Except as otherwise indicated, all information in this prospectus gives effect to the proposed Reorganization.

In this prospectus, unless otherwise indicated or the context otherwise requires, references to the “Company,” “Driven Brands,” the “Issuer,” “we,” “us” and “our” refer, prior to the Corporate Conversion discussed herein, to RC Driven Holdings LLC and its subsidiaries, and after the Corporate Conversion, Driven Brands Holdings Inc. and its subsidiaries. On August 3, 2020, we completed the acquisition (the “ICWG Acquisition”) of International Car Wash Group (“ICWG”). References to “brands” refer to the brands under which we and our franchisees operate each store location or warehouse, as applicable (referred to as “locations,” “stores,” or “units”). References to the size of our business are based on store count. References to “franchise” or “franchisee” refer to third parties that operate locations under franchise or license agreements, references to “franchised locations” refer to locations operated by franchisees, references to “independent operator” refer to third parties that operate locations under independent operator agreements, references to “independently-operated locations” refer to international locations outside North America where independent operators are responsible for site-level labor and receive commissions based on a percent of site revenue from car washes and references to

 

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“company-operated locations” refer to locations operated by subsidiaries of the Company. References to our “Principal Stockholders” refer to Driven Equity LLC and RC IV Cayman ICW Holdings LLC, each of which is a related entity of Roark Capital Management, LLC (“Roark”) as described under “Prospectus Summary—Our Principal Stockholders.” References to “car parc” refer to the total number of registered vehicles within a geographic region. References to cash-on-cash returns refer to our estimates of annual unit-level EBITDA divided by initial investment, except that we calculate CARSTAR unit cash-on-cash returns using estimates of incremental EBITDA from conversion divided by conversion costs. We calculate Take 5 franchise unit cash-on-cash returns based on company operated unit-level economics for greenfield locations open for at least two years, adjusted to include franchise costs (e.g., royalties, supply margin and initial franchise fees). We provide cash-on-cash returns as we believe it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry and we use it internally as a benchmark to compare our performance to that of our competitors. This measure has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

Throughout this prospectus, we provide a number of key performance indicators used by management and typically used by our competitors in the automotive services industry. These and other key performance indicators are discussed in more detail in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Indicators.” Except as otherwise specified, the following are key performance indicators used throughout this prospectus:

 

   

“System-wide sales” represents the total of net sales for our company-operated stores and independently-operated stores, and sales at franchised stores. Sales at franchised stores are not included as revenue in our consolidated statements of operations, but rather, the Company includes franchise royalties and fees that are derived from sales at franchised stores. Franchise royalties and fees revenue represented 19% and 22% of our total revenue in 2019 and 2018, respectively. During 2019 and 2018, approximately 93% and 96%, respectively, of franchise royalties and fees revenue was attributable to royalties, with the balance attributable to license and development fees. Revenue from company-operated stores represented 56% and 47% of our total revenue in 2019 and 2018, respectively. There was no revenue from independently-operated stores in 2019 or 2018 since the ICWG acquisition occurred in 2020.

 

   

“Store count” reflects the number of franchised, independently-operated and company-operated stores open at the end of the reporting period.

 

   

“Same store sales” reflect the change in sales year-over-year for the same store base. We define the same store base to include all franchised, independently-operated and company-operated stores open for comparable weeks during the given fiscal period in both the current and prior year.

 

   

“Adjusted EBITDA” means earnings before interest expense, income tax expense, and depreciation and amortization, with further adjustments for acquisition-related costs, straight-line rent, equity compensation, loss on debt extinguishment and certain non-recurring, non-core, infrequent or unusual charges.

 

   

“Segment Adjusted EBITDA” means Adjusted EBITDA with a further adjustment for store opening costs. Segment Adjusted EBITDA is a supplemental measure of operating performance of our segments and may not be comparable to similar measures reported by other companies. Segment Adjusted EBITDA is a performance metric utilized by the Company’s Chief Operating Decision Maker to allocate resources to and assess performance of the Company’s segments.

Adjusted EBITDA is a non-GAAP financial measure, which is discussed in more detail in the section entitled “Use of Non-GAAP Financial Information.” Our fiscal year ends on the last Saturday of each calendar year. Our most recent fiscal years ended on December 28, 2019 and December 29, 2018 and were both 52-week years. Our fiscal quarters are comprised of 13 weeks each, except for 53-week fiscal years for which the fourth quarter will be comprised of 14 weeks, and end on the 13th Saturday of each quarter (14th Saturday of the fourth quarter, when applicable).

 

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USE OF NON-GAAP FINANCIAL INFORMATION

To supplement our financial information presented in accordance with the U.S. GAAP, we have presented Adjusted EBITDA, Acquisition Adjusted EBITDA and Adjusted Net Income, each a non-GAAP financial measure.

Adjusted EBITDA is defined above under “Basis of Presentation.” Acquisition Adjusted EBITDA represents Adjusted EBITDA for the applicable period as adjusted to give effect to management’s estimates of a full period of Adjusted EBITDA from any businesses acquired in such period as if such acquisitions had been completed on the first day of such period (“Acquisition EBITDA adjustments”), except that we include the impact of the ICWG Acquisition as if it had been completed on the first day of our 2019 fiscal year. Acquisition EBITDA adjustments are based on the most recently available historical financial information of acquired businesses at the time of such acquisitions, as adjusted as permitted under the Amended and Restated Base Indenture, dated as of April 24, 2018, by and among Driven Brands Funding, LLC, Driven Brands Canada Funding Corporation, and Citibank, N.A., as trustee and securities intermediary (as further amended, modified, supplemented, the “Securitization Senior Notes Indenture”) to (a) eliminate expenses related to the prior owners and certain other non-recurring costs and expenses, if any, as if such businesses had been acquired on the first day of such period, (b) give effect to a full year of performance for any acquisitions completed by such acquired businesses prior to our acquisition and (c) give full year effect to sale leaseback transactions, including rent adjustments in connection with acquisitions, as if such transactions occurred on the first day of such period. Adjusted Net Income is calculated by eliminating from net income the adjustments described for Adjusted EBITDA, amortization related to acquired intangible assets and the tax effect of the adjustments. Our acquired intangible assets primarily relate to franchise agreements and trademarks. Although our intangible assets directly contribute to the Company’s revenue generation, the amortization related to acquired intangible assets is a non-cash amount which is not affected by operations of any particular period and which typically fluctuates period over period based on the size and timing of the Company’s acquisition activity. Accordingly, we believe excluding the amortization related to acquired intangible assets enhances the Company’s and our investors’ ability to compare our past performance with our current performance and to analyze underlying business trends.

We present these metrics because we believe they are a useful indicator of our operating performance. We believe Adjusted EBITDA and Adjusted Net Income are commonly used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. Our management and certain investors use Acquisition Adjusted EBITDA as an estimate of the potential of our ongoing operations to generate Adjusted EBITDA after giving effect to recent acquisitions.

Adjusted EBITDA, Acquisition Adjusted EBITDA and Adjusted Net Income should not be construed as alternatives to net income and net income margin under GAAP as indicators of operating performance. Adjusted EBITDA, Acquisition Adjusted EBITDA and Adjusted Net Income may not be comparable to similarly titled measures reported by other companies. We have included these measures because we believe they provide management and investors with additional information to measure our performance.

The presentation of Acquisition Adjusted EBITDA should not be construed as an inference that our future results will be consistent with our “as if” estimates. These “as if” estimates of potential operating results were not prepared in accordance with GAAP or the pro forma rules of Regulation S-X promulgated by the SEC. Furthermore, while Acquisition Adjusted EBITDA gives effect to management’s estimate of a full year of Adjusted EBITDA in respect of acquisitions completed in the applicable period, Acquisition Adjusted EBITDA does not give effect to any Adjusted EBITDA in respect of such acquisitions for any period prior to such applicable period, except that we include the impact of the ICWG Acquisition as if it had been completed on the first day of our 2019 fiscal year. As a result, the Acquisition Adjusted EBITDA across different periods may not necessarily be comparable.

For reconciliations of these measures to the nearest GAAP measures, see “Prospectus Summary—Summary Historical Consolidated Financial and Other Data.”

 

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PROSPECTUS SUMMARY

The following summary contains selected information about us and about this offering. It does not contain all of the information that is important to you and your investment decision. Before you make an investment decision, you should review this prospectus in its entirety, including matters set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. Some of the statements in the following summary constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

DRIVEN BRANDS’ OVERVIEW

Driven Brands is the largest automotive services company in North America with a growing and highly-franchised base of more than 4,100 locations across 49 U.S. states and 14 international countries. Our scaled, diversified platform fulfills an extensive range of core consumer and commercial automotive needs, including paint, collision, glass, vehicle repair, oil change, maintenance and car wash. Driven Brands provides a breadth of high-quality and high-frequency services to a wide range of customers who rely on their cars in all economic environments to get to work and in many other aspects of their daily lives. Our asset-light business model generates consistent recurring revenue and strong operating margins, and requires limited maintenance capital expenditures. Our significant free cash flow generation and capital-efficient growth results in meaningful shareholder value creation. Our diversified platform of needs-based service offerings has delivered twelve consecutive years of positive same store sales growth including throughout the Great Recession, and from 2015 to 2019 we grew our revenue and Adjusted EBITDA at a CAGR of 37% and 22%, respectively.

We have a portfolio of highly recognized brands that compete in the large, recession-resistant and highly-fragmented automotive care industry, which was estimated to be a $300+ billion market in the U.S. in 2019, and has exhibited favorable long-term growth trends. Our U.S. industry is underpinned by a large, growing car parc of more than 275 million vehicles, and is expected to continue its long-term growth trajectory given (i) consumers more frequently outsourcing automotive services due to vehicle complexity; (ii) increases in average repair costs, (iii) average age of the car on the road getting older, and (iv) long-term increases in annual miles traveled. Outside of North America, our international business has a proud 55-year history providing express-style conveyor car wash services across Europe and Australia. Our network generated approximately $600 million in revenue from approximately $3 billion in system-wide sales in 2019. Including ICWG for 2019, our network would have serviced 50 million vehicles across a diverse mix of customers, with approximately 50% of our system-wide sales coming from retail customers and approximately 50% coming from commercial customers such as fleet operators and insurance carriers. Our success is driven in large part by our mutually beneficial relationships with more than 2,500 individual franchisees and independent operators. Our scale, geographic breadth, and best-in-class shared services provide significant competitive platform advantages, and we believe that we are well positioned to increase our market share through continued organic and acquisition growth.

The Driven Brands’ platform enables our portfolio of brands to be stronger together than they are apart. We have invested heavily in the creation of unique and powerful shared services, which provides each brand with more resources and produces better results than any individual brand could achieve on its own. Our locations are strengthened by ongoing training initiatives, targeted marketing enhancements, procurement savings, and cost efficiencies, driving revenue and profitability growth for both Driven Brands and for our franchisees. Our performance is further enhanced by a data analytics engine of approximately 18 billion data elements informed by customers across our thousands of locations at every transaction. Our platform advantages combined with our brand heritage, dedicated marketing funds, culture of innovation, and best-in-class management team have positioned us as a leading automotive services provider and the consolidator of choice in North America.



 

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Driven Brands has a long track record of delivering strong growth through consistent same store sales performance, store count growth, and acquisitions. All of our brands produce highly-compelling unit-level economics and cash-on-cash returns, which results in recurring and growing income for Driven Brands and for our healthy and growing network of franchisees, and we have agreements to open more than 500 new franchised units as of September 26, 2020. Our organic growth is complemented by a consistent and repeatable M&A strategy, having completed more than 40 acquisitions since 2015. Notably, in August 2020 we acquired ICWG, the world’s largest car wash company by location count with more than 900 locations across 14 countries, demonstrating our continued ability to pursue and execute upon scalable and highly strategic M&A. Within our existing service categories, we believe we have enormous whitespace, with over 12,000 potential locations across North America alone. We are only in first gear.

RECENT GROWTH AND PERFORMANCE

We believe our historical success in driving revenue and profit growth is underpinned by our highly-recognized brands, dedicated marketing funds, exceptional in-store execution, franchisee support, and ability to provide a wide range of high-quality services for our retail and commercial customers. Following the acquisition of the Company by affiliates of Roark in early 2015, we made significant investments in our shared services and data analytics capabilities, which has enabled us to accelerate our growth, as evidenced by the following achievements from 2015 through 2019:

 

   

Increased our total store count from 2,306 to 3,106, at a CAGR of 8%

 

   

Increased revenue from $168 million* to $600 million(1) at a CAGR of 37%

 

   

Increased system-wide sales from $1.4 billion to $2.9 billion, at a CAGR of 19%

 

   

Grew same store sales at an average annual rate of 4.2%

 

   

Increased net income from $3 million* to $8 million

 

   

Increased Adjusted Net Income from $18 million* to $37 million, at a CAGR of 20%

 

   

Increased Adjusted EBITDA from $53 million* to $119 million, at a CAGR of 22%

 

   

Including ICWG from the first day of our 2019 fiscal year, we would have generated revenue of $936 million, system-wide sales of $3.2 billion, net income of $26 million and Acquisition Adjusted EBITDA(2) of $244 million

 

STORE COUNT**

 

REVENUE**

($MM)

 

SYSTEM-WIDE SALES**

($BN)

 

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(1)

As described in Note 1 to our consolidated financial statements, we adopted the new revenue recognition standard during the annual period beginning on December 31, 2017. Prior to that time, advertising contributions and related expenditures were not included in the consolidated statements of operations. Revenue for 2019 is inclusive of advertising contributions totaling $66 million in accordance with our



 

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  adoption of the new revenue recognition standard. The inclusion of advertising contributions in 2019 revenue was responsible for three percentage points of the CAGR from 2015 to 2019.
(2)

Acquisition Adjusted EBITDA for 2019 includes the impact of the ICWG Acquisition and other businesses acquired in 2019 as if such acquisitions had been completed on the first day of our 2019 fiscal year.

* 

These metrics for fiscal 2015 represent pro forma revenue, pro forma net income, pro forma Adjusted Net Income, and pro forma Adjusted EBITDA after giving effect to the acquisition of Driven Holdings LLC by the Company on April 17, 2015, as if it occurred at the beginning of our 2015 fiscal year. See “Summary Historical Consolidated Financial and Other Data” for further discussion and a reconciliation of 2015 pro forma net income, pro forma Adjusted Net Income, and pro forma Adjusted EBITDA.

**

Pro forma 2019 amounts include the impact of the ICWG Acquisition as if it had been completed on the first day of our 2019 fiscal year.

Our financial performance and business model are highly resilient across economic cycles, as demonstrated by 12 consecutive years of consistent positive same store sales growth, including growth through the Great Recession. In addition, our highly-franchised business model generates consistent, recurring revenue and significant and predictable free cash flow, and we are insulated from the operating cost variability of our franchised locations. The operating costs of franchised locations are borne by the franchisees themselves, and our international locations outside North America utilize an independent operator model whereby a third-party is responsible for site-level labor and receives commissions based on a percent of site revenue from car washes.

SAME STORE SALES GROWTH(1)

 

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(1)

Prior to Fiscal 2018, same store sales growth was presented pro forma for acquired locations based on available information. Beginning in Fiscal 2018, we modified our same store sales calculation to treat acquired locations as comparable after they have been a part of Driven Brands for 12 months.

OUR OPPORTUNITY: THE LARGE, RECESSION-RESISTANT AND HIGHLY FRAGMENTED AUTOMOTIVE SERVICES INDUSTRY WITH LONG-TERM GROWTH TRENDS

The highly-fragmented U.S. automotive care industry, estimated to be a $300+ billion market in 2019, provides critical needs-based services and replacement components, accessories, and equipment to vehicle owners after initial sale. The core of the industry is a large and growing car parc of more than 275 million vehicles in operation (“VIO”), with an average vehicle age of 12 years. Our VIO sweet spot for repairs and maintenance is the population of vehicles 6 years or older that are outside of manufacturers’ warranty periods and represent the majority of the car parc. This expanding pool of older vehicles consistently requires a variety of on-going services to remain operable. As a result, the industry has experienced stable and predictable long-term growth trends driven by non-discretionary and non-cyclical demand from end customers who need their vehicles every day.

 



 

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The U.S. automotive care industry has a long track record of consistent growth, having grown at a 3% CAGR from 2007 to 2019, and a 4% CAGR from 2014 to 2019. We believe numerous secular tailwinds will continue to drive predictable long-term industry growth. The addressable market of vehicles in operation is projected to grow along with the average vehicle age, all of which increase the needs for vehicle maintenance and repair. Increasing vehicle complexity is driving higher cost of repairs and greater consumer reliance on “do-it-for-me” (“DIFM”) service providers with specialized knowledge, tools and equipment. These trends continue to drive an increased need for professional DIFM services, premiumization of certain products such as higher-cost motor oils to sustain performance, and increasing average repair order.

In addition to the benefits of the growing car parc and shift in consumer preference towards DIFM, the car wash industry also uniquely benefits from the affordability and frequency-of-use of the services provided. Since our acquisition of ICWG in August 2020, Driven Brands operates in the automated segment of the car wash industry, which accounts for approximately 70% of the total U.S. car wash industry, and which has grown at a 5.2% CAGR in the U.S. between 2015 and 2020, outpacing the 2.5% CAGR of the overall U.S. car wash industry over the same timeframe. Driven Brands’ express-style conveyer car wash services provide a very quick and convenient experience relative to other non-automated car wash services, such as handwashing, and ensures a safe and comfortable experience as the consumer remains in their vehicle during the wash.

All of these secular tailwinds play to Driven Brands’ advantage as the largest automotive services platform in North America. We believe that as a large, scaled chain, Driven Brands will continue to gain market share from independent market participants due to our ability to invest in the required technology, infrastructure, and equipment to service more complex cars, as well as preferences from insurance carriers and fleet operators to work with nationally scaled and recognized chains with broad geographic coverage, extensive service offerings, strong operating metrics and centralized billing services. In addition to services that are essential for vehicles to remain operable, including collision, oil change and repairs, we also provide services through our car wash segment that make consumers feel great about maintaining their vehicles, with a highly convenient, safe and affordable experience.

The automotive services industry is highly fragmented, comprised primarily of regional and locally owned and operated independent shops, and offers a significant consolidation opportunity across our segments.

 

U.S. Addressable Market for Driven Brands’ Three Largest Segments

 

 

Maintenance(1)(2)

  

Car Wash(1)(2)(3)

   Paint, Collision & Glass(2)(4)

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Highly fragmented industry with top 10 companies representing ~15% of market share(1)(2)

   

Highly fragmented conveyer car wash industry with top 10 companies representing ~5% market share (1)(2(3)

   

Highly fragmented industry with top 5 companies representing ~15% of market share(2)(4)

 

(1)

Percentage of market share based on aggregate store count.

(2)

Based on management estimates using internal knowledge in addition to information derived from third party sources. See “Industry and Market Data.”

(3)

$9 billion car wash market size represents total car wash industry. Market share figures are based on the share of conveyor car wash location count only rather than share of total car wash industry.

(4)

Percentage of market share based on aggregate store count, except for the glass repair component of the Paint, Collision & Glass segment, which is based on revenue.

 



 

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OUR COMPETITIVE STRENGTHS AND STRATEGIC DIFFERENTIATION

We believe the following strengths differentiate us from our competitors and enable us to profitably grow our leading market position and drive our continued success.

We Provide an Extensive Suite of Services Retail and Commercial Customers Consistently Need

We believe Driven Brands is the only automotive services platform of scale providing an extensive suite of services to its customers. Our diversified platform is uniquely capable of offering a compelling and convenient service proposition to our customers by providing a wide breadth of services for all vehicle types and across multiple service categories including paint, collision, glass, repair, oil change, maintenance and car wash. Our diverse offerings span a wide range of price points and most of our services are non-discretionary and essential to the customer in any economic environment. Our network generated approximately $600 million in revenue from approximately $3 billion in system-wide sales in 2019. Including ICWG for the full 2019 fiscal year, our network would have serviced 50 million vehicles across a diverse mix of customers, with approximately 50% of our system-wide sales coming from retail customers and approximately 50% coming from commercial customers such as fleet operators and insurance carriers. For our commercial customers, we offer a compelling value proposition by providing a “one-stop-shop” for their many automotive service needs through our global footprint of more than 4,100 locations offering an extensive range of complementary and needs-based services.

 

2019 REVENUE BY SEGMENT(1)    PRO FORMA 2019 REVENUE BY SEGMENT(1)(2)
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(1)

Excludes advertising revenue and intercompany eliminations.

(2)

Percentages calculated using historical segment revenues for Maintenance, Paint, Collision & Glass and Platform Services and pro forma revenue of ICWG for fiscal 2019.

Platform of Highly Recognized and Long-Standing Brands

We are the largest diversified automotive services platform in North America, and our brands have been providing quality services to retail and commercial customers around the world for over 350 years combined. We believe that the longevity and awareness of our brands, tenure of our franchisees, and the quality and value of our offerings resonate deeply with our customers. Maaco and Meineke have been operating since 1972 and are two of the most recognizable brands in the industry. In addition, Take 5 and ABRA have been operating since 1984, and CARSTAR has been in operation since 1989. CARSTAR and ABRA are also highly regarded by our insurance carrier customers featuring Net Promoter Scores of 85 and 87, respectively. Our brands are supported by over 250 highly qualified Driven Brands field operations team members that provide training and operational expertise to our franchisees and company-operated and independently-operated locations to help them deliver best-in-class customer service and drive strong financial performance. Additionally, our brands are supplemented by our continuous brand investment, with more than $1 billion having been spent on marketing over our 45 year history. Our deep and ongoing investment in training, operations and marketing has enabled our brands to stay highly relevant in the evolving marketplace and has helped position our locations as the “go to” destination for our retail and commercial customers’ automotive service needs.



 

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Powerful Shared Services and Data Analytics Engine

We have proactively built and invested in our shared services and data analytics capabilities, which are an integral component of Driven Brands and provide us with a significant competitive advantage and deep defensive moat against our peers. Our platform of centralized marketing support, consumer insights, procurement, training, new store development, finance, technology and fleet services provides significant benefits across the system by driving cost savings, incremental revenue, and sharing of best practices and capabilities across brands. We believe our shared services platform provides each brand with more resources and produces better results than any individual brand could achieve on its own. In addition, we believe the scale provided by our platform increases engagement with third parties and improves our ability to attract and retain employees, franchisees, and customers. We have used our strength and scale to create procurement programs that provide franchisees with lower pricing on supplies than they could otherwise achieve on their own. Our shared services are enhanced by our data analytics engine, which is powered by internally collected data from consumers, their vehicles and services that are provided to us at each transaction and further enriched by third-party data. This powerful data gathering capability results in more than 40 million data elements collected each month and a growing data repository with approximately 18 billion unique elements, which we use throughout our platform for improving our marketing and customer prospecting capabilities, measuring location performance, enhancing store-level operations, and optimizing our real estate site selection. As we grow organically and through acquisition, we believe the power of our shared services and data analytics will grow and will continue to be a key differentiator for our business through strengthening economies of scale, enhanced and accelerated data collection, and continued roll-out of best practices, ultimately driving attractive growth and profitability in our overall business.

Highly Franchised and Independently-Operated Business Model with Attractive Company-operated Unit Economics

We believe our operating model incorporates the best financial attributes of franchised, independently-operated and company-operated businesses. Driven Brands benefits from recurring cash flow streams generated by our highly franchised and independently-operated unit composition as well as the high-growth and high-margin characteristics of our company-operated units. Across all of our brands, our locations generate attractive and consistent cash-on-cash returns and strong brand loyalty from our customers, which has driven consistent same store sales growth.

Our asset-light business, combined with the geographic and service category diversification of our locations, results in high operating margins and highly stable cash flow generation for Driven Brands that has been consistent throughout economic cycles. Our diverse base of more than 1,800 franchisees has an average tenure with Driven Brands of approximately 15 years, and our franchisees typically work at the locations they operate and are highly engaged with their employees and customers. Our brands have attractive unit level economics, and our franchisees earn strong cash-on-cash returns, averaging 67% at CARSTAR, 50% at Meineke, 48% at Maaco, and 44% at Take 5. Outside of North America, we operate an independent operator model across our 740 car wash locations, whereby a third-party is responsible for site-level labor and receives commissions based on a percent of site revenue from car washes. As of September 26, 2020, 83% of our locations were either franchised or independently-operated (and such locations contributed to 27% of total revenue and 87% of total system-wide sales in the nine months ended September 26, 2020).

We also benefit from highly-attractive unit economics at our company-operated stores, primarily within our Take 5 brand and our domestic car wash business. Given the high growth and margins at these locations, our invested capital has yielded very strong cash-on-cash returns and expanding our company-operated unit count continues to be an attractive aspect of our growth strategy. The combination of our asset-light franchised units with our attractive and high-growth company-operated locations provides Driven Brands with a compelling mix that result in durable operating margins, a highly attractive growth profile and recurring free cash flow generation.



 

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Proven Ability to Drive and Integrate Highly Accretive M&A

M&A is a core competency of the Driven Brands platform. We have invested in and built out a dedicated team and supporting infrastructure and processes to systematically source, diligence, acquire and integrate acquisitions. Since 2015, we have completed more than 40 transactions. As a part of our M&A strategy, we have grown our existing segments, such as our paint and collision business through the acquisitions of CARSTAR in 2015, ABRA in 2019 and Fix Auto USA in 2020, and we have also expanded into adjacent, complementary service offerings, including oil change services through our acquisition of Take 5 in 2016, glass services in 2019, and car wash services through our acquisition of ICWG in 2020. The acquisition of ICWG, the world’s largest car wash company by location count with more than 900 locations across 14 countries, demonstrated our continued ability to pursue and execute upon scalable and highly strategic M&A as well as integrating large businesses into the Driven Brands platform. In addition, we have a proven track record of executing tuck-in acquisitions of independent market participants that are highly value accretive when integrated into our platform based on our ability to drive performance improvement post-acquisition through upfront cost synergies as well as incremental revenue growth opportunities from Driven Brands’ platform and economies of scale.

Our M&A capabilities are enhanced by information and data provided by our platform. 1-800-Radiator, for instance, is a very powerful identifier of prospective acquisition targets through its broad customer base of approximately 100,000 automotive shops. Once a company has been acquired, we leverage our shared services to enable the acquired business to benefit from our powerful procurement programs, data analytics capabilities, and training services. Every acquisition has been integrated into Driven Brands on plan and has demonstrated improved performance by being a part of our platform rather than operating as an independent company. We also seek to acquire businesses that make the rest of our platform and team stronger, including capabilities that can be extended to our existing brands, enhance our capture of data or strengthen our commercial customer base. Our track-record of highly-accretive M&A, with acquired companies benefiting from rapid growth and immediate synergies, will continue to be a significant part of the growth story for Driven Brands given the expected consolidation in the highly fragmented automotive services industry.

Deep Bench of Talent Poised to Capitalize on Attractive Growth Opportunity

Driven Brands is led by a best-in-class management team with experience managing many multi-billion dollar franchise and automotive service organizations. Our strategic vision is set by our CEO Jonathan Fitzpatrick, who previously served as the Chief Brand and Operations Officer of Burger King, and since joining Driven Brands in 2012, has led our transformation into an industry leading platform. Our highly experienced management team has previously held senior positions at large franchisors, including Burger King and Wendy’s and other global corporations, including Bank of America, General Electric, Lowe’s, McKinsey, Motorola, and United Parcel Service. Our success, growth and platform allow us to continue to attract and retain exceptional talent.

THE STRATEGIES THAT WILL CONTINUE OUR TRACK RECORD OF GROWTH

We expect to drive continued growth and strong financial performance by executing on the following strategies:

Grow Our Brands with New Locations

We have a proven track record of unit growth, having grown our store count at a CAGR of 8% between 2015 and 2019, and we believe our competitive strengths provide us with a solid financial and operational foundation to continue growing our footprint. Based on an extensive internal analysis, we believe we have enormous whitespace, with more than 12,000 potential locations across North America within our existing service categories.



 

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Our franchise growth is driven both by new store openings as well as through conversions of independent market participants that do not have the benefits of our scaled platform. Our attractive unit economics, national brand recognition, strong insurance and fleet customer relationships and beneficial shared services capabilities provide highly compelling economic benefits for our franchisees resulting in a strong desire to join and stay within our network. We have agreements to open more than 500 new franchised units as of September 26, 2020, which provides us with visibility into future franchise unit growth.

Additionally, we continue to expand our company-operated Take 5 footprint, primarily in Southern U.S. markets, and our domestic company-operated car wash business, both through new greenfield openings as well as tuck-in acquisitions and conversions. Both the oil change and car wash markets in North America are highly fragmented, providing significant runway for continued growth. The success of our company-operated locations is supported by our deep data analytics capabilities that use proprietary algorithms and insights that enable us to identify optimal real estate and make informed site selection decisions. With low net start-up costs and strong sales ramp, company-operated locations provide highly attractive returns, and we believe there is ample whitespace in existing and adjacent markets for continued unit growth.

Continue to Drive Same Store Sales Growth

We have demonstrated an ability to drive attractive organic growth with positive same store sales performance for 12 consecutive years. We believe that we are well positioned to continue benefiting from this momentum by executing on the following growth levers:

 

   

Continued Commercial Partnership Expansion: We are proactively growing our commercial partnerships and winning new customers by being a highly convenient and cost effective “one-stop-shop” service provider that caters to the extensive suite of automotive service needs for fleet operators and insurance carriers. These customers want to work with nationally scaled and recognized chains with broad geographic coverage, extensive service offerings, strong operating metrics and centralized billing services. We have a growing team dedicated to expanding partnerships with existing commercial customers as well as attracting new national and local customers.

 

   

Continued Growth of Subscription Car Wash Revenue Model: In 2017, ICWG introduced a subscription membership program across its domestic car wash stores, and revenue from this subscription program has grown to more than 35% of domestic car wash revenue in 2019. In addition to fostering strong customer loyalty to our stores, the subscription program also generates predictable and recurring revenue and provides incremental data and customer insights, further strengthening our data analytics capabilities. We believe there is significant opportunity to continue to grow our subscription program.

 

   

Leverage Data Analytics to Optimize Marketing, Product Offerings and Pricing: We have large, dedicated brand marketing funds supported by contributions from our franchisees, and in 2019 we collected and spent approximately $90 million for marketing across our brands. Insights from our data analytics engine enhance our marketing and promotional strategy to drive growth in unit-level performance. For instance, our proprietary data algorithms help optimize lead generation and conversion through personalized, targeted, and timely marketing promotions that provide customers with the optimal offer at the right time. In addition, our data provides insights that are enabling us to identify and roll out new product offerings, improve menu design and optimize pricing structure across our brands. Use cases like these are regularly tested, refined and deployed across our network to drive store performance.

 

   

Benefit from Industry Tailwinds: The U.S. automotive care industry has a long track record of consistent growth, having grown at a 3% CAGR from 2007 to 2019, and a 4% CAGR from 2014 to 2019. We believe that the industry has significant tailwinds that will drive continued growth, including



 

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a large and expanding pool of older cars, increasing long-term miles driven trends, a growing need for DIFM services, and increasing average repair order due to more technology and premiumization in vehicles.

Enhance Margins through Procurement Initiatives and Strengthening Platform Services

In addition to topline growth, Driven Brands has also been able to leverage the strength of the platform to enhance margins for franchised, independently-operated and company-operated locations through the following levers:

 

   

Leverage Shared Services and Platform Scale: We expect to continue to benefit from margin improvements associated with our increasing scale and the growing efficiency of our platform. As a result of the investments we have made, our shared services provide substantial operating leverage and are capable of supporting a much larger business than we are today. Driven Brands has also been increasing margins through technology advancements to enhance in-store operations and deploy best-practice training initiatives across the portfolio.

 

   

Utilize Purchasing Strength from Procurement Programs: Driven Brands currently provides franchisees, independently-operated and company-operated locations with lower pricing on supplies than they could otherwise achieve on their own, thereby augmenting the value proposition to new and existing franchisees as well as the earnings of our independently-operated and company-operated locations. Our procurement programs provide us with recurring revenue via supplier rebates and product margin. As we continue to grow organically and through acquisition, we believe we are well-positioned to continue driving lower procurement pricing and more benefits to our overall system.

 

   

Drive Incremental Profitability through Innovation: In 2017, Driven Brands launched Spire Supply, an in-house distributor of consumable products such as oil filters and wiper blades which currently serves all franchised and company-operated Take 5 stores as well as a large portion of Meineke stores. Spire Supply provides us with incremental EBITDA by reducing spend that would otherwise be paid to third-party vendors, providing Driven Brands and its franchisees with significant cost reductions. There is substantial opportunity to continue to grow Spire Supply through increased adoption across our franchisee network, introduction of new, complementary product lines, and the sale of products to independent market participants.

We plan to continue to invest in these capabilities that enhance the power of our platform and believe that these platform benefits will continue to provide strong tailwinds to our profits, as well as the profits of our franchisees going forward.

Pursue Accretive M&A in Existing and New Service Categories

Driven Brands is optimally positioned to continue its long and successful track record of acquisitions, both in our existing service categories as well as into new, complementary ones, and we maintain an actionable pipeline of M&A opportunities. Since 2015, we have completed more than 40 acquisitions, and since 2019, the Company expanded into both glass and car wash services, which has provided us with new organic and acquisition growth opportunities in two highly fragmented service categories. In addition, the evolving vehicle technology landscape provides numerous opportunities for Driven Brands to leverage its scale and core competencies to continue to expand our market share. As the consolidator of choice, we plan to capitalize on the highly fragmented nature of the automotive services industry by continuing to execute on accretive M&A using our proven acquisition strategy and playbook.



 

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RISK FACTORS

Participating in this offering involves substantial risk. Our ability to execute our strategy also is subject to certain risks. The risks described under the heading “Risk Factors” immediately following this summary may cause us not to realize the full benefits of our competitive strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the more significant challenges and risks we face include the following:

 

   

competition with numerous domestic and foreign businesses;

 

   

changing economic conditions, changing regulations and tariffs, new interpretations of existing laws, difficulties and delays in obtaining or maintaining required licenses or approvals and other unexpected events and circumstances could adversely affect our business and results of operations;

 

   

changes in consumer preferences and perceptions could reduce demand for our products and services;

 

   

weather may impact the demand for our services;

 

   

our business is affected by the financial results of our franchisees;

 

   

we may face challenges in retaining franchisees and customers for a long period of time;

 

   

the impact of advances in automotive technology, including self-driving and electric vehicles and shared mobility, may reduce the demand for our services;

 

   

certain restrictions by valuable manufacturers or government regulation or third parties may prevent us from providing our services and products to customers;

 

   

changes in labor costs, supply and other operating costs, interest rates, foreign exchange rates and inflation could adversely affect our results of operations;

 

   

we may experience supply chain shortages and interruptions and rely on key suppliers to provide high-quality products pursuant to customary terms and prices;

 

   

our operations have been, and are expected to continue to be, affected by the coronavirus outbreak;

 

   

substantially all of our assets are pledged as security under our debt facilities that impose certain restrictions and obligations, noncompliance of which could put us in default;

 

   

our growth strategy may not succeed if we are unable to complete future acquisitions and integrate those businesses successfully into our future growth;

 

   

our business may be adversely impacted by the geographic concentration of our locations and the number of our brands;

 

   

our international operations are subject to various risks and uncertainties;

 

   

we and our franchisees and independent operators are subject to various laws and regulations, and the failure to comply with those laws and regulations may lead to losses and harm our brands;

 

   

we may be subject to litigation in the ordinary course of business;

 

   

our ability to attract and retain qualified personnel;

 

   

our operations in Europe may be adversely impacted by the Brexit withdrawal of the U.K.;

 

   

our intellectual property is material to our business, and litigation to enforce or other claims involving our intellectual property may be costly and unsuccessful;

 

   

we are subject to material failure, interruption, security breaches or cyber incidents with respect to our information technology systems;



 

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our franchise system is subject to various risks, including our dependency on franchised locations that make up a majority of our locations, risks that franchisees face as operating entities, franchisees’ noncompliance with our agreements and franchisees’ actions that may harm our brands;

 

   

we are a holding company and rely on dividends, distributions and other transfers of funds from our subsidiaries;

 

   

we are an “emerging growth company” and are able take advantage of reduced disclosure requirements that could make our common stock less attractive to investors;

 

   

we will be required to pay our existing owners for certain tax benefits; and

 

   

we are a “controlled company” within the meaning of NASDAQ rules, and we intend to rely on exemptions from certain corporate governance requirements.

RECENT DEVELOPMENTS

Preliminary Estimated Financial Results for the Three Months and the Year Ended December 26, 2020

Our financial results for the three months and fiscal year ended December 26, 2020 are not yet complete and will not be available until after the completion of this offering. Accordingly, set forth below are certain preliminary estimated financial results for the three months and fiscal year ended December 26, 2020, which are subject to revision based upon the completion of our quarter-end financial closing processes and other developments that may arise prior to the time our financial results are finalized. Our preliminary estimated financial results are therefore forward-looking statements based solely on information available to us as of the date of this prospectus and may differ from these estimates. You should not place undue reliance on these estimates. The information presented herein should not be considered a substitute for the financial information to be filed with the SEC in our Annual Report on Form 10-K for the fiscal year ended December 26, 2020 once it becomes available. Our preliminary estimated financial results contained in this prospectus have been prepared in good faith by, and are the responsibility of, management based upon our internal reporting for the three months and year ended December 26, 2020. Grant Thornton LLP has not audited, reviewed, compiled or performed any procedures with respect to the following preliminary estimated financial results. Accordingly, Grant Thornton LLP does not express an opinion or any other form of assurance with respect thereto. For additional information, see “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”.

The following are our preliminary estimated financial results for the three months and the fiscal year ended December 26, 2020:

 

    Three months ended     Year ended  
(in thousands)   December 26,
2020
(estimated low)
    December 26,
2020
(estimated high)
    December 28,
2019
(actual)
    December 26,
2020
(estimated low)
    December 26,
2020
(estimated high)
    December 28,
2019
(actual)
 

Preliminary estimated financial results:

           

Revenue

  $ 275,000     $ 287,000     $ 182,700     $ 891,000     $ 903,000     $ 600,273  

Net income (loss)

    (2,100     1,600       (10,585     1,200       4,900       7,750  

Adjusted EBITDA

    60,800       65,900       24,295       200,400       205,500       119,245  

Acquisition Adjusted EBITDA

          264,200       269,300    

Net debt(a)

          2,013,000       2,013,000    


 

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The following table provides a reconciliation of net income (loss) to Adjusted EBITDA and Acquisition Adjusted EBITDA for the periods presented:

 

    Three months ended     Year ended  
(in thousands)   December 26,
2020
(estimated low)
    December 26,
2020
(estimated high)
    December 28,
2019
(actual)
    December 26,
2020
(estimated low)
    December 26,
2020
(estimated high)
    December 28,
2019
(actual)
 

Net income (loss)

  $ (2,100   $ 1,600     $ (10,585   $ 1,200     $ 4,900     $ 7,750  

Income tax expense (benefit)

    (900     700       (1,887     5,200       6,800       4,830  

Interest expense, net

    31,300       31,300       17,023       96,300       96,300       56,846  

Depreciation and amortization

    22,500       22,500       8,992       55,100       55,100       24,220  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    50,800       56,100       13,543       157,800       163,100       93,646  

Acquisition related costs(b)

    2,100       2,100       8,205       15,400       15,400       12,497  

Non-core items and project costs, net(c)

    6,000       6,000       1,259       5,200       5,200       6,644  

Sponsor management fees(d)

    100       100       538       5,400       5,400       2,496  

Straight-line rent adjustment(e)

    3,500       3,500       (143     6,600       6,600       2,172  

Equity-based compensation expense(f)

    300       500       298       800       1,000       1,195  

Foreign currency transaction gain(g)

    (7,200     (7,200     —         (7,200     (7,200     —    

Bad debt expense(h)

    —         —         —         2,800       2,800       —    

Asset impairment and closed store expenses(i)

    500       100       —         8,200       7,800       —    

Loss on debt extinguishment(j)

    4,700       4,700       595       5,400       5,400       595  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 60,800     $ 65,900     $ 24,295     $ 200,400     $ 205,500     $ 119,245  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition EBITDA adjustments(k)

          63,800       63,800    
       

 

 

   

 

 

   

Acquisition Adjusted EBITDA

        $ 264,200     $ 269,300    
       

 

 

   

 

 

   

 

a.

Net debt consists of the outstanding principal amounts of debt less cash and cash equivalents and restricted cash.

b.

Consists of acquisition costs as reflected within the consolidated statements of operations, including legal, consulting and other fees and expenses incurred in connection with acquisitions completed during the applicable period, as well as inventory rationalization expenses incurred in connection with acquisitions. We expect to incur similar costs in connection with other acquisitions in the future and, under U.S. GAAP, such costs relating to acquisitions are expensed as incurred and not capitalized.

c.

Consists of discrete items and project costs, including 1) non-capitalizable expenses relating to the Company’s initial public offering and strategic transactions in 2019 and 2020, and 2) wage subsidies received directly attributable to the COVID-19 pandemic in 2020.

d.

Includes management fees paid to Roark.



 

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e.

Consists of the non-cash portion of rent expense, which reflects the extent to which our straight-line rent expense recognized under U.S. GAAP exceeds or is less than our cash rent payments.

f.

Represents non-cash equity-based compensation expense.

g.

Represents foreign currency transaction gains and losses primarily related to the remeasurement of our intercompany loans and gain on remeasurement of cross currency swaps.

h.

Represents bad debt related to customer that declared bankruptcy due to COVID-19 pandemic.

i.

Relates to the discontinuation of the use of the Pro Oil tradename as those locations were transitioned to the Take 5 tradename, as well as impairment of certain fixed assets and operating lease right-of-use assets related to closed locations. Also represents lease exit costs and other costs associated with stores that were closed prior to their respective lease terminations dates.

j.

Represents charges incurred and the write-off of debt issuance costs associated with early termination of debt.

k.

Represents Acquisition EBITDA adjustments necessary to reflect a full period of Adjusted EBITDA from acquired businesses.

Year-over-year growth in consolidated revenue and Adjusted EBITDA for the three months ended December 26, 2020 was primarily the result of acquisitions as well as new franchise and company-operated units. Operating expenses, based on the mid-point of the range provided, have increased year-over-year primarily as a result of acquisitions. Specifically, independently-operated store expenses, company-operated store expenses, and depreciation and amortization increased as a result of the growth in unit count year-over-year. However, operating expenses as a percentage of revenue are trending in line with prior quarters.

We present Adjusted EBITDA and Acquisition Adjusted EBITDA for the reasons described in “Use of Non-GAAP Financial Information.” These measures are discussed in more detail in the section entitled “Use of Non-GAAP Financial Information.”

ICWG Acquisition

On August 3, 2020, we completed the ICWG Acquisition. Pursuant to the agreement and plan of merger entered into in connection with the acquisition (the “Merger Agreement”), RC IV ICW Merger Sub LLC, a subsidiary of RC IV Cayman ICW Holdings LLC and the direct parent of RC IV Cayman ICW LLC, merged with and into Driven Investor LLC. Driven Investor LLC subsequently contributed all of the equity interests of RC IV Cayman ICW LLC to the Company in exchange for 430 shares of the Company’s common stock. RC IV Cayman ICW LLC is the direct parent of Shine Holdco (UK) Limited, a holding company of all of the assets and liabilities of ICWG. These transactions are collectively referred to herein as the ICWG Acquisition.

Refinancing Transaction

On December 14, 2020, Driven Brands Funding, LLC (the “Master Issuer”) and Driven Brands Canada Funding Corporation (the “Canadian Co-Issuer”, and together with the Master Issuer, the “Master Co-Issuers”), each wholly owned indirect subsidiaries of the Company, issued $450 million of 3.237% Fixed Rate Senior Secured Notes, Class A-2. Proceeds from the offering were used (i) to repay in full the series 2015-1 and Series 2016-1 Fixed Rate Senior Secured Notes, Class A-2, (ii) to pay associated transaction fees and expenses and make-whole prepayment consideration, and (iii) for general corporate purposes. See “Description of Material Indebtedness.”

Impact of COVID-19

Commencing in December 2019, the novel strain of coronavirus (SARS-Cov-2) and the disease it causes “COVID-19,” spread rapidly throughout the world. The global crisis resulting from the spread of COVID-19 has disrupted, and continues to significantly disrupt, local, regional, and global economies and businesses in the United States and internationally. Because automotive services were generally deemed “essential” by most federal, state, provincial and local governmental authorities in the United States and Canada, substantially all of Driven Brands’ locations remained open despite the ongoing COVID-19 pandemic.



 

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In response to the COVID-19 pandemic, Driven Brands proactively implemented various initiatives across each of its segments, with a focus on ensuring the safety of employees, franchisees and customers, and minimizing the financial impact of COVID-19 while continuing to execute on building the foundation for future growth. Driven Brands’ initiatives implemented include, but are not limited to:

 

   

Aggressively managing expenses by reducing headcount and general and administrative expenses;

 

   

Deferring non-essential capital expenditures and new construction plans;

 

   

Availing itself of income and payroll tax deferral programs pursuant to the “Coronavirus Aid, Relief, and Economic Security Act” (the “CARES Act”);

 

   

Extending and improving payment terms with vendors and negotiating rent relief for a significant portion of company-operated locations;

 

   

Reducing and deferring advertising fees for certain franchisees and assisting franchisees in securing government funding pursuant to the CARES Act;

 

   

Adjusting company-operated location labor and variable costs to optimize efficiency and profitability; and

 

   

Leveraging data analytics and insights to tailor marketing and promotional strategies, including in respect of consumer sentiments relating to the ongoing COVID-19 pandemic.

Driven Brands’ sales volumes began to decline in late March 2020 as the pandemic worsened in the markets in which Driven Brands operates and federal, state, provincial and local governments implemented stricter guidelines and policies, including stay-at-home orders and the closure of non-essential businesses. Sales performance has varied by segment, but since early April, consolidated Driven Brands same store sales trends have improved significantly and have outperformed trends for the industry. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Factors Impacting Our Results.”

CONSOLIDATED SAME STORE SALES AS A % OF PRIOR YEAR

 

LOGO

OUR PRINCIPAL STOCKHOLDERS

Our Principal Stockholders, Driven Equity LLC and RC IV Cayman ICW Holdings LLC, are controlled indirect subsidiaries of Roark Capital Partners III LP (“Roark Capital Partners III”) and Roark Capital Partners IV Cayman AIV LP (“Roark Capital Partners IV”), respectively. Roark Capital Partners III and Roark Capital Partners IV are each investment funds related to Roark. Roark is an Atlanta-based private equity firm with over $13 billion in equity capital commitments raised since inception. Roark focuses on consumer and business companies, with a specialization in franchised and multi-unit business models in the retail, consumer services and business services sectors.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY AND A CONTROLLED COMPANY

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or “JOBS Act”. As an “emerging growth company,” we may take advantage of specified reduced



 

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reporting and other requirements that are otherwise applicable to public companies. These provisions include, among other things:

 

   

reduced obligations with respect to financial data, including presenting only two years of audited financial statements and selected financial data;

 

   

exemption from new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies; and

 

   

reduced disclosure about executive compensation arrangements.

We will cease to be an “emerging growth company” upon the consummation of this offering, and once we cease to be an “emerging growth company,” we will not be entitled to the exemptions provided in the JOBS Act discussed above.

In addition, upon the closing of this offering, we will be a “controlled company” within the meaning of the corporate governance rules for NASDAQ listed companies because more than 50% of our voting common stock will be owned by our Principal Stockholders. For further information on the implications of this distinction, see “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock” and “Management—Board Committees.”

REORGANIZATION

Prior to July 6, 2020, we operated as a Delaware limited liability company under the name RC Driven Holdings LLC. On July 6, 2020, we converted into a Delaware corporation and changed our name to Driven Brands Holdings Inc. (the “Corporate Conversion”). In conjunction with the Corporate Conversion, all of our outstanding equity interests were converted into 1,000 shares of common stock held by our direct parent, Driven Investor LLC and we subsequently issued an additional 430 shares of common stock to Driven Investor LLC as part of the ICWG Acquisition. Prior to the closing of this offering, (i) we will effect a stock split of our common stock (the “Stock Split”), (ii) Driven Investor LLC will be liquidated and all of our common stock will be held by our Principal Stockholders, current and former employees and management and board members, (iii) profit interests in Driven Investor LLC will be exchanged for an economically equivalent number of vested and unvested shares of our common stock and (iv) options to purchase units of Driven Investor LLC will be converted into options to purchase shares of our common stock (collectively, the “Reorganization”). The number of vested and unvested shares of common stock to be issued in the Reorganization and the number of options to be issued to certain holders of profits interests in Driven Investor LLC will be determined in accordance with the limited liability company agreement of Driven Investor LLC.

At the initial public offering price of $22.00 per share, (i) 132,891,375 shares of common stock (including 4,788,723 shares of restricted stock issued to holders of unvested profits interests in Driven Investor LLC) will be outstanding after giving effect to the Reorganization, reflecting an implied 92,931.0-for-one Stock Split, (ii) options to purchase 5,349,109 shares of our common stock at an exercise price equal to the price to the public in this offering will be issued to certain holders of profits interests in Driven Investor LLC and (iii) options to purchase 22,805 shares of our common stock with a weighted-average exercise price of $12.08 per share will be issued to holders of existing options to purchase units in Driven Investor LLC.

The purpose of the Corporate Conversion was to reorganize our structure so that the entity that is offering our common stock to the public in this offering is a corporation rather than a limited liability company and so that our existing investors will own our common stock rather than equity interests in a limited liability company.

Driven Brands Holdings Inc. now holds all of the assets of RC Driven Holdings LLC and has assumed all of its liabilities and obligations. We are a holding company and hold all of the assets and operating entities in the



 

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Paint, Collision & Glass, Maintenance and Platform Services segments through our direct subsidiary, Driven Holdings, LLC, and hold all of the assets and operating entities in the Car Wash segment through our direct subsidiary, Shine Holdco (UK) Limited (“Shine Holdco”).

CORPORATE INFORMATION

We were originally organized as RC Driven Holdings LLC under the laws of the State of Delaware as a limited liability company on March 27, 2015. On July 6, 2020, we converted into a corporation under the laws of the state of Delaware and changed our name to Driven Brands Holdings Inc. as described above under “—Reorganization”. Our principal executive offices are located at 440 S. Church Street, Suite 700, Charlotte, NC 28202. Our telephone number is (704) 377-8855. Our website is located at www.drivenbrands.com. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in, and are not considered part of, this prospectus. You should not rely on our website or any such information in making your decision whether to purchase shares of our common stock.



 

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THE OFFERING

 

Common stock offered by us

  

31,818,182 shares

Option to purchase additional shares

   We have granted the underwriters an option for a period of 30 days to purchase up to an additional 4,772,727 shares of common stock.

Common stock outstanding after giving effect to this offering

  


164,709,557 shares (or 167,415,112 shares if the underwriters exercise their option to purchase additional shares in full and after giving effect to the purchase of 2,067,172 shares of common stock from existing holders as described under “Use of Proceeds”).

Use of proceeds

  

We estimate that our net proceeds from this offering will be approximately $652 million (or approximately $751 million if the underwriters exercise their option to purchase additional shares in full), after deducting underwriting discounts and commissions, offering expenses that have been paid by us, and estimated offering expenses payable by us.

 

We currently expect to use the net proceeds from this offering and cash on hand to repay in full the outstanding $722 million in aggregate principal amount of indebtedness under the senior credit facilities assumed in the ICWG Acquisition (the “Car Wash Senior Credit Facilities”). Following this offering, there will be $1,457 million aggregate principal amount of securitized debt outstanding. If the underwriters exercise their option to purchase additional shares from us, we intend to use a portion of the net proceeds therefrom to acquire from certain of our existing stockholders shares of our common stock at the price paid by the underwriters for shares of our common stock in this offering and to use any remaining proceeds for general corporate purposes. None of the existing stockholders we purchase shares from will be an existing employee, executive officer or director or Principal Stockholder of the Company. See “Use of Proceeds.”

Controlled company

   Upon completion of this offering, our Principal Stockholders will continue to beneficially own more than 50% of our outstanding common stock. As a result, we intend to avail ourselves of the “controlled company” exemptions under the rules of NASDAQ, including exemptions from certain of the corporate governance listing requirements. See “Management—Controlled Company.”

Dividend policy

   We do not intend to pay cash dividends on our common stock in the foreseeable future. However, we may, in the future, decide to pay dividends on our common stock. Any declaration and payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, cash flows, capital requirements, levels of indebtedness, restrictions imposed by applicable law, our overall financial condition, restrictions in our debt agreements, and any other factors deemed relevant by our board of directors. See “Description of Material Indebtedness.


 

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Listing

   Our common stock has been approved for listing on NASDAQ under the symbol “DRVN”.

Income Tax Receivable Agreement

   We will enter into an income tax receivable agreement with our existing stockholders that will provide for the payment by us to our existing stockholders of 85% of the amount of the cash savings, if any, in U.S. and Canadian federal, state, local and provincial income tax that we and our subsidiaries actually realize as a result of the utilization of certain tax benefits. See “Certain Relationships and Related Party Transactions—Income Tax Receivable Agreement.”

Risk Factors

   You should read the section titled “Risk Factors” beginning on page 28 and the other information included in this prospectus for a discussion of some of the risks and uncertainties you should carefully consider before deciding to invest in our common stock.

The number of shares of our common stock to be outstanding after this offering is based on 132,891,375 shares of our common stock outstanding before this offering and excludes:

 

   

12,533,984 shares of common stock reserved for issuance under our 2021 Omnibus Incentive Plan (the “Omnibus Incentive Plan”), including;

 

   

Stock options to purchase 5,349,109 shares of our common stock at an exercise price equal to the price to the public in this offering to be issued to certain holders of profits interests in Driven Investor LLC;

 

   

197,049 shares of common stock underlying performance share units or restricted share units to be granted to certain of our employees in connection with this offering; and

 

   

Stock options to purchase 36,364 shares of our common stock at an exercise price equal to the price to the public in this offering to be issued to certain of our directors in connection with this offering. See “Executive Compensation”;

 

 

   

Stock options to purchase 22,805 shares of our common stock with a weighted-average exercise price of $12.08 per share to be issued to holders of existing options to purchase units in Driven Investor LLC;

 

   

1,790,569 shares of our common stock that will become available for future issuance under our Employee Stock Purchase Plan, or the ESPP, and shares of our common stock that become available pursuant to provisions in the ESPP that automatically increase the share reserve under the ESPP.

Except as otherwise indicated, all of the information in this prospectus:

 

   

gives effect to the completion of the Reorganization prior to the closing of this offering, as a result of which there will be an aggregate of 132,891,375 shares of common stock outstanding (including 4,788,723 shares of restricted stock) as further described in the section titled “—Reorganization”; and

 

   

assumes no exercise of the underwriters’ option to purchase up to 4,772,727 additional shares of common stock in this offering.



 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present our summary consolidated financial and other data for the periods indicated. We have derived the summary historical consolidated statements of operations data and consolidated statements of cash flows data for the fiscal years ended December 28, 2019 and December 29, 2018 and the summary historical consolidated balance sheet data as of December 28, 2019 and December 29, 2018 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary historical consolidated statements of operations data and consolidated statements of cash flows data for the nine months ended September 26, 2020 and September 28, 2019 and the summary historical consolidated balance sheet data as of September 26, 2020 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements and, in our opinion, contain all adjustments, consisting of only normal recurring adjustments, necessary for fair presentation of such financial data. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

                                                                   
     Nine Months Ended      Year Ended  

in thousands (except share, per share and unit data)

   September 26,
2020
    September 28,
2019
     December 28,
2019
     December 29,
2018
 

Statement of Operations Data

          

Revenue:

          

Franchise royalties and fees

   $        94,214     $        86,885      $     114,872      $      108,040  

Company-operated store sales

     323,339       235,130        335,137        233,932  

Independently-operated store sales

     30,595                      

Advertising contributions

     42,429       36,792        66,270        72,792  

Supply and other revenue

     125,115       58,766        83,994        77,951  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total revenue

     615,692       417,573        600,273        492,715  

Operating Expenses:

          

Company-operated store expenses

     202,333       160,076        218,988        159,244  

Independently-operated store expenses

     17,995                      

Advertising expenses

     42,429       36,792        69,779        74,996  

Supply and other expenses

     70,167       34,987        57,700        52,653  

Selling, general and administrative expenses

     153,162       98,464        142,249        125,763  

Acquisition costs

     13,287       4,292        11,595         

Store opening costs

     1,921       2,859        5,721        2,045  

Depreciation and amortization

     32,656       15,228        24,220        19,846  

Asset impairment charges

     6,732                      
  

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

     540,682       352,698        530,252        434,547  
  

 

 

   

 

 

    

 

 

    

 

 

 

Operating income

     75,010       64,875        70,021        58,168  

Interest expense, net

     64,973       39,823        56,846        41,758  

Loss on debt extinguishment

     673              595        6,543  
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before taxes

     9,364       25,052        12,580        9,867  

Income tax expense

     6,109       6,717        4,830        2,805  
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income

   $ 3,255     $ 18,335      $ 7,750      $ 7,062  
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to non-controlling interest

   $ (34   $      $ 19      $  
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income attributable to Driven Brands Holdings Inc.

   $ 3,289     $ 18,335      $ 7,731      $ 7,062  
  

 

 

   

 

 

    

 

 

    

 

 

 

Earnings per share:

          

Basic and diluted(1)

   $ 3,029     $ 18,335      $ 7,731      $ 7,062  

Weighted average shares outstanding

          

Basic and diluted

     1,086       1,000        1,000        1,000  


 

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     Nine Months Ended     Year Ended  

in thousands (except share, per share and unit data)

   September 26,
2020
    September 28,
2019
    December 28,
2019
    December 29,
2018
 

Statement of Cash Flows Data

        

Net cash provided by operating activities

   $ 66,455     $ 31,060     $ 41,372     $ 38,753  

Net cash used in investing activities

     (26,549     (150,301     (482,423     (17,799

Net cash provided by (used in) financing activities

     111,161       402,200       446,530       (9,493

Net change in cash, cash equivalents and restricted cash included in advertising fund assets

     151,535       282,696       5,359       11,653  

Cash dividends per share

   $     $ 163,000     $ 163,000     $ 52,987  

Other Financial Data and Operational Data(2):

        

System-wide sales

   $ 2,419,642     $ 2,129,230     $ 2,885,561     $ 2,576,266  

Store count

     4,185       2,780       3,106       2,588  

Same store sales growth (%)

     (5.9 %)      4.9     5.0     5.3

Adjusted EBITDA

   $ 139,534     $ 94,950     $ 119,245     $ 94,014  

Adjusted Net Income

     41,838       35,095       36,617       32,023  

Maintenance capital expenditures(3)

     5,287       1,206       1,846       1,595  
     September 26,
2020
          December 28,
2019
    December 29,
2018
 

Balance Sheet Data

        

Cash and cash equivalents

   $ 184,356       $ 34,935     $ 37,530  

Working capital

     70,454         26,497       29,656  

Total assets

     4,501,890         1,876,240       1,306,919  

Total debt(4)

     2,098,092         1,314,963       701,231  

 

(1)

See Note 13 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of earnings per share, basic and diluted.

(2)

See the definitions of key performance indicators under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Indicators.” For a discussion of how we utilize non-GAAP measures, refer to “Use of Non-GAAP Financial Information.”

(3)

Necessary expenditures for continued operations of the business. Maintenance capital expenditures were $1.6 million, $1.6 million and $0.3 million for the fiscal years ended December 30, 2017, December 31, 2016 and December 26, 2015, respectively.

(4)

Total debt as of December 28, 2019 equals the current portion of long-term debt ($13 million) and the noncurrent portion of long-term debt, net of discount and debt issuance costs ($1,302 million). Total debt as of September 26, 2020 equals the current portion of long-term debt ($21 million) and the non-current portion of long-term debt, net of discount and debt issuance costs ($2,077 million).



 

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The following table provides a reconciliation of net income (loss) to Adjusted EBITDA for the periods presented:

 

    Nine Months Ended     Year Ended  

in thousands

  September 26,
2020
    September 28,
2019
    December 28,
2019
    December 29,
2018
    December 30,
2017
    December 31,
2016
    December 26,
2015

(Pro Forma)(1)
 

2015 predecessor net loss

              $ (2,021

2015 successor net loss

                (901

Pro forma adjustments

                5,647  
             

 

 

 

Net income (loss)

  $ 3,255     $ 18,335     $ 7,750     $ 7,062     $ 37,862     $ (8,918   $  2,725  

Income tax expense (benefit)

    6,109       6,717       4,830       2,805       (37,716     (4,398     2,866  

Interest expense, net

    64,973       39,823       56,846       41,758       40,763       33,591       21,082  

Depreciation and amortization

    32,656       15,228       24,220       19,846       17,864       19,212       10,035  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 106,993     $ 80,103     $ 93,646     $ 71,471     $ 58,773     $ 39,487     $ 36,708  

Acquisition related costsa

    13,287       4,292       12,497             900       4,507       3,683  

Non-core items and project costsb

    (926     5,385       6,644       1,694       5,703       12,449        

Sponsor management feesc

    5,357       1,958       2,496       1,960       2,267       2,096       708  

Straight-line rent adjustmentd

    3,124       2,315       2,172       1,304       780       835        

Equity-based compensation expensee

    508       897       1,195       1,195       650       605       276  

Loss on debt extinguishmentf

    673             595       6,543             1,022       11,589  

Foreign currency transaction lossg

    55                                      

Asset impairment charges and closed store expensesh

    7,621                   9,847       3,267              

Bad debt expensei

    2,842                               11,816        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 139,534     $ 94,950     $ 119,245     $ 94,014     $ 72,340     $ 72,817     $ 52,964  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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The following table provides a reconciliation of net income (loss) to Adjusted Net Income for the periods presented:

 

    Nine Months Ended     Year Ended  

in thousands

  September 26,
2020
    September 28,
2019
    December 28,
2019
    December 29,
2018
    December 30,
2017
    December 31,
2016
    December 26,
2015(1)
 

Net income (loss)

  $ 3,255     $ 18,335     $ 7,750     $ 7,062     $ 37,862     $ (8,918   $ 2,725  

Acquisition related costsa

    13,287       4,292       12,497             900       4,507       3,683  

Non-core items and project costsb

    (926     5,385       6,644       1,694       5,703       12,449        

Sponsor management feesc

    5,357       1,958       2,496       1,960       2,267       2,096       708  

Straight-line rent adjustmentd

    3,124       2,315       2,172       1,304       780       835        

Equity-based compensation expensee

    508       897       1,195       1,195       650       605       276  

Loss on debt extinguishmentf

    673             595       6,543             1,022       11,589  

Foreign currency transaction lossg

    55                                      

Asset impairment charges and closed store expensesh

    7,621                   9,847       3,267              

Bad debt expensei

    2,842                               11,816        

Amortization related to acquired intangible assetsj

    11,693       7,500       11,314       10,739       10,875       14,188       5,880  

Provision for uncertain tax positionsk

    2,810                                      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income before tax impact of adjustments

  $ 50,299     $ 40,682     $ 44,663     $ 40,344     $ 62,304     $ 38,600     $ 24,861  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tax impact of adjustmentsl

    (8,461     (5,587     (8,046     (8,321     (9,308     (17,595     (7,211
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

  $ 41,838     $ 35,095     $ 36,617     $ 32,023     $ 52,996     $ 21,005     $ 17,650  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

This column presents the reconciliation of predecessor net loss for the period December 28, 2014 to April 16, 2015 and successor net loss for the period April 17, 2015 to December 26, 2015 to pro forma net income and pro forma Adjusted EBITDA. The pro forma adjustments give effect to our acquisition of Driven Holdings LLC as if it occurred at the beginning of fiscal year 2015. We have presented pro forma net income, pro forma Adjusted Net Income, and pro forma Adjusted EBITDA for fiscal year 2015 because we believe these metrics are useful in understanding our operating performance on a comparable basis since our acquisition of Driven Holdings LLC.

a.

Consists of acquisition costs as reflected within the consolidated statement of operations, including legal, consulting and other fees and expenses incurred in connection with acquisitions completed during the applicable period, as well as inventory rationalization expenses incurred in connection with acquisitions. We expect to incur similar costs in connection with other acquisitions in the future and, under U.S. GAAP, such costs relating to acquisitions are expensed as incurred and not capitalized.

b.

Consists of discrete items and project costs, including (i) third-party consulting and professional fees associated with strategic transformation initiatives, including discrete projects between 2016 and 2018 focused on the buildout of shared services for our multi-brand platform and the implementation of standardized processes and systems across our business, (ii) wage subsidies received directly attributable to the COVID-19 pandemic and (iii) other miscellaneous expenses, including non-capitalizable expenses relating to the Company’s initial public offering and other strategic transactions.

c.

Includes management fees paid to Roark.

d.

Consists of the non-cash portion of rent expense, which reflects the extent to which our straight-line rent expense recognized under U.S. GAAP exceeds or is less than our cash rent payments.

e.

Represents non-cash equity-based compensation expense.



 

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f.

Represents the write-off of debt issuance costs associated with early termination of debt.

g.

Represents foreign currency transaction gains and losses primarily related to the remeasurement of our intercompany loans and gain on remeasurement of cross currency swaps.

h.

Relates to the discontinuation of the use of the Pro Oil tradename as those locations were transitioned to the Take 5 tradename, as well as impairment of certain fixed assets and operating lease right-of-use assets related to closed locations. Also represents lease exit costs and other costs associated with stores that were closed prior to their respective lease termination dates.

i.

Represents bad debt expense related to uncollectible receivables outside of normal operations.

j.

Consists of amortization related to acquired intangible assets as reflected within depreciation and amortization in the consolidated statement of operations.

k.

Represents uncertain tax positions recorded for prior year Canadian tax positions, inclusive of interest and penalties.

l.

Represents the tax impact of adjustments associated with the reconciling items between net income and Adjusted Net Income, excluding the provision for uncertain tax positions. To determine the tax effect of the reconciling items, we utilized statutory income tax rates ranging from 9% to 38%, depending upon the tax attributes of each adjustment and the applicable jurisdiction.

The following table provides the store counts for the periods presented:

 

     Nine Months Ended      Year Ended  
     September 26,
2020
     September 28,
2019
     December 28,
2019
     December 29,
2018
     December 30,
2017
     December 31,
2016
     December 26,
2015
 

Franchised stores

     2,739        2,331        2,610        2,283        2,294        2,276        2,235  

Independently- operated stores

     740                                            

Company- operated stores

     706        449        496        305        297        260        71  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,185        2,780        3,106        2,588        2,591        2,536        2,306  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


 

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SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

On August 3, 2020, we completed the ICWG Acquisition. As a result of the ICWG Acquisition, the Company has expanded its service offerings by entering into the car wash business. The following summary unaudited pro forma condensed consolidated financial information is presented to illustrate the estimated effects of: (i) the ICWG Acquisition based on the historical results of operations of Driven Brands and Shine Holdco, and (ii) the Reorganization, the completion of this offering, adjustment to include the impact of the income tax receivables agreement and elimination of Roark management fees and the application of the net proceeds of this offering as described under “Use of Proceeds” (the “IPO Transaction” and, together with the ICWG Acquisition, the “Transactions”).

The summary unaudited pro forma condensed consolidated financial information is presented as follows:

 

   

The unaudited pro forma condensed consolidated statement of operations for the year ended December 28, 2019 was prepared based on (i) the historical audited consolidated statement of operations of Driven Brands for the fiscal year ended December 28, 2019 and (ii) the historical audited consolidated income statement of Shine Holdco for the fiscal year ended December 31, 2019.

 

   

The unaudited pro forma condensed consolidated statement of operations for the nine months ended September 26, 2020 was prepared based on (i) the historical unaudited condensed consolidated statement of income of Driven Brands for the nine months ended September 26, 2020 and (ii) the historical unaudited consolidated income statement of Shine Holdco from January 1, 2020 through August 2, 2020.

 

   

The unaudited pro forma condensed consolidated balance sheet as of September 26, 2020 was prepared based on the historical unaudited condensed consolidated balance sheet of Driven Brands as of September 26, 2020.

The summary unaudited pro forma condensed consolidated financial information has been prepared for illustrative purposes only and is not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the Transactions been completed as of the dates indicated. In addition, the summary unaudited pro forma condensed consolidated financial information does not purport to project the future financial position or results of operations of the combined company. Future results may vary significantly from the results reflected because of various factors, including those discussed in the section entitled “Risk Factors.” The following summary unaudited pro forma condensed consolidated financial information should be read in conjunction with the “Unaudited Pro Forma Condensed Consolidated Financial Information” and the notes thereto included elsewhere in this prospectus and with the historical consolidated financial statements of the Company and Shine Holdco and related notes included elsewhere in this prospectus.



 

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The summary unaudited pro forma condensed consolidated statement of operations data for the year ended December 28, 2019 and the nine months ended September 26, 2020 give effect to the Transactions as if they had occurred on December 30, 2018, the beginning of the Company’s fiscal year 2019. The unaudited pro forma condensed consolidated balance sheet data as of September 26, 2020 gives effect to the Transactions as if they occurred on September 26, 2020.

 

     Pro forma Nine
Months Ended
    Pro forma Year
Ended
 

in thousands (except share, per share and unit data)

   September 26,
2020
    December 28,
2019
 

Statement of Operations Data

    

Revenue:

    

Franchise royalties and fees

   $ 94,214     $ 114,872  

Company-operated store sales

     425,589       479,903  

Independently-operated store sales

     125,586       185,316  

Advertising contributions

     42,429       66,270  

Supply and other revenue

     128,160       89,858  
  

 

 

   

 

 

 

Total revenue

     815,978       936,219  

Operating Expenses:

    

Company-operated store expenses

     261,534       296,705  

Independently-operated store expenses

     75,434       106,962  

Advertising expenses

     42,429       69,779  

Supply and other expenses

     71,712       60,767  

Selling, general and administrative expenses

     175,493       197,948  

Acquisition costs

     6,514       25,187  

Store opening costs

     1,921       5,721  

Depreciation and amortization

     57,141       73,157  

Asset impairment charges

     6,732       6,703  

(Profit) loss on disposal of tangible assets

     (28,920     4,258  
  

 

 

   

 

 

 

Total operating expenses

     669,990       847,187  
  

 

 

   

 

 

 

Operating income

     145,988       89,032  

Interest expense, net

     60,494       61,828  

Loss on debt extinguishment

     673       595  
  

 

 

   

 

 

 

Income (loss) before taxes

     84,821       26,609  

Income tax expense (benefit)

     20,654       480  
  

 

 

   

 

 

 

Net income (loss)

   $ 64,167     $ 26,129  
  

 

 

   

 

 

 

Net (loss) attributable to non-controlling interest

   $ (87   $ (64
  

 

 

   

 

 

 

Net income (loss) attributable to Driven Brands Holdings Inc.

   $ 64,254     $ 26,193  
  

 

 

   

 

 

 

Earnings per share:

    

Basic and diluted

   $ 0.49     $ 0.21  

Weighted average shares outstanding

    

Basic and diluted

     130,991,282       122,999,213  

 

     Pro forma as of
September 26,
2020
        

Balance Sheet Data

                      

Cash and cash equivalents

   $ 124,982     

Working capital

     13,478     

Total assets

     4,437,811     

Total debt

     1,422,102     


 

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The following table provides a reconciliation of pro forma net loss to pro forma Adjusted EBITDA and Acquisition Adjusted EBITDA for the year ended December 28, 2019:

 

     Pro forma
Year Ended
 

in thousands

   December 28, 2019  

Pro forma net income

   $ 26,129  

Income tax benefit

     480  

Interest expense, net

     61,828  

Depreciation and amortization

     73,157  
  

 

 

 

Pro forma EBITDA

   $             161,594  

Acquisition related costsa

     26,089  

Non-core items and project costsb

     14,190  

Straight-line rent adjustmentc

     2,172  

Equity-based compensation expensed

     1,195  

Loss on debt extinguishmente

     595  

Asset impairment charges and closed store expensesf

     5,540  
  

 

 

 

Pro forma Adjusted EBITDA

   $ 211,375  

Acquisition EBITDA adjustmentsi

     32,698  
  

 

 

 

Acquisition Adjusted EBITDA

   $ 244,073  

The following table provides a reconciliation of pro forma net loss to pro forma Adjusted Net Income for the year ended December 28, 2019:

 

     Pro forma
Year Ended
 

in thousands

   December 28, 2019  

Pro forma net income

   $ 26,129  

Acquisition related costsa

     26,089  

Non-core items and project costsb

     14,190  

Straight-line rent adjustmentc

     2,172  

Equity-based compensation expensed

     1,195  

Loss on debt extinguishmente

     595  

Asset impairment charges and closed store expensesf

     5,540  

Gain of remeasurement of cross currency swapsg

     (4,718

Loss on interest rate swapsh

     6,708  

Amortization related to acquired intangible assetsj

                   13,467  
  

 

 

 

Pro forma Adjusted Net Income before tax impact of adjustments

   $ 91,367  
  

 

 

 

Tax impact of adjustmentsk

     (12,770
  

 

 

 

Pro forma Adjusted Net Income

   $ 78,597  
  

 

 

 

 

a.

Consists of acquisition costs as reflected within the unaudited pro forma condensed consolidated statement of operations, including legal, consulting and other fees and expenses incurred in connection with acquisitions completed during the applicable period, as well as inventory rationalization expenses incurred in connection with acquisitions. We expect to incur similar costs in connection with other acquisitions in the future and, under U.S. GAAP, such costs relating to acquisitions are expensed as incurred and not capitalized.



 

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b.

Consists of discrete items and project costs, including (i) third-party consulting and professional fees associated with strategic transformation initiatives, (ii) wage subsidies received directly attributable to the COVID-19 pandemic and (iii) other miscellaneous expenses, including non-capitalizable expenses relating to the Company’s initial public offering and other strategic transactions.

c.

Consists of the non-cash portion of rent expense, which reflects the extent to which our straight-line rent expense recognized under U.S. GAAP exceeds or is less than our cash rent payments.

d.

Represents non-cash equity-based compensation expense.

e.

Represents the write-off of debt issuance costs associated with early termination of debt.

f.

Represents non-cash impairment charges related to long-lived assets at Shine Holdco and lease exit costs and other costs associated with stores that were closed prior to their respective lease termination dates.

g.

Represents non-cash gain related to the change in fair value for derivatives that are not designated as hedges in accordance with U.S. GAAP.

h.

Represents non-cash loss related to the change in fair value for Shine Holdco derivatives that would not have qualified for hedge accounting U.S. GAAP prior to the ICWG Acquisition. Subsequent to the ICWG Acquisition, these derivatives are treated as hedges under U.S. GAAP.

i.

Represents Acquisition EBITDA adjustments for the businesses we acquired in 2019, as permitted under our Securitization Senior Notes Indenture. Additionally, not included in this adjustment, Driven Brands and Shine Holdco realized incremental cost savings and EBITDA uplift from these acquisitions as a result of leveraging our shared services and platform capabilities.

j.

Consists of amortization related to acquired intangible assets as reflected within depreciation and amortization in the unaudited pro forma condensed consolidated statement of operations.

k.

Represents the tax impact of adjustments associated with the reconciling items between net income and Adjusted Net Income. To determine the tax effect of the reconciling items, we utilized statutory income tax rates ranging from 9% to 38%, depending upon the tax attributes of each adjustment and the applicable jurisdiction.



 

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RISK FACTORS

You should carefully consider the risks and uncertainties described below, as well as the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto included elsewhere in this prospectus, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our common stock. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. Any of the following risks could materially adversely affect our business, financial condition and results of operations, in which case the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Relating to Our Business

Competition is intense and may harm our business and results of operations.

The automotive aftermarket industry is highly competitive, and we are subject to a wide variety of competitors across the “do it for me” (“DIFM”) and “do-it-yourself” (“DIY”) automotive services industries. Competitors include international, national, regional and local repair and maintenance shops, paint and collision repair shops, automobile dealerships, oil change shops, car wash businesses and suppliers of automotive parts, including online retailers, wholesale distributors, hardware stores, and discount and mass market merchandise stores. The large number and variety of market participants creates intense competition with respect to the scale, geographic reach, price, service, quality, brand awareness, customer satisfaction and adherence to various insurance carrier performance indicators. Some of our competitors have consolidated smaller and independent automotive services brands and shops to achieve additional efficiencies and economies of scale.

Certain of our competitors may have greater brand recognition, as well as greater financial, marketing, operating and other resources, which may give them competitive advantages with respect to some or all of these areas of competition. Some of our competitors have engaged and may continue to engage in substantial price discounting in response to economic weakness and uncertainty, which may adversely impact our sales and operating results. As our competitors expand operations and marketing campaigns, we expect competition to intensify. Further, new competitors may emerge at any time. Such increased competition could have a material adverse effect on our business, financial condition and operating results.

Changes in consumer preferences and perceptions, and in economic, market and other conditions could adversely affect our business and results of operations.

Demand for our products and services may be affected by a number of factors, including:

 

   

The number and age of vehicles in the car parc, as vehicles of a certain age (typically older than three to five years) may no longer be under the original vehicle manufacturers’ warranties and tend to need more maintenance and repair than newer vehicles. A smaller, younger car parc could lessen demand for our services.

 

   

Rising energy prices, because increases in energy prices may cause customers to defer certain repairs or purchases as they use a higher percentage of their income to pay for gasoline and other energy costs and may drive their vehicles less frequently, resulting in less wear and tear and lower demand for repairs and maintenance.

 

   

Advances and changes in automotive technology and parts design, including, but not limited to, changes in the materials used for the construction of structural components and body panels, changes in the types of paints and coatings used for automobiles or materials used for tires, changes in engines and drivetrains to hybrid and electric technology, increased prevalence of sensors and back-up cameras, and increased prevalence of self-driving vehicles and shared mobility, may reduce collisions, may result in

 

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cars needing repairs and maintenance, such as motor oil changes, less frequently and parts lasting longer, may make customers more likely to use dealership automotive repair services, or may increase the cost to our locations to obtain relevant parts or training for employees.

 

   

Economic downturns, as declining economic conditions may cause customers to defer vehicle maintenance, repairs, oil changes, car washes or other services, obtain credit, or repair and maintain their vehicles themselves. During periods of good economic conditions, consumers may decide to purchase new vehicles rather than having their older vehicles serviced. In addition, economic weaknesses and uncertainty may cause changes in consumer preferences, and if such economic conditions persist for an extended period of time, this may result in consumers making long-lasting changes to their spending behaviors in the automotive aftermarket markets.

 

   

Weather, as mild weather conditions may lower the failure rates of automotive parts or result in fewer accidents or slower deterioration of paints and coatings, resulting in the need for fewer automotive repairs and less frequent automotive maintenance services. In addition, inclement weather may cause customers to defer or forego vehicle maintenance, such as oil changes and car washes.

 

   

Customers that may be unfamiliar with their vehicle’s mechanical operation and, as a result, may select a service provider they have patronized in the past, or may continue to turn to the dealership where they bought their vehicle for repairs. Increasing complexity in the systems used in vehicles may exacerbate this risk.

 

   

Restrictions on access to diagnostic tools and repair information imposed by the original vehicle manufacturers or by governmental regulation, which may cause vehicle owners to rely on dealers to perform maintenance and repairs.

 

   

Negative publicity associated with any of our services and products, or regarding the automotive aftermarket industries generally, whether or not factually accurate, could cause consumers to lose confidence in or could harm the reputation of our brands.

 

   

Changes in travel patterns, which may cause consumers to rely more heavily on mass transportation or to travel less frequently.

 

   

Payments for automobile repairs, which may be dependent on insurance programs, and insurance companies may require repair technicians to hold certain certifications that the personnel at our locations do not hold.

 

   

Changes in governmental regulations in the automotive sector, including pollution prevention laws, which may affect demand for automotive repair and maintenance services and increase our costs in unknown ways.

 

   

Automobile manufacturers, which may release repair information only to their own dealerships, making it costly or impossible for our locations to repair certain automobiles.

Other events and factors that could affect our results include:

 

   

changes in consumer preferences, perceptions, and spending patterns;

 

   

demographic trends;

 

   

employment levels and wage rates, and their effects on the disposable income and actual or perceived wealth of potential customers and their consumption habits (which may impact traffic and transaction size);

 

   

variations in the timing and volume of sales at our locations;

 

   

changes in frequency of customer visits;

 

   

traffic patterns and the type, number, and location of competitors;

 

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variations in the cost of, availability of and shipping costs of motor oil and automobile supplies, parts, paints, refinish coatings and car wash supplies;

 

   

unexpected slowdowns in business or operational support efforts;

 

   

changes in the availability or cost of labor, including health care-related costs;

 

   

the timing of expenditures in anticipation of future sales at our locations;

 

   

an inability to purchase sufficient levels of advertising or increases in the cost of advertising;

 

   

increases in national, federal, state, local and provincial taxes in the countries in which we operate, including income taxes, indirect taxes, non-resident withholding taxes, and other similar taxes;

 

   

factors associated with operating in foreign locations, including repatriation risks, foreign currency risks, and changes in tax treatment;

 

   

unreliable or inefficient technology, including point-of-sale and payment systems;

 

   

weather, natural disasters, pandemics and other catastrophic events and terrorist activities;

 

   

changes in the number of renewals of franchise agreements;

 

   

changes in consumer driving patterns; and

 

   

our ability to maintain direct repair program relationships with insurance partners.

Our business is affected by the financial results of our franchisees.

Our business is impacted by the operational and financial success of our franchisees, including the franchisees’ implementation of our strategic plans and their ability to secure adequate financing. The employees of franchisees are not our employees. We provide training and support to franchisees, but the quality of franchised store operations may be diminished by a number of factors beyond our control. Consequently, franchisees may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other store personnel. If they do not, our image and reputation may suffer, and revenues could decline.

Additionally, if our franchisees are impacted by weak economic conditions and are unable to secure adequate sources of financing, their financial health may worsen, our revenues may decline and we may need to offer extended payment terms or make other concessions. In limited circumstances, or for approximately 3% of franchised locations, we also may be required to make lease payments without being able to collect sublease payments on domestic locations that we lease from landlords and then sublease to the franchisees in the event franchisees fail to pay rent under the subleases. Additionally, refusal on the part of franchisees or any franchisee association to renew or restructure their franchise agreements may result in decreased payments from franchisees. Entering into restructured franchise agreements may result in reduced franchisee payment royalty rates in the future. Furthermore, if our franchisees are not able to obtain the financing necessary to complete planned remodel and construction projects, they may be forced to postpone or cancel such projects.

Our business is affected by advances in automotive technology.

The demand for our automotive repair and maintenance services and products may be adversely affected by continuing developments in automotive technology, including self-driving and electric vehicles and shared mobility. Some of the cars produced by certain automotive manufacturers last longer and require service and maintenance at less frequent intervals, or they may require more specialized service and maintenance than we offer at our locations. Quality improvement of manufacturers’ original equipment parts has in the past reduced, and may in the future reduce, demand for our services and products, adversely affecting our sales. For example, manufacturers’ use of stainless steel exhaust components has increased the life of those parts, thereby decreasing

 

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the demand for exhaust repairs and replacements. Longer and more comprehensive warranty or service programs offered by automobile manufacturers and other third parties also could adversely affect the demand for our products and services. New automobile owners may also choose to have their cars serviced by a dealer during the period that the car is under warranty. In addition, advances in automotive technology, such as accident-avoidance technology, continue to require us to incur additional costs to update diagnostic capabilities and technical training programs or may make providing such training programs more difficult. These advances could increase our costs and reduce our profits and may materially and adversely affect our business and results of operations.

Certain restrictions may prevent us from providing our services and products to customers.

Certain vehicle owners may have contractual relationships with third parties that prevent us from providing our services and products. Restrictions on access to diagnostic tools and repair information imposed by the original vehicle manufacturers or by governmental regulation may cause vehicle owners to rely on dealers to perform maintenance and repairs. In addition, insurance companies may require repair technicians to hold certain certifications that our locations’ personnel do not hold. Any such restrictions could adversely impact our revenues, results of operations, business, and financial conditions.

Changes in labor costs, other operating costs, such as commodity costs, interest rates, foreign exchange rates and inflation could adversely affect our results of operations.

Increases in employee wages, benefits, and insurance and other operating costs such as commodity costs, legal claims, insurance costs and costs of borrowing could adversely affect operations and administrative expenses at our locations. Operating costs are susceptible to increases as a result of factors beyond our control, such as weather conditions, natural disasters, disease outbreaks, global demand, product recalls, inflation, civil unrest, tariffs and government regulations. Increases in gasoline prices could result in the imposition of fuel surcharges by distributors used by us and our franchisees, which would increase the cost of operations. Any increase in such costs for our locations could reduce our and our franchisees’ sales and profit margins if we choose not, or are unable, to pass the increased costs to our customers. In addition, increases in interest rates may impact land and construction costs and the cost and availability of borrowed funds and leased locations, and thereby adversely affect our and our franchisees’ ability to finance the development of additional locations and maintenance of existing locations. Inflation can also cause increased commodity, labor and benefits costs which could reduce the profitability of our locations. Increases in labor costs could make it difficult to find new independent operators and may require us to pay higher commissions to existing independent operators. Any of the foregoing increases could adversely affect our and our franchisees’ business and results of operations.

Our locations may experience difficulty hiring and retaining qualified personnel, resulting in higher labor costs.

The operation of our locations requires both entry-level and skilled employees, and trained and experienced automotive field personnel may be in high demand and short supply at competitive compensation levels in some areas, which may result in increases in labor costs. From time to time, we, our franchisees and independent operators may experience difficulty hiring and maintaining such qualified personnel. In addition, the formation of unions may increase the operating expenses of our locations. Any such future difficulties could result in a decline in the sales and operating results of our locations, which could in turn materially and adversely affect our revenues, results of operations, business, and financial condition.

Insurance coverage may not be adequate, and increased self-insurance and other insurance costs could adversely affect our results of operations.

We and our franchisees maintain insurance, and these insurance policies may not be adequate to protect us from liabilities that we incur in our business. Certain extraordinary hazards, for example, may not be covered, and insurance may not be available (or may be available only at prohibitively expensive rates) with respect to

 

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many other risks. Moreover, any loss incurred could exceed policy limits, and policy payments made to us, franchisees may not be made on a timely basis. Any such loss or delay in payment could lead to a decline in the sales and operating results of our locations, which could in turn have a material and adverse effect on our revenues, results of operations, business, and financial condition.

In addition, in the future, insurance premiums may increase and we and our franchisees may not be able to obtain similar levels of insurance on reasonable terms, or at all. Although we seek to manage our claims to prevent increases, such increases can occur unexpectedly and without regard to our efforts to limit them. If such increases occur, our locations may be unable to pass them along to the consumer through product or service price increases, resulting in decreased profitability, which could have a material adverse effect on our business and results of operations.

In the event that liability to third parties arises, to the extent losses experienced by such third parties are either not covered by the franchisee’s or our insurance or exceed the policy limits of the franchisee’s or our insurance, such parties could seek to recover their losses from us, whether or not they are legally or contractually entitled to do so, which could increase litigation costs or result in liability for us. Additionally, a substantial unsatisfied judgment could result in the bankruptcy of one or more of our operating entities, which could have a material adverse effect on our results of operations, business, and financial condition.

Higher health care costs could adversely affect our results of operations.

Franchisees and independent operators may, and in certain cases are required to, offer access to health care benefits to certain of their employees and we may offer access to health care benefits to certain of our employees at company-operated locations. Changes in legislation, including government-mandated health care benefits under the Patient Protection and Affordable Care Act (“Health Care Reform Act”) and changes in market practice may cause us and our franchisees and independent operators to provide health insurance to employees on terms that differ significantly from those of existing programs, and may increase the cost of health care benefits. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. We and our franchisees and independent operators may also be subject to increased health care costs as a result of environmental hazards or litigation requiring the payment of additional health care costs.

We continue to review the Health Care Reform Act, and regulations issued related thereto (as well as potential amendments to or repeal of the Health Care Reform Act and such legislation) to evaluate the potential impact of this law and any amendment or repeal on our business, and to accommodate various parts of the laws. Although we cannot currently determine with certainty what long-term impact any such legislation (or any amendment or repeal) will have on us, it is expected that costs will increase over the long term, as well as for franchisees and independent operators and/or third-party suppliers and service providers. There are no assurances that a combination of cost management and price increases can accommodate all of the costs associated with compliance. Increased health care costs could have a material adverse effect on our results of operations, business, and financial condition.

Changes in supply costs could adversely affect our results of operations.

The operation of our locations requires large quantities of automotive and car wash supplies. Our success depends in part on our ability to anticipate and react to changes in supply costs, and we are susceptible to increases in primary and secondary supply costs as a result of factors beyond our control. These factors include general economic conditions, significant variations in supply and demand, seasonal fluctuations, pandemics, weather conditions, fluctuations in the value of currencies in the markets in which we operate, commodity market speculation and government regulations. Higher supply costs could reduce our profits, which in turn may materially and adversely affect our business and results of operations. This volatility could also cause us and our franchisees or independent operators to consider changes to our product delivery strategy and result in adverse adjustments to pricing of our services.

 

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Recent and potential additional tariffs imposed by the United States government or a global trade war could increase our supply costs, which could materially and adversely affect our business and results of operations.

Effective September 1, 2019, the United States government imposed increased tariffs on certain imports from China. On January 15, 2020, the United States and China signed “Phase 1” of a trade deal, thereby easing, but not eliminating, certain tariffs and trade limitations. However, it is unclear when the subsequent phases of the trade deal will be entered into. Higher tariffs in the United States and elsewhere could increase our supply costs and adversely impact our profitability. Moreover, the new tariffs could also make our products more expensive for customers, potentially suppressing customer demand. We may not be able to offset the financial impact of tariffs through price increases to customers. There could be additional tariffs or other regulatory changes in the future. There is also a concern that the trade policies of the United States and other nations could result in the adoption of additional tariffs and other trade restrictions by various nations, leading to a global trade war and making our products uncompetitive in certain markets. Any of the foregoing could materially and adversely affect our business and results of operations.

Decreases in our product sourcing revenue could adversely affect our results of operations.

We supply to franchisees of the 1-800-Radiator brand certain products required to operate applicable locations. We supply to other franchisees and to company-operated locations certain products required to operate applicable locations. We may also supply to third parties certain products. Although 1-800-Radiator franchisees may be required by their franchise agreements to purchase products from the 1-800-Radiator electronic network, they may not be required to do so in the future. Other franchisees may, but are not required to, purchase products from us, and may in the future decide not to do so. While it is our expectation that we will benefit from product sourcing income and pricing arrangements, there can be no assurance that such income and arrangements will continue, be renewed or replaced. Our failure to maintain our current product sourcing income could have a material adverse effect on our sales and profit margins, which in turn could materially and adversely affect our business and results of operations. We benefit from negotiated discounts with large branded oil suppliers based on our scale and ability to meet volume requirements. Our failure to negotiate beneficial terms in the future or failure to meet volume requirements could have a material adverse effect on our sales and profit margins. A portion of our distribution income is based on the growth and expansion of Take 5 locations as well as beneficial pricing negotiated with suppliers and ability to manage unit labor and shipping costs. Decreases in the volume of our purchases by or increases in costs of products, labor or shipping could have a material adverse effect on our sales and profit margins.

We depend on key suppliers, including international suppliers, to deliver high-quality products at prices similar to historical levels.

We recommend key suppliers (including our subsidiaries) to our franchisees, and our success is dependent on, among other things, our continuing ability to offer our services and products at prices similar to historical levels. Our suppliers may be adversely impacted by economic weakness and uncertainty, such as increased commodity prices, increased fuel costs, tight credit markets and various other factors. In such an environment, our suppliers may seek to change the terms on which they do business with us in order to lessen the impact of any current and future economic challenges on their businesses or may cease or suspend operations. If we are forced to renegotiate the terms upon which we conduct business with our suppliers or find alternative suppliers to provide key products or services, it could adversely impact the profit margins at our locations, which in turn could materially and adversely affect our business and results of operations.

Economic weakness and uncertainty has previously forced some suppliers to seek financing in order to stabilize their businesses, and others have been forced to restructure or have ceased operations completely. In addition, some of our key suppliers have significant operations outside of the markets in which we operate, which could expose us to events in the countries of those suppliers’ operations, including government intervention, and

 

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foreign currency fluctuation. If a key supplier or a large number of other suppliers suspend or cease operations, we and our franchisees may have difficulty keeping our respective locations fully supplied. If we and our franchisees were forced to suspend one or more services offered to customers, that could have a significant adverse impact on our sales and profit margins, which in turn could materially and adversely affect our business and results of operations.

Supply chain shortages and interruptions could adversely affect our business.

We and our franchisees are dependent upon frequent deliveries of automobile parts, motor oil and car wash and other supplies that meet our quality specifications. Shortages or interruptions in the supply of automobile products, motor oil or car wash and other supplies caused by unanticipated demand, problems in production or distribution, acts of terrorism, financial or other difficulties of suppliers, labor actions, inclement weather, natural disasters such as floods, drought and hurricanes, outbreak of disease, including coronavirus and pandemics, or other conditions could adversely affect the availability, quality and cost of supplies for such products, which could lower our revenues, increase operating costs, damage brand reputation and otherwise harm our business and the businesses of our franchisees. Such shortages or interruptions could reduce our sales and profit margins which in turn may materially and adversely affect our business and results of operations.

Our business depends on the willingness of suppliers, distributors and service providers to supply our locations with goods and services pursuant to customary credit arrangements which may be available in the future on less favorable terms or not at all.

As is common in the automotive services and parts distribution and car wash industries, our locations purchase goods from suppliers, distributors and service providers pursuant to customary credit arrangements. Changes in our capital structure and our franchisees’ capital structures, or other factors outside our control, may cause our suppliers, distributors and service providers to change their customary credit arrangements. Any event affecting trade credit from suppliers, distributors and service providers (including any inability of such suppliers, distributors and service providers to obtain trade credit or factor their receivables on favorable terms or at all) or our and our franchisees’ available liquidity, could reduce the resources available to support our locations, which in turn could affect our and our franchisees’ ability to execute business plans, develop or enhance products or services, take advantage of business opportunities or respond to competitive pressures.

Our operations and financial performance has been affected by, and is expected to continue to be affected by, the coronavirus outbreak.

The global crisis resulting from the spread of COVID-19 has disrupted, and continues to significantly disrupt, local, regional, and global economies and businesses in the countries in which we operate, as well as adversely affected workforces, customers, consumer sentiment, economies and financial markets, and has impacted our financial results. Because automotive services were generally deemed “essential” by most federal, state, provincial and local governmental authorities in the United States and Canada, substantially all of our locations remained open despite the ongoing COVID-19 pandemic. However, we have, from time to time, closed a limited number of locations and have modified work hours for employees and identified and implemented cost-savings measures throughout our operations. As a result of the ongoing COVID-19 pandemic, our locations also experienced reduced customer traffic and sales volume due to changes in consumer behavior as individuals decreased automobile use and practiced social distancing and other behavioral changes mandated by governmental authorities or independently undertaken out of an abundance of caution resulting in same store sales in the second quarter of 2020 decreasing to 81% of prior year levels in the same period of 2019. In many of the countries in which we operate, the COVID-19 pandemic has resulted in an acute economic downturn and significantly increased unemployment. A sustained decline in the sales and operating results of locations as a result of the ongoing COVID-19 pandemic, the acute economic downturn resulting therefrom or continued weak economic conditions could, in turn, materially and adversely affect the ability of franchisees to pay, or disrupt the timely payment of, amounts owed to us or decrease the profitability of our locations.

 

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The COVID-19, or coronavirus, outbreak has the potential to cause a disruption in our supply chain and may adversely impact economic conditions in North America, Europe, Australia and elsewhere. These and other disruptions, as well as poor economic conditions generally, may lead to a decline in the sales and operating results of our locations. In addition, the continuation of the global outbreak of coronavirus may adversely affect the economies and financial markets of many countries and could result in a sustained reduction in the demand for our services and products, longer payment cycles, slower adoption of new technologies and/or increased price competition, as well as a reduction of workforce at our locations. A decline in the sales and operating results of our locations could in turn materially and adversely affect our ability to pursue our growth strategy. Each of these results would reduce our future sales and profit margins, which in turn could materially and adversely affect our business and results of operations.

The extent to which the coronavirus impacts us will depend on future developments, including the duration, spread and severity of the pandemic, the extent of additional outbreaks, the effectiveness or duration of measures intended to contain or mitigate the spread of COVID-19 or prevent future outbreaks, and the effect of these developments on overall demand in the automotive repair and service industries in the geographic regions in which we operate, all of which are highly uncertain and difficult to accurately predict.

Our failure to build and maintain relationships with insurance partners could adversely affect our business.

A significant portion of the profits generated by certain of our brands, such as ABRA, CARSTAR and Fix Auto USA are derived from insurance companies. Many insurance companies have implemented performance-based agreements (“PBAs”) with collision repair operators who have been recognized as consistent high quality, performance-based repairers in the industry. We have PBAs with a variety of insurance providers, typically with one-year durations with automatic renewal provisions. If we or enough of our franchisees fail to perform services for an insurance provider in accordance with the service levels in the applicable PBA, the insurance provider may terminate or elect to not renew the PBA. Our ability to continue to grow our business with respect to certain brands, as well as to maintain existing business volume and pricing, is related to our ability to maintain these PBAs. In addition, our ability to open additional locations may depend on our ability to maintain and grow PBAs, and the loss of any existing material PBAs could have a material adverse effect on the operations and business prospects of one or more of our brands. PBAs are governed by agreements that are usually cancellable upon short notice. These relationships can change quickly, both in terms of pricing and volumes, depending upon collision repair shop performance, cycle time, cost of repair, customer satisfaction, competition, insurance company management, program changes and general economic activity. There can be no assurance that PBAs will not change in the future, which in turn could materially and adversely affect our business and results of operations.

A significant portion of our revenue-generating assets are pledged as security under the terms of our securitized financing facility.

Our securitized debt facility is secured by substantially all of the domestic and foreign revenue-generating assets of the Company and its subsidiaries other than the assets in our Car Wash segment and certain other businesses, including all franchise agreements, material company-operated locations, material product distribution contracts and material intellectual property. Under certain circumstances, we may be terminated as manager of such assets of our subsidiaries under the securitized debt facility or following an event of default pursuant to the terms of such debt facility, the pledged assets under such facility may be foreclosed upon pursuant to the terms of the Securitization Senior Notes Indenture. See “Risk factors—Risks Related to the Securitized Debt Facility.”

 

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If we are unable to successfully enter new markets and select appropriate sites for our locations, and if our franchisees are unable to construct new locations, complete remodels of our locations, or convert non-Driven Brands locations into our locations, our growth strategy may not succeed.

Our growth strategy includes entering into franchise agreements and development agreements with franchisees who will open additional locations in markets where there are either an insufficient number or relatively few or no existing locations. We rely heavily on these franchisees and developers to grow our franchise systems, and there can be no assurance that we will be able to successfully expand or acquire critical market presence for our brands in new geographical markets either in the United States, Canada, Europe or other international markets. Consumer characteristics and competition in new markets may differ substantially from those in the markets where we currently operate. Additionally, we may be unable to identify qualified franchisees and independent operators or appropriate locations, develop brand recognition, successfully market our products or attract new customers in such markets. Further, we may refranchise company-operated locations to franchisees in the future. The success of these transactions is dependent upon the availability of sellers and buyers, the availability of financing, and our ability to negotiate transactions on terms deemed acceptable. In addition, the operations of locations that we acquire may not be integrated successfully, and the intended benefits of such transactions may not be realized.

We and our franchisees face many other challenges in opening additional locations, including:

 

   

availability of financing on acceptable terms;

 

   

negotiation of acceptable lease terms;

 

   

securing required applicable governmental permits and approvals;

 

   

impact of natural disasters and other acts of nature and terrorist acts or political instability;

 

   

availability of franchise territories not prohibited by the territorial exclusivity provisions of existing franchisees;

 

   

diversion of management’s attention to the integration of acquired location operations;

 

   

exposure to liabilities arising out of sellers’ prior operations of acquired locations;

 

   

incurrence or assumption of debt to finance acquisitions or improvements and/or the assumption of long-term, non-cancelable leases; and

 

   

general economic and business conditions.

Should we and our franchisees not succeed in opening additional locations or improving existing locations, there may be adverse impacts to our growth strategy and to our ability to generate additional profits, which in turn could materially and adversely affect our business and results of operations.

A component of our business strategy includes the construction of additional locations and the renovation and build-out of existing locations, and a significant portion of the growth in our sales and profit margins will depend on growth in comparable sales for our locations. We face competition from other operators, retail chains, companies and developers for desirable site locations, which may adversely affect the cost, implementation and timing of our expansion plans. If we experience delays in the construction or remodeling processes, we may be unable to complete such activities at the planned cost, which could adversely affect our business and results of operations. Additionally, we cannot guarantee that such remodeling will increase the revenues generated by these locations or that any such increases will be sustainable. Likewise, we cannot be sure that the sites we select for additional locations will result in locations which meet sales expectations. Our failure to add a significant number of additional locations or grow comparable sales for our locations could materially and adversely affect our business and results of operations.

In particular, because the majority of the development of additional locations is likely to be funded by franchisee investment, our growth strategy is dependent on our existing and prospective franchisees’ ability to

 

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access funds to finance such development. We do not generally provide our franchisees with direct financing and therefore their ability to access borrowed funds generally depends on their independent relationships with various financial institutions. In addition, labor and material costs expended will vary by geographical location and are subject to general price increases. The timing of these improvements can affect the performance of a location, particularly if the improvements require the relevant location to be closed. If our existing and prospective franchisees are not able to obtain financing at commercially reasonable rates, or at all, they may be unwilling or unable to invest in the development of additional locations. In addition, our growth strategy may take longer to implement and may not be as successful as expected. Both of these factors could reduce our competitiveness and future sales and profit margins, which in turn could materially and adversely affect our business and results of operations.

Certain acquisitions could adversely affect our financial results.

We may pursue strategic acquisitions as part of our business strategy. There is no assurance that we will be able to find suitable acquisition candidates or be able to complete acquisitions on favorable terms, if at all. We may also discover liabilities or deficiencies associated with any companies acquired that were not identified in advance, which may result in unanticipated costs. The effectiveness of our due diligence review and ability to evaluate the results of such due diligence may depend upon the accuracy and completeness of statements and disclosures made or actions taken by the target companies or their representatives. As a result, we may not be able to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges. In addition, we may not be able to successfully integrate ICWG or other acquired businesses and may incur significant costs to integrate and support acquired companies. Any of these factors could adversely affect our financial results.

Our business may be adversely impacted by additional leverage in connection with acquisitions.

We may pursue strategic acquisitions as part of our business strategy. If we are able to identify acquisition candidates, such acquisitions may be financed with a substantial amount of additional indebtedness. Although the use of leverage presents opportunities to increase our profitability, it has the effect of potentially increasing losses as well. If income and appreciation from acquisitions acquired through debt are less than the cost of the debt, the total return will decrease. Accordingly, any event which adversely affects the value of an acquisition will be magnified to the extent we are leveraged and we could experience losses substantially greater than if we did not use leverage.

Increased indebtedness could also make it more difficult for us to satisfy our obligations with respect to any other debt agreements, increase our vulnerability to general adverse economic and industry conditions and require that a greater portion of our cash flow be used to pay indebtedness, which would reduce the availability of cash available for other purposes, and limit our flexibility in planning for, or reacting to, changes in our business and in the automotive services and parts distribution and car wash industries, which could place us at a disadvantage to competitors that have less debt. In addition, additional indebtedness may require us to agree to financial and other covenants that may limit our ability to make investments, pay dividends or engage in other transactions beneficial to our business, and the leverage may cause potential lenders to be less willing to lend funds or refinance existing indebtedness in the future. Additional leverage and the risks associated with additional leverage could also cause the trading price of our common stock to decrease. Our failure to comply with our covenants under such indebtedness could result in an event of default that, if not cured or waived, could result in an acceleration of repayment of other existing indebtedness.

Leveraged losses could adversely affect our ability to manage and support our locations and our brands, which in turn could materially and adversely affect our business and results of operations.

 

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We may not be able to achieve management’s estimate of the Acquisition Adjusted EBITDA of the acquired businesses outlined under “Prospectus Summary—Summary Unaudited Pro Forma Condensed Consolidated Financial Information.”

We have prepared Acquisition EBITDA adjustments for businesses that we acquired in 2019 and 2020 that are reflected in our Acquisition Adjusted EBITDA and set forth under “Prospectus Summary—Summary Unaudited Pro Forma Condensed Consolidated Financial Information.” These Acquisition EBITDA adjustments have not been prepared in accordance with the GAAP or any other accounting or securities regulations relating to the presentation of pro forma financial information. In particular, these adjustments do not account for seasonality and are not a guarantee that such results will actually be realized. Our failure to achieve the expected revenue and Adjusted EBITDA contributions from these acquired businesses could have a material adverse effect on our financial condition and results of operations.

Our Acquisition Adjusted EBITDA is based on certain estimates and assumptions and should not be regarded as a representation by us or any other person that we will achieve such operating results. Prospective investors should not place undue reliance on our Acquisition Adjusted EBITDA and should make their own independent assessment of our future results of operations, cash flows and financial condition.

Our Acquisition Adjusted EBITDA set forth under “Prospectus Summary—Summary Unaudited Pro Forma Condensed Consolidated Financial Information” represents our estimate of our anticipated annual operating results, including, without limitation, our estimates of the contribution of acquired businesses if such acquisitions had occurred on the first day of the applicable period. Our Acquisition Adjusted EBITDA is based on certain estimates and assumptions, some or all of which may not materialize. Unanticipated events may occur that could have a material adverse effect on the actual results achieved by us during the periods to which these estimates relate. Presentation of Acquisition Adjusted EBITDA excludes certain expense items and such presentation is not intended to be a substitute for historical GAAP measures of operating performance or liquidity. See “Use of Non-GAAP Financial Information” and “Prospectus Summary—Summary Unaudited Pro Forma Condensed Consolidated Financial Information” for a discussion of the limitations of non-GAAP measures and the Acquisition Adjusted EBITDA calculation included in this prospectus.

Our Acquisition Adjusted EBITDA is subject to material risks, uncertainties and contingencies. We do not intend to update or otherwise revise our Acquisition Adjusted EBITDA to reflect circumstances existing or arising after the date of this prospectus, or to reflect the occurrence of unanticipated events. Our Acquisition Adjusted EBITDA should not be relied upon for any purpose following the consummation of this offering. The inclusion of Acquisition Adjusted EBITDA should not be regarded as a representation by us or any other person that we will achieve such operating results or revenues.

Our business is subject to a certain level of seasonality.

Seasonal changes may impact the demand for our automotive repair and maintenance services and products. Customers may purchase fewer undercar services during the winter months, when miles driven tend to be lower. Demand for collision repair and services may be lower outside of winter months, when collisions are typically less common due to improved driving conditions. In addition, customers may defer or forego car washes or vehicle maintenance, such as oil changes, at any time during periods of inclement weather. In our locations that sell or rotate tires, sales may decrease during the period from January through April and in September. Profitability of franchisees is also typically lower during months in which revenue composition is more heavily weighted toward tires, which is a lower margin category. In addition, profitability in certain areas of North America may be lower in the winter months when certain costs, such as utilities and snow plowing, are typically higher. Unusual fluctuations in demand for car wash or automotive repair and maintenance services and products could reduce our sales and profit margins, which in turn may materially and adversely affect our business and results of operations.

 

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Our business may be adversely impacted by the geographic concentration of our locations.

Although the franchise agreements provide franchisees with varying degrees of exclusive areas and territory exclusivity, these territories may be relatively small, and overall there is a geographic concentration of our locations in certain countries, states, regions and provinces. As a result, economic conditions in particular areas may have a disproportionate impact on our business. As of September 26, 2020, there were locations in 49 states in the United States and 14 international countries. In the United States, our locations were most concentrated in California, Texas, Florida, Illinois and Ohio, in Canada our locations were most concentrated in Ontario and Quebec and in Europe our locations were most concentrated in the U.K. and Germany. In North America, no single state or province accounted for more than 14% of system sales and the top three states represented less than 28% of system sales for the last twelve months ended September 26, 2020. Adverse economic conditions in countries, states, regions or provinces that contain a high concentration of our locations could have a material adverse impact on our sales and profit margins in the future, which in turn could materially and adversely affect our business and results of operations.

The number of our brands exposes us to a greater variety of risks.

The diversity of our brands may expose us to a wider range of risks than a single-branded business. In addition, the impact of certain risks may differ across our service categories, and certain risks may impact one or more of our brands disproportionately. Risks affecting one or more of our brands could materially and adversely affect our business and results of operations. In addition, certain of our brands compete with one another in the same service categories and geographic regions.

Our international operations are subject to various risks and uncertainties, and there is no assurance that they will be successful.

We have international operations in Canada, Europe, and Australia. The financial conditions of our international franchisees and independent operators may be adversely impacted by political, economic or other changes in these markets. In addition, payments we receive from our international franchisees may be affected by recessionary or expansive trends, increasing labor costs, changes in applicable tax laws, changes in inflation rates, changes in exchange rates and the imposition of restrictions on currency conversion or the transfer of funds, application of tariffs to supplies and goods, expropriation of private enterprises, political and economic instability and other external factors in these markets. In addition, we and our current or future franchisees face many risks and uncertainties in opening additional international locations, including differing cultures and consumer preferences, diverse government regulations and tax systems, securing acceptable suppliers, difficulty in collecting payments and longer payment cycles, uncertainty with respect to intellectual property protections, contract enforcement and legal remedies, uncertain or differing interpretations of rights and obligations in connection with international franchise agreements, independent operator agreements, development agreements and agreements related thereto (collectively, the “franchise documents” with respect to franchisees and the “independent operator documents” with respect to independent operators), the selection and availability of suitable locations for our locations, currency regulation and other external factors. Further, changing labor conditions may result in difficulties in staffing and training at international locations, franchised and independently-operated locations. Any of the foregoing may materially and adversely affect our business and results of operations.

Adverse economic conditions or a global debt crisis could adversely affect our business.

Our financial condition and results of operations are impacted by global markets and economic conditions over which neither we nor our franchisees have control. An economic downturn may result in a reduction in the demand for our services and products, longer payment cycles, slower adoption of new technologies and/or increased price competition. In addition, certain European countries experienced deterioration of their sovereign debt during the recent global economic crisis and were impacted by slowing growth rates or recessionary

 

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conditions, market volatility and/or political unrest. Although Europe has experienced market stabilization and improvements, there is no assurance that such stabilization or improvements will be sustainable. Any deterioration of economic conditions in Europe, the United States, or Canada could have a material adverse impact on financial markets and economic conditions in the United States and throughout the world.

Economic downturns, as declining economic conditions may cause customers to defer vehicle maintenance, repairs, oil changes or other services, obtain credit, or repair and maintain their own vehicles. As a result, poor economic conditions may lead to a decline in the sales and operating results of our locations, which could in turn materially and adversely affect the ability of franchisees to pay franchise royalties or amounts owed to us, or have a material adverse impact on our ability to pursue our growth strategy. Each of these results would reduce our profits, which may materially and adversely affect our business and results of operations.

Our success depends on the effectiveness of our marketing and advertising programs.

Brand marketing and advertising significantly affect sales at our locations. Our marketing and advertising programs may not be successful, which may prevent us from attracting new customers and retaining existing customers. Also, because many of the franchisees are contractually obligated to pay advertising fees based on a percentage of their gross revenues and because we will deduct a portion of the gross revenues of the company-operated locations to fund their marketing and advertising fees, our advertising budget depends on sales volumes at these locations. While we and certain of our franchisees have sometimes voluntarily provided additional funds for advertising in the past, we are not legally obligated to make such voluntary contributions or loan money to pay for advertising. If sales decline, we will have fewer funds available for marketing and advertising, which could materially and adversely affect our revenues, business and results of operations.

As part of our marketing efforts, we rely on print, television and radio advertisements, as well as search engine marketing, web advertisements, social media platforms and other digital marketing to attract and retain customers. These efforts may not be successful, resulting in expenses incurred without the benefit of higher revenues or increased employee or customer engagement. Customers are increasingly using internet sites and social media to inform their purchasing decisions and to compare prices, product assortment, and feedback from other customers about quality, responsiveness and customer service before purchasing our services and products. If we are unable to continue to develop successful marketing and advertising strategies, especially for online and social media platforms, or if our competitors develop more effective strategies, we could lose customers and sales could decline. In addition, a variety of risks are associated with the use of social media and digital marketing, including the improper disclosure of proprietary information, negative comments about or negative incidents regarding us, exposure of personally identifiable information, fraud or out-of-date information. The inappropriate use of social media and digital marketing vehicles by us, our franchisees, customers, employees or others could increase our costs, lead to litigation or result in negative publicity that could damage our reputation. Many social media platforms immediately publish the content, videos and/or photographs created or uploaded by their subscribers and participants, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests and/or may be inaccurate. The dissemination of negative information related to our brands could harm our business, prospects, financial condition, and results of operations, regardless of the information’s accuracy. The harm may be immediate without affording us an opportunity for redress or correction. The occurrence of any such developments could have an adverse effect on our business results and on our profits.

Our failure or our franchisees’ and independent operators’ failure to comply with health, employment and other federal, state, local and provincial laws, rules and regulations may lead to losses and harm our brands.

We and our franchisees and independent operators are subject to various federal, state, local, provincial and foreign laws and are subject to a variety of litigation risks, including, but not limited to, customer claims, product liability claims, personal-injury claims, environmental claims, employee allegations of improper termination,

 

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harassment and discrimination, wage and hour claims and claims related to violations of the Americans with Disabilities Act of 1990 (“ADA”), the Family and Medical Leave Act (“FMLA”) and similar foreign, state, local and provincial laws, the Foreign Corrupt Practices Act and similar anti-bribery and corruption laws and regulations, religious freedom, the Fair Labor Standards Act (“FLSA”), applicable Canadian employment standards legislation, the Dodd-Frank Act, the Health Care Reform Act, the Electronic Funds Transfer Act, the Payment Card Industry Data Security Standards, franchise laws, ERISA and intellectual property claims. The successful development and operation of our locations depends to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations. Our locations’ operations are also subject to licensing and regulation by state, local and provincial departments relating to safety standards, federal, state and provincial labor and immigration law (including applicable equal pay and minimum wage requirements, overtime pay practices, reimbursement for necessary business expense practices, classification of employees, working and safety conditions and work authorization requirements), federal, state, local and provincial laws prohibiting discrimination and other laws regulating the design and operation of facilities, such as the ADA, the Health Care Reform Act and applicable human rights and accessibility legislation, and subsequent amendments.

The operation of our franchise system is also subject to franchise laws and regulations enacted by a number of states and provinces and rules promulgated by the U.S. Federal Trade Commission. Any future legislation regulating franchise relationships may negatively affect our operations, particularly our relationships with our franchisees. Similarly, in Europe, our independent operator model is subject to rules and regulations that vary by country, state and region. Any future regulation affecting our independent operator relationships could materially and adversely affect our business and results of operations. For example, future regulation could require us to pay additional commissions to independent operators in order for our independent operators not to be deemed our employees. We may incur substantial additional costs in each jurisdiction in which our independent operators are deemed to be employees as a result of legislative or interpretive changes.

Failure to comply with new or existing franchise or independent operator laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future sales, which could reduce profits, which in turn could materially and adversely affect our business and results of operations.

In addition to the risk of adverse legislation or regulations being enacted in the future, we cannot predict how existing or future laws or regulations will be administered or interpreted. Further, we cannot predict the amount of future expenditures that may be required in order to comply with any such laws or regulations.

We are subject to the FLSA, applicable foreign employment standards laws and similar state laws, which govern such matters as time keeping and payroll requirements, minimum wage, overtime, employee and worker classifications and other working conditions, along with the ADA, FMLA and the Immigration Reform and Control Act of 1986, various family leave, sick leave or other paid time off mandates and a variety of other laws enacted, or rules, regulations and decisions promulgated or rendered, by federal, state, local and provincial governmental authorities that govern these and other employment matters, including labor scheduling, meal and rest periods, working conditions and safety standards. We have experienced and expect further increases in payroll expenses as a result of federal, state and provincial mandated increases in the minimum wage. In addition, our vendors may be affected by higher minimum wage standards, which may increase the price of goods and services they supply to our brands.

Approximately 70% of our franchisees in the United States have received loans under the Paycheck Protection Program enacted pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and applicable implementing guidelines issued by the U.S. Small Business Administration thereunder (the “PPP”). The terms of the PPP provide that up to the entire amount of principal and accrued interest on the loans made thereunder may be forgiven to the extent the proceeds of such loans are used for qualifying expenses, including certain payroll costs, rent and utility expenses, and at least 60% of such proceeds are used to fund

 

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payroll costs. There can be no assurance that a franchisee will qualify for forgiveness of a loan under the PPP in whole or in part and any use of proceeds to make franchise royalty payments will not qualify for forgiveness. Following the date of this prospectus, the terms of the PPP may be materially modified by additional or amended implementing guidelines (e.g., a further reduction in the required percentage of loan proceeds that must be applied to fund payroll costs to qualify for forgiveness), and there can be no assurance that any such modification will not impose additional conditions on franchisees to qualify for forgiveness of a loan under the PPP or otherwise materially modify the terms of any such loan. In addition, these loans may contain representations and warranties that the loan is “necessary to support ongoing operations” of the franchisee and will contain other customary provisions and events of default. To the extent any portion of a loan under the PPP is not forgiven, the debt service payments on such loan or, to a greater extent, the acceleration of the full outstanding amount of such loan following an event of default, including for non-payment of debt service or breach of representations and warranties, could materially and adversely affect the ability of such franchisee to pay, or disrupt the timely payment of, franchisee payments, advertising fees or other amounts to us, landlords, key suppliers or creditors which, in turn, could materially and adversely affect our business and results of operations.

Companies that operate franchise systems may also be subject to claims for allegedly being a joint employer with a franchisee. In August 2015, the National Labor Relations Board (the “NLRB”) adopted a new and broader standard for determining when two or more otherwise unrelated employers may be found to be a joint employer of the same employees under the National Labor Relations Act. Under that standard, there was an increased risk that franchisors could be held liable or responsible for unfair labor practices and other violations at franchised locations under the National Labor Relations Act and subject them to other liabilities and obligations. However, on February 25, 2020 the NLRB adopted a rule that reinstated the standard that existed prior to August 2015 thereby reducing the risk that franchisors might be held liable as a joint employer under the National Labor Relations Act as well for other violations and claims referenced above. Further, on January 12, 2020, the U.S. Department of Labor (the “DOL”) announced a final rule to revise and update the definition of joint employer under the FLSA. Under the final rule, the test for assessing whether a party can be deemed a joint employer would be based upon whether that party (i) hires or fires the employee; (ii) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (iii) determines the employee’s rate and method of payment; and (iv) maintains the employee’s employment records. The final rule also clarifies when additional factors may be relevant in determining whether a person is a joint employer, and identifies certain other factors that do not make joint employer status more or less likely under the FLSA, including the relationships that exist under the typical franchise business model. The final rule is effective as of March 16, 2020, and is likely to reduce a franchisor’s risk of liability that existed under the joint employer standard in effect under the FLSA prior to that date. However, a New York federal court rejected certain provisions of the DOL’s final rules in September 2020 relating to the joint employer test. The new rules promulgated by the NLRB and the DOL do not affect potential liability as a joint employer under other federal or state laws that are interpreted to require application of the standards existing prior to the adoption of the new rules in 2020 or other similar standards. Foreign concepts of joint-employment, co-employment and related employer status create similar risks in the international context, including with respect to our independent operator model in Europe.

Additionally, depending upon the outcome of certain legal proceedings currently pending before a federal court in California involving the application of the wage and hour laws of California in another franchise system, franchisors may be subject to claims that their franchisees should be treated as employees and not as independent contractors under the wage and hour laws of that state and, potentially, certain other states with similar wage and hour laws. Further, the California legislature recently enacted a statute known as Assembly Bill 5 (“AB-5”), which in its current form would require “gig economy” workers to be reclassified as employees instead of independent contractors. Depending upon the application of AB-5, franchisors in certain industries could be deemed to be covered by the statute, in which event their franchisees would be deemed to be employees of the franchisors. If such misclassification claims are successful against a franchisor, the franchisor could be liable to its franchisees (and potentially their employees) based upon the rights and remedies available to employees under such laws and, thereafter, have to treat its franchisees (and their employees) as the franchisor’s employees under these laws.

 

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We expect increases in payroll expenses as a result of federal, state and provincial mandated increases in the minimum wage, and although such increases are not expected to be material, there can be no assurance that there will not be material increases in the future. Enactment and enforcement of various federal, state, local and provincial laws, rules and regulations on immigration and labor organizations may adversely impact the availability and costs of labor in any of the countries in which we operate. Other labor shortages or increased employee turnover could also increase labor costs. In addition, vendors may be affected by higher minimum wage standards or availability of labor, which may increase the price of goods and services they supply to us. Evolving labor and employment laws, rules and regulations could also result in increased exposure on our part for labor and employment related liabilities that have historically been borne by franchisees and independent operators.

Increased health care costs could have a material adverse effect on our business and results of operations. These various laws and regulations could lead and have led to enforcement actions, fines, civil or criminal penalties or the assertion of litigation claims and damages. In addition, improper conduct by our franchisees, independent operators, employees or agents could damage our reputation and lead to litigation claims, enforcement actions and regulatory actions and investigations, including, but not limited to, those arising from personal injury, loss or damage to personal property or business interruption losses, which could result in significant awards or settlements to plaintiffs and civil or criminal penalties, including substantial monetary fines. Such events could lead to an adverse impact on our financial condition, even if the monetary damage is mitigated by insurance coverage.

Noncompliance by us or our franchisees or independent operators with any of the foregoing laws and regulations could lead to various claims and reduced profits as set forth in more detail below under “—Complaints or litigation may adversely affect our business and reputation.”

Our locations are subject to certain environmental laws and regulations.

Certain activities of our locations involve the handling, storage, transportation, import/export, recycling, or disposing of various new and used products and generate solid and hazardous wastes. These business activities are subject to stringent foreign, federal, regional, state, local and provincial laws, by-laws and regulations governing the storage and disposal of these products and wastes, the release of materials into the environment or otherwise relating to environmental protection. These laws and regulations may impose numerous obligations upon our locations’ operations, including the acquisition of permits to conduct regulated activities, the imposition of restrictions on where or how to store and how to handle new products and to manage or dispose of used products and wastes, the incurrence of capital expenditures to limit or prevent releases of such material, the imposition of substantial liabilities for pollution resulting from our locations’ operations, and costs associated with workers’ compensation and similar health claims from employees.

In addition, environmental laws and regulations have generally imposed further restrictions on our operations over time, which may result in significant additional costs to our business. Failure to comply with these laws, regulations, and permits may result in the assessment of administrative, civil, and criminal penalties, the imposition of remedial and corrective action obligations, and the issuance of injunctions limiting or preventing operation of our locations. Any adverse environmental impact on our locations, including, without limitation, the imposition of a penalty or injunction, or increased claims from employees, could materially and adversely affect our business and results of operations.

Environmental laws also impose liability for damages from and the costs of investigating and cleaning up sites of spills, disposals or other releases of hazardous materials. Such liability may be imposed, jointly and severally, on the current or former owners or operators of properties or parties that sent wastes to third-party disposal facilities, in each case without regard to fault or whether such persons knew of or caused the release. Although we are not presently aware of any such material liability related to our current or former locations or business operations, such liability could arise in the future and could materially and adversely affect our business and results of operations.

 

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Complaints or litigation may adversely affect our business and reputation.

We may be subject to claims, including class action lawsuits, filed by customers, franchisees, independent operators, employees, suppliers, landlords, governmental authorities and others in the ordinary course of business, including as a result of violations of the laws set forth above under “Our failure or our franchises and independent operators’ failure to comply with health, employment, and other federal, state, and local laws, rules and regulations may lead to losses and harm our brands” and “—Our locations are subject to certain environmental laws and regulations” Significant claims may be expensive to defend and may divert time and resources away from our operations, causing adverse impacts to our operating results. In addition, adverse publicity related to litigation could negatively impact the reputation of our brands, even if such litigation is not valid, or a substantial judgment against us could negatively impact the reputation of our brands, resulting in further adverse impacts to results of operations. Franchisees and independent operators are subject to similar litigation risks.

In the ordinary course of business, we will be, from time to time, the subject of complaints or litigation from franchisees and independent operators, which could relate to alleged breaches of contract or wrongful termination under the franchise documents and independent operator documents. These claims may also reduce the ability of franchisees to enter into new franchise agreements with us. In addition, litigation against a franchisee, independent operator or their affiliates or against a company-operated location by third parties, whether in the ordinary course of business or otherwise, may include claims against us by virtue of our relationship with the franchisee, independent operator or company-operated location, including, without limitation, for allegedly being a joint employer with a franchisee or independent operator, resulting in vicarious liability for acts and omissions at locations over which we have little or no control over day-to-day operations. Litigation may lead to a decline in the sales and operating results of our locations and divert our management resources regardless of whether the allegations in such litigation are valid or whether we are liable.

Further, we may be subject to employee, franchisee, independent operator and other claims in the future based on, among other things, discrimination, harassment, wrongful termination and wage, rest break and meal break issues, including those relating to overtime compensation. We have been subject to these types of claims in the past, and if one or more of these claims were to be successful or if there is a significant increase in the number of these claims, our business, financial condition and operating results could be harmed.

Certain governmental authorities and private litigants have recently asserted claims against franchisors for provisions in their franchise agreements which restrict franchisees from soliciting and/or hiring the employees of other franchisees or the applicable franchisor. Claims against franchisors for such “no-poaching” clauses include allegations that these clauses violate state and federal antitrust and unfair practices laws by restricting the free movement of employees of franchisees or franchisors (including both corporate employees and the employees of company-operated locations), thereby depressing the wages of those employees. All of our brands operating in the United States have had no-poaching clauses in their franchise agreements. In 2018, the Attorney General of the State of Washington issued civil investigative demands to a number of franchisors seeking information concerning no-poaching clauses in their franchise agreements. Beginning in January 2019, several brands, including ABRA, CARSTAR, Maaco, Meineke, Fix Auto USA and 1-800-Radiator & A/C, received civil investigative demands requesting information concerning their use of no-poaching clauses. To resolve objections to these clauses raised by the Washington Attorney General, these brands entered into an Assurance of Discontinuance with the state agreeing to no longer include such provision in any U.S. franchise agreement or renewal franchise agreement signed after the date of the Assurance of Discontinuance, to not enforce any such provisions in any of their existing franchise agreements and to notify their franchisees of these changes. In the case of Washington-based franchisees, these brands agreed to seek amendments to their franchise agreements removing the no-poaching clauses. No fines or other monetary penalties were assessed against the brands. Prior to receipt of the civil investigative demands, our then existing brands operating in the United States decided to delete the no-poaching clauses in their franchise agreements. All of our brands have notified franchisees that they do not intend to enforce the no-poaching clauses in their existing franchise agreements. Our brands operating

 

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outside of the United States also have decided to delete the no-poaching clauses, if any, contained in their franchise agreements, to the extent they are entering into new franchise agreements. Our brands may be subject to claims arising out of their prior inclusion of no-poaching clauses in their franchise agreements that may have restricted the employment opportunities of employees of our brands. Any adverse results in any cases or proceedings that may be brought against our brands by any governmental authorities or private litigants may materially and adversely affect our business and results of operations.

We may have product liability exposure that adversely affects our results of operations.

Our locations and franchisees may receive or produce defective products, which may adversely impact the relevant brand’s goodwill. There can be no assurance that the insurance held by franchisees will be adequate to cover the associated risks of the sale of defective products, or that, as a franchise and the associated potential liabilities grows, a franchisee will be able to secure an increase in its insurance coverage. Accordingly, in cases in which a franchisee experiences increased insurance premiums or must pay claims out of pocket, the franchisee may not have the funds necessary to pay franchisee payments owed to us. In cases in which insurance premiums increase or claims are required to be paid by us, the profitability of our business may decrease. Each of these outcomes could, in turn, materially and adversely affect our business and results of operations. In the event that product liability arises, to the extent such liability is either not covered by our or the franchisees’ insurance or exceeds the policy limits of our or the franchisees’ insurance, the aggrieved parties could seek to recover their losses from us, whether or not we are legally or contractually entitled to do so, which could increase litigation costs or result in liability for us.

We are subject to payment-related risks.

For our sales to our customers, we accept a variety of payment methods, including credit cards, debit cards, electronic funds transfers and electronic payment systems. Accordingly, we are, and will continue to be, subject to significant and evolving regulations and compliance requirements, including obligations to implement enhanced authentication processes that could result in increased costs and liability, and reduce the ease of use of certain payment methods. For certain payment methods, including credit and debit cards, as well as electronic payment systems, we pay interchange and other fees, which may increase over time. We rely on independent service providers for payment processing, including credit and debit cards. If these independent service providers become unwilling or unable to provide these services to us or if the cost of using these providers increases, our business could be harmed. We are also subject to payment card association operating rules and agreements, including data security rules and agreements, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for losses incurred by card issuing banks or customers, subject to fines and higher transaction fees, lose our ability to accept credit or debit card payments from our customers, or process electronic fund transfers or facilitate other types of payments. Any failure to comply with the foregoing rules or requirements could harm our brand, reputation, business and results of operations.

Catastrophic events may disrupt our business in a manner that adversely affects our business.

Unforeseen events, including war, terrorism and other international, regional or local instability or conflicts (including current or future civil unrest and labor issues), embargos, public health issues (including widespread/pandemic illness or disease outbreaks such as coronavirus), and natural disasters such as hurricanes, earthquakes, or other adverse weather and climate conditions, whether occurring in the United States or abroad, could disrupt our operations, disrupt the operations of franchisees, distributors, suppliers or customers, or result in political or economic instability. These events could reduce demand for our products or make it difficult or impossible to receive products from our distributors or suppliers, which could have a material adverse effect on our business and results of operations.

 

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Instability, disruption or destruction caused by civil insurrection or social unrest may affect the markets in which we operate, our suppliers, customers, sales of products and customer service.

Our business, and the business of our suppliers, may be adversely affected by instability, disruption, or destruction caused by riots, civil insurrection, social unrest, manmade disasters or crimes. There have been recent demonstrations and protests in cities throughout the United States. Though they have generally been peaceful, in some locations they have been accompanied by damage and loss of merchandise. These events may result in closures of our locations, declines in customer traffic, and/or property damage and loss to our locations. Further, governmental authorities in affected cities and regions have taken and may continue to take actions in an effort to protect people and property while permitting lawful and non-violent protest, including curfews and restrictions on business operations, which may be disruptive to our operations and may also harm consumer confidence and perceptions of personal well-being and security. In addition, consumer reaction to any statements we or our franchisees or independent operators may make in response to the protests, or to matters directly or indirectly related to the protests, could be perceived in a way that negatively impacts our reputation, value and image. All of the foregoing may negatively affect our sales, which could have a material adverse effect on our business and results of operations.

We and our franchisees lease or sublease the land and buildings where a number of our locations are situated, which could expose us to possible liabilities and losses.

We and our franchisees lease the land and buildings where a significant number of our locations are located. The terms of the leases and subleases vary in length, with primary terms (i.e., before consideration of option periods) expiring on various dates. In addition, franchisees’ obligations or the company-operated location’s obligations to pay rent are generally non-cancelable, even if the location operated at the leased or subleased location is closed. In the case of subleased locations, in the event the applicable franchisee fails to make required payments, we may not be able to recover those amounts. As leases expire, the franchisees or the company-operated locations may be unable to negotiate renewals on commercially acceptable terms or at all, which could cause the franchisees or the company-operated locations to close locations in desirable locations or otherwise negatively affect profits, which in turn could negatively affect our business and results of operations.

Our current locations may become unattractive, and attractive new locations may not be available for a reasonable price, if at all, which could adversely affect our business.

The success of any of our locations depends in substantial part on its location. There can be no assurance that our current locations will continue to be attractive as demographic patterns and trade areas change. For example, neighborhood or economic conditions where our locations are located could decline in the future, thus resulting in potentially reduced sales. In addition, rising real estate prices in some areas may restrict our ability or our franchisees’ ability to purchase or lease new desirable locations. If desirable locations cannot be obtained at reasonable prices, our ability to execute our growth strategies could be adversely affected, and we may be affected by declines in sales as a result of the deterioration of certain locations, each of which could materially and adversely affect our business and results of operations.

Our financial performance could be materially adversely affected if we fail to retain, or effectively respond to a loss of, key executives.

The success of our business depends on the contributions of key executives and senior management, including our President and Chief Executive Officer, Jonathan Fitzpatrick, and our Executive Vice President and Chief Financial Officer, Tiffany Mason. The departure of key executives or senior management could have a material adverse effect on our business and long-term strategic plan. We have a succession plan that includes short-term and long-term planning elements intended to allow us to successfully continue operations should any of our key executives or senior management become unavailable to serve in their respective roles. However, there is a risk that we may not be able to implement the succession plan successfully or in a timely manner or that the succession plan

 

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will not result in the same financial performance we currently achieve under the guidance of our existing executive team. Any lack of management continuity could adversely affect our ability to successfully manage our business and execute our growth strategy, as well as result in operational and administrative inefficiencies and added costs, and may make recruiting for future management positions more difficult.

We might be adversely impacted by the Brexit withdrawal of the United Kingdom from the European Union.

We have operations in the U.K. and the European Union (“E.U.”) and face risks associated with the uncertainty and potential disruptions that might follow the United Kingdom withdrawing from the European Union (“Brexit”). Brexit could adversely affect political, regulatory, economic or market conditions and contribute to instability in global political institutions, regulatory agencies and financial markets. For example, we might experience volatility in exchange rates and interest rates and changes in laws regulating our U.K. operations. Customers might reduce purchases due to the uncertainty caused by Brexit. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations.

Risks Related to Intellectual Property

We depend on our intellectual property to protect our brands; Litigation to enforce or defend our intellectual property rights may be costly.

Our intellectual property is material to the conduct of our business. Our success depends on our and our franchisees’ continued ability to use our intellectual property and on the adequate protection and enforcement of such intellectual property. We rely on a combination of trademarks, service marks, copyrights trade secrets and similar intellectual property rights to protect our brands. The success of our business strategy depends, in part, on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded services and products in both existing and new markets. There can be no assurance that the steps we take to protect and maintain our rights in our intellectual property will be adequate, or that third parties will not infringe, misappropriate or violate our intellectual property. If any of our efforts to protect our intellectual property is not adequate, or if any third party infringes, misappropriates or violates our intellectual property, the value of our brands may be harmed. As a result, if we are unable to successfully protect, maintain, or enforce our rights in our intellectual property, there could be a material adverse effect on our business and results of operations. Such a material adverse effect could result from, among other things, consumer confusion, dilution of the distinctiveness of our brands, or increased competition from unauthorized users of our brands, each of which may result in decreased revenues and a corresponding decline in profits. In addition, to the extent that we do, from time to time, institute litigation to enforce our intellectual property rights, such litigation could result in substantial costs and diversion of resources and could negatively affect profits, regardless of whether we are able to successfully enforce such rights.

We may fail to establish trademark rights in the countries in which we operate.

Our success depends on our and our franchisees’ continued ability to use our trademarks in order to capitalize on our name-recognition, increase awareness of our brands and further develop our brands in the countries in which we operate. We have registered certain trademarks and have other trademark applications pending in the United States and certain foreign jurisdictions. Registrations for “Fix Auto USA” are owned and maintained by a third-party licensor. See “—We do not own certain software that is used in operating our business, and our proprietary platforms and tools incorporate open source software.” Not all of the trademarks that we use have been registered in all of the countries in which we do business or may do business in the future, and some trademarks may never be registered in all of these countries. Some countries’ laws do not protect unregistered trademarks at all, or make them more difficult to enforce, and third parties (other than Mondofix in the case of “Fix Auto USA”) may have filed for “1-800 Radiator,” “ABRA,” “Carstar,” “Drive N Style,” “Econo Lube N’ Tune,” “Maaco,” “Meineke,” “Merlin”, “Pro Oil Change,” “Take 5 Oil Change,” “IMO” or similar

 

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marks in countries where we have not registered the brands as trademarks. Rights in trademarks are generally national in character, and are obtained on a country-by-country basis by the first person to obtain protection through use or registration in that country in connection with specified products and services. Some countries’ laws do not protect unregistered trademarks at all, or make them more difficult to enforce, and third parties may have filed for trademarks that are the same or similar to our brands in countries where we have not registered our brands as trademarks. Accordingly, we may not be able to adequately protect our brands everywhere in the world and use of our brands may result in liability for trademark infringement, trademark dilution or unfair competition. In addition, the laws of some countries do not protect intellectual property to the same extent as the laws of the United States and Canada. All of the steps we have taken to protect our intellectual property in the United States, Canada and in the foreign countries in which we operate may not be adequate.

If franchisees and other licensees do not observe the required quality and trademark usage standards, our brands may suffer reputational damage, which could in turn adversely affect our business.

We license certain intellectual property to franchisees, advertisers and other third parties. The franchise agreements and other license agreements require that each franchisee or other licensee use our trademarks in accordance with established or approved quality control guidelines and, in addition to supply agreements, subject the franchisees, other licensees and suppliers that provide products to our brands, as applicable, to specified product quality standards and other requirements in order to protect the reputation of our brands and to optimize the performance of our locations. We contractually require that our franchisees and licensees maintain the quality of our brand, however, there can be no assurance that the permitted licensees, including franchisees, advertisers and other third parties, will follow such standards and guidelines, and accordingly their acts or omissions may negatively impact the value of our intellectual property or the reputation of our brands. Noncompliance by these entities with the terms and conditions of the applicable governing franchise or other agreement that pertains to servicing and repairs, health and safety standards, quality control, product consistency, timeliness or proper marketing or other business practices, may adversely impact the goodwill of our brands. For example, franchisees and other licensees may use our trademarks improperly in communications, resulting in the weakening of the distinctiveness of our brands. Although we monitor and restrict franchisee activities through our franchise agreements, franchisees or third parties may refer to or make statements about our brands that do not make proper use of trademarks or required designations, that improperly alter trademarks or branding, or that are critical of our brands or place our brands in a context that may tarnish their reputation. Franchisees or company-operated locations may also produce or receive through the supply chain defective products, which may adversely impact the goodwill of our brands. There can be no assurance that the franchisees or other licensees will not take actions that could have a material adverse effect on our intellectual property.

We may become subject to third-party infringement claims or challenges to IP validity.

We may in the future become the subject of claims asserted by third parties for infringement, misappropriation or other violation of their intellectual property rights in areas where we or our franchisees operate or where we intend to conduct operations, including in foreign jurisdictions. Such claims, whether or not they have merit, could be time-consuming, cause delays in introducing new products or services, harm our image, our brands, our competitive position or our ability to expand our operations into other jurisdictions and lead to significant costs related to defense or settlement. As a result, any such claim could harm our business and cause a decline in our results of operations and financial condition, which in turn may materially and adversely affect our business and results of operations.

If such claims were decided against us, then we could be required to pay damages, cease offering infringing products or services on short notice, develop or adopt non-infringing products or services, rebrand our products, services or even our businesses, and we could be required to make costly modifications to advertising and promotional materials or acquire a license to the intellectual property that is the subject of the asserted claim, which license may not be available on acceptable terms or at all. The attendant expenses that we bear could require the expenditure of additional capital, and there would be expenses associated with the defense of any

 

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infringement, misappropriation, or other third-party claims, and there could be attendant negative publicity, even if ultimately decided in our favor. In addition, third parties may assert that our intellectual property is invalid or unenforceable. If our rights in any of our intellectual property were invalidated or deemed unenforceable, then third parties could be permitted to engage in competing uses of such intellectual property which, in turn, could lead to a decline in location revenues and sales, and thereby negatively affect our business and results of operations.

We do not own certain software that is used in operating our business, and our proprietary platforms and tools incorporate open source software.

We utilize both commercially available third-party software and proprietary software to run point-of-sale, diagnostics, pricing, inventory and various other key functions. While such software can be replaced, the delay, additional costs, and possible business interruptions associated with obtaining, renewing or extending software licenses or integrating a large number of substitute software programs contemporaneously could adversely impact the operation of our locations, thereby reducing profits and materially and adversely impacting our business and results of operations.

In addition, we use open source software in connection with our proprietary software and expect to continue to use open source software in the future. Some open source licenses require licensors to provide source code to licensees upon request, or prohibit licensors from charging a fee to licensees. While we try to insulate our proprietary code from the effects of such open source license provisions, we cannot guarantee we will be successful. Accordingly, we may face claims from others claiming ownership of, or seeking to enforce the license terms applicable to such open source software, including by demanding release of the open source software, derivative works or our proprietary source code that was developed or distributed with such software. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our software, any of which would have a negative effect on our business and results of operations. In addition, if the license terms for the open source code change, we may be forced to re-engineer our software or incur additional costs. We cannot assure you that we have not incorporated open source software into our proprietary software in a manner that may subject our proprietary software to an open source license that requires disclosure, to customers or the public, of the source code to such proprietary software. Any such disclosure would have a negative effect on our business and the value of our proprietary software.

We are heavily dependent on computer systems and information technology and any material failure, interruption or security breach of our computer systems or technology could impair our ability to efficiently operate our business.

We are dependent upon our computer systems, including certain of our own proprietary software, and other information technology to properly conduct our business, including, but not limited to, point-of-sale processing in our locations, management of our supply chain, collection of cash, payment of obligations and various other processes and procedures. See “—We do not own certain software that is used in operating our business, and our proprietary platforms and tools incorporate open source software” herein. Our ability to efficiently manage our business depends significantly on the reliability and capacity of these information technology systems. The failure of these systems to operate effectively, an interruption, problems with maintenance, upgrading or transitioning to replacement systems, fraudulent manipulation of sales reporting from our locations or a breach in security of any of these systems could result in loss of sales and franchise royalty payments, cause delays in customer service, result in the loss of data, create exposure to litigation, reduce efficiency, cause delays in operations or otherwise harm our business. Significant capital investments might be required to remediate any problems. Any security breach involving any of our point-of-sale or other systems could result in a loss of consumer confidence and potential costs associated with fraud or breaches of data security laws. Also, despite our considerable efforts to secure our computer systems and information technology, security breaches, such as unauthorized access and computer viruses, may occur, resulting in system disruptions, shutdowns or unauthorized disclosure of confidential information. A security breach of our computer systems or information

 

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technology could require us to notify customers, employees or other groups, result in adverse publicity, loss of sales and profits, and could result in penalties or other costs that could adversely affect the operation of our business and results of operations.

The occurrence of cyber incidents, or a deficiency in cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of confidential information, and/or damage to our employee and business relationships, all of which could lead to loss and harm our business.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include an unauthorized party gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information about customers, franchisees, independent operators, our company, vendors or employees. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. The company has been subject to attempted cyber-attacks in the past and may continue to be subject to such attacks in the future. A successful cyber-attack or other cyber incident experienced by us or our service providers could cause an interruption of our operations, could damage our relationship with franchisees and independent operators, and could result in the exposure of private or confidential data, potentially resulting in litigation. In addition to maintaining insurance coverage to address cyber incidents, we have also implemented processes, procedures and controls to help mitigate these risks. However, these measures, as well as our increased awareness of a risk of a cyber incident, do not guarantee that our reputation and financial results will not be adversely affected by any incident or event that occurs.

Because our locations accept electronic forms of payment from our customers, our business requires the collection and retention of customer data, including credit and debit card numbers and other personally-identifiable information in various information systems that we and our franchisees maintain in conjunction with third parties with whom we contract to provide credit card processing services. We also maintain important internal company data, such as personally-identifiable information about our employees, franchisees, and independent operators and information relating to our operations. Our use of personally-identifiable information is regulated by foreign, federal, state and provincial laws, as well as by certain third-party agreements. As privacy and information security laws and regulations change, we may incur additional costs to ensure that we remain in compliance with those laws and regulations. If our security and information systems are compromised or if our employees or franchisees fail to comply with these laws, regulations, or contract terms, and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation and could disrupt our operations and result in costly litigation, judgments, or penalties resulting from violation of federal, state and provincial laws and payment card industry regulations. A cyber incident could also require us to notify law enforcement agencies, customers, employees or other groups, result in fines or require us to incur expenditures in connection with remediation, require us to pay increased fees to third parties, result in adverse publicity, loss of sales and profits, or require us to incur other costs, any of which could adversely affect the operation of our business and results of our operations.

Changing regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and harm our brands in a manner that adversely affects our business.

The United States, Canada and other jurisdictions in which we operate are increasingly adopting or revising privacy, information security and data protection laws and regulations (“Privacy and Data Protection Laws”) that could have a significant impact on our current and planned privacy, data protection and information security related practices, including our collection, use, sharing, retention and safeguarding of consumer and/or employee information, and some of our current or planned business activities. In the United States, this includes increased privacy related enforcement activity at both the federal level and the state level, including the implementation of the California Consumer Protection Act (the “CCPA”), which came into effect in January 2020, and other state

 

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laws. In Canada, this includes the federal Personal Information Protection and Electronic Documents Act and similar laws in several Canadian provinces. In the European Union and the United Kingdom, this includes the implementation of the General Data Protection Regulation (the “GDPR”), which came into effect in May 2018, and in the UK they include the UK-GDPR, and the UK Data Protection Act of 2018 (the “UK Laws”). We, our affiliated entities and our service providers may need to take measures to ensure compliance with new, evolving and existing requirements contained in the GDPR, the CCPA, the UK Laws and other Privacy and Data Protection Laws and to address customer concerns related to their rights under any such Privacy and Data Protection Laws. We also may need to continue to make adjustments to our compliance efforts as more clarification and guidance on the requirements of the GDPR, the CCPA, the UK Laws and other Privacy and Data Protection Laws becomes available. Our ongoing efforts to ensure our and our affiliated entities’ compliance with the GDPR, the CCPA and other existing or future Privacy and Data Protection Laws affecting customer or employee data to which we are subject could result in additional costs and operational disruptions. Our and our affiliated entities and’ or services providers’ failure to comply with such laws could result in potentially significant regulatory investigations or government actions, litigation, operational disruptions, penalties or remediation and other costs, as well as adverse publicity, loss of sales and profits and an increase in fees payable to third parties. All of these implications could adversely affect our revenues, results of operations or business and financial condition.

Risks Relating to the Franchisees

As of September 26, 2020, a majority of our locations are owned and operated by franchisees and, as a result, we are highly dependent upon our franchisees.

While the franchise agreements are designed to maintain brand consistency, the high percentage of our locations owned by franchisees may expose us to risks not otherwise encountered if we had owned and controlled the locations. In particular, we are exposed to the risk of defaults or late payments by franchisees of franchisee payments. Other risks include limitations on enforcement of franchise obligations due to bankruptcy or insolvency proceedings; unwillingness of franchisees to support marketing programs and strategic initiatives; inability to participate in business strategy changes due to financial constraints; inability to meet rent obligations on subleases; failure to operate the locations in accordance with required standards; failure to report sales information accurately; efforts by one or more large franchisees or an organized franchise association to cause poor franchise relations; and failure to comply with quality and safety requirements that result in potential losses even when we are not legally liable for a franchisee’s actions or failure to act. Although we believe that our current relationships with franchisees are generally good, there can be no assurance that we will maintain strong franchise relationships. Our dependence on franchisees could adversely affect our business and financial condition, our reputation, and our brands.

Franchisees are operating entities exposed to risk.

Franchisees, as operating entities, may be natural persons or legal entities. Under certain of the franchise documents, franchisee entities are not required to be limited-purpose entities, making them potentially subject to business, credit, financial and other risks, which may be unrelated to the operations of our locations. These unrelated risks could materially and adversely affect a franchisee and its ability to make its franchisee payments in full or on a timely basis. A decrease in franchisee payments could have a material adverse effect on our business and results of operations.

Franchisee changes in control may cause complications.

The franchise documents prohibit “changes in control” of a franchisee without the consent of its “franchisor.” In the event we provide such consent, there is no assurance that a successor franchisee would be able to perform the former franchisee’s obligations under such franchise documents or successfully operate its franchise. In the event of the death or disability of a franchisee or the principal of a franchisee entity, the personal

 

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representative of the franchisee or principal of a franchisee entity may not find an acceptable transferee. In the event that an acceptable successor franchisee is not located, the franchisee would be in default under its franchise documents or otherwise not be able to comply with its obligations under the franchise documents and, among other things, the franchisee’s right to operate its franchise could be terminated. If a successor franchisee is not found, or a successor franchisee that is approved is not as successful in operating the location as the former franchisee or franchisee principal, the sales of the location would be impacted and could adversely impact our business and results of operations.

Franchise documents are subject to termination and non-renewal.

The franchise documents are subject to termination by the franchisor under the franchise documents in the event of a default generally after expiration of applicable cure periods. Under certain circumstances, including unauthorized transfer or assignment of the franchise, breach of the confidentiality provisions or health and safety violations, a franchise document may be terminated by the franchisor under the franchise document upon notice without an opportunity to cure. Generally, the default provisions under the franchise documents are drafted broadly and include, among other things, any failure to meet operating standards and actions that may threaten our intellectual property.

In addition, certain of the franchise documents have terms that will expire over the next 12 months. In such cases, the franchisees may renew the franchise document and receive a “successor” franchise document for an additional term. Such option, however, is contingent on the franchisee’s execution of the then-current form of franchise document (which may include increased franchise royalty rates, advertising fees and other costs or requirements), the satisfaction of certain conditions (including modernization of the location and related operations) and the payment of a renewal fee. If a franchisee is unable or unwilling to satisfy any of the foregoing conditions, such franchisee’s expiring franchise document and the related franchisee payments will terminate upon expiration of the term of the franchise document unless we decide to restructure the franchise documents in order to induce such franchisee to renew the franchise document. Certain of the franchise documents also have month-to-month terms (or are subject to termination by the franchisee upon notice), and are therefore subject to termination at the end of any given month (or the period following notice of termination).

Terminations or restructurings of franchise documents could reduce franchise payments or require us to incur expenses to solicit and qualify new franchises, which in turn may materially and adversely affect our business and results of operations.

We may not be able to retain franchisees or maintain the quality of existing franchisees.

Each franchised location is heavily reliant on its franchisee, many of whom are individuals who have numerous years of experience addressing a broad range of concerns and issues relevant to its business. We attempt to retain such franchisees by providing them with competitive franchising opportunities. However, we cannot guarantee the retention of any, including the top-performing, franchisees in the future, or that we will maintain the ability to attract, retain, and motivate sufficient numbers of franchisees of the same caliber, and the failure to do so could materially and adversely affect our business and results of operations. In the event a franchisee leaves our franchise and a successor franchisee is not found, or a successor franchisee that is approved is not as successful in operating the location as the former franchisee or franchisee principal, the sales of the location may be impacted.

The quality of existing franchisee operations may be diminished by factors beyond our control, including franchisees’ failure or inability to hire or retain qualified managers, mechanics, and other personnel or franchisees experiencing financial difficulty, including those franchisees that become over-leveraged. Training of managers, mechanics, and other personnel may be inadequate, especially due to advances and changes in automotive technology. These and other such negative factors could reduce the franchisees’ revenues, could impact payments under the franchise documents and could have a material adverse effect on our business and results of operations.

 

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Our location development plans under development agreements may not be implemented effectively by franchisees.

We rely heavily on franchisees to develop our locations. Development involves substantial risks, including the following:

 

   

the availability of suitable locations and terms for potential development sites;

 

   

the ability of franchisees to fulfill their commitments to build new locations in the numbers and the time frames specified in their development agreements;

 

   

the availability of financing, at acceptable rates and terms, to both franchisees and third-party landlords, for locations development;

 

   

delays in obtaining construction permits and in completion of construction;

 

   

developed properties not achieving desired revenue or cash flow levels once opened;

 

   

competition for suitable development sites;

 

   

changes in governmental rules, regulations, and interpretations (including interpretations of the requirements of the ADA); and

 

   

general economic and business conditions.

There is no assurance that franchisees’ development and construction of locations will be completed, or that any such development will be completed in a timely manner. There is no assurance that present or future development plans will perform in accordance with expectations.

The opening and success of our locations depend on various factors, including the demand for our locations and the selection of appropriate franchisee candidates, the availability of suitable sites, the negotiation of acceptable lease or purchase terms for new locations, costs of construction, permit issuance and regulatory compliance, the ability to meet construction schedules, the availability of financing and other capabilities of franchisees. There is no assurance that franchisees planning the opening of locations will have the ability or sufficient access to financial resources necessary to open and operate the locations required by their agreements. It cannot be assured that franchisees will successfully participate in our strategic initiatives or operate locations in a manner consistent with our concepts and standards.

If our franchisees do not comply with their franchise agreements and policies or participate in the implementation of our business model, our business could be harmed.

Our franchisees are an integral part of our business. Franchisees will be subject to specified product quality standards and other requirements pursuant to the related franchise agreements in order to protect our brands and to optimize their performance. However, franchisees may provide substandard services or receive through the supply chain or produce defective products, which may adversely impact the goodwill of our brands. Franchisees may also breach the standards set forth in their respective franchise documents. We may be unable to successfully implement our business model, company policies, or brand development strategies if our franchisees do not actively participate in such implementation. The failure of our franchisees to focus on the fundamentals of each business’ operations, such as quality and service (even if such failures do not rise to the level of breaching the franchise documents), could materially and adversely affect our business and results of operations. It may be more difficult to monitor our international franchisees’ implementation of our brand strategies due to our lack of personnel in the markets served by such franchisees.

Franchisees could take actions that could harm our brands and adversely affect our business.

Franchisees are contractually obligated to operate their stores for the contractual terms and in accordance with the standards set forth in the franchise agreements. We also provide training and support to franchisees.

 

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However, franchisees are independent third parties that we do not control, and the franchisees own, operate and oversee the daily operations of their locations. As a result, the ultimate success and quality of any franchised location rests with the franchisee. If franchisees do not successfully operate stores for the contractual terms and in a manner consistent with required standards, franchise royalty payments to franchisor will be adversely affected and our image and reputation could be harmed, which in turn could hurt our revenues, results of operations, business and financial condition.

In addition, we may be unable to successfully implement the strategies that we believe are necessary for further growth if franchisees do not participate in that implementation. Our revenues, results of operations, business and financial condition could be adversely affected if a significant number of franchisees do not participate in brand strategies, which in turn may harm our financial condition.

Risks Related to the Securitized Debt Facility

Our substantial indebtedness could adversely affect our financial condition.

We have a significant amount of indebtedness. Following this offering and the use of proceeds described here, we will have six series of term notes, $1,442 million of which were outstanding as of September 26, 2020, and one series of variable funding notes, which had no outstanding balance as of September 26, 2020, pursuant to the Securitization Senior Notes Indenture.

Our obligations under the notes are secured by substantially all of our and our subsidiaries’ domestic and foreign revenue-generating assets other than the assets in our Car Wash segment. Subject to the limits contained in the Securitization Senior Notes Indenture, we may be able to incur substantial additional debt from time to time to finance capital expenditures, investments, acquisitions, or for other purposes. If we do incur substantial additional debt, the risks related to our high level of debt could intensify. Specifically, our high level of indebtedness could have important consequences, including:

 

   

limiting our ability to obtain additional financing to fund capital expenditures, investments, acquisitions or other general corporate requirements;

 

   

requiring a substantial portion of our cash flow to be dedicated to payments to service our indebtedness instead of other purposes, thereby reducing the amount of cash flow available for capital expenditures, investments, acquisitions and other general corporate purposes;

 

   

increasing our vulnerability to and the potential impact of adverse changes in general economic, industry and competitive conditions;

 

   

limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

 

   

placing us at a disadvantage compared to other, less leveraged competitors or competitors with comparable debt at more favorable interest rates; and

 

   

increasing our costs of borrowing.

In addition, the financial and other covenants we agreed to in the securitized debt facility may limit our ability to incur additional indebtedness, make investments, and engage in other transactions, and the leverage may cause potential lenders to be less willing to loan funds to us in the future.

We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which would adversely affect our financial condition and results of operations.

Our ability to make principal and interest payments on and to refinance our indebtedness will depend on our ability to generate cash in the future and, in particular, the ability of the assets securing our securitized debt facility to generate cash in the future. This, to a certain extent, is subject to general economic, financial,

 

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competitive, legislative, regulatory, and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations, in the amounts projected or at all, or if future borrowings are not available to us under our securitized variable funding notes or otherwise in amounts sufficient to fund our other liquidity needs, our financial condition and results of operations may be adversely affected. If we cannot generate sufficient cash flow from operations to make scheduled principal amortization and interest payments on our debt obligations in the future, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures, or seek additional equity investments. If we are unable to refinance any of our indebtedness on commercially reasonable terms or at all or to effect any other action relating to our indebtedness on satisfactory terms or at all, our business may be harmed.

Our securitized debt facility has restrictive terms and our failure to comply with any of these terms could put us in default, which would have an adverse effect on our business and prospects.

Unless and until we repay all outstanding borrowings under our securitized debt facility, we will remain subject to the restrictive terms of these borrowings. The securitized debt facility, under which certain of our wholly-owned subsidiaries outside of our Car Wash segment have issued fixed rate notes and variable funding notes, contains a number of covenants, with the most significant financial covenant being a debt service coverage calculation. These covenants limit the ability of certain of our subsidiaries to, among other things:

 

   

sell assets;

 

   

engage in mergers, acquisitions, and other business combinations;

 

   

declare dividends or redeem or repurchase capital stock;

 

   

incur, assume, or permit to exist additional indebtedness or guarantees;

 

   

make loans and investments;

 

   

incur liens; and

 

   

enter into transactions with affiliates.

The securitized debt facility also requires us to maintain specified financial ratios. Our ability to meet these financial ratios can be affected by events beyond our control, and we may not satisfy such a test. A breach of these covenants could result in a rapid amortization event, as described in the next paragraph, or default under the securitized debt facility. If amounts owed under the securitized debt facility are accelerated because of a default and we are unable to pay such amounts, the investors may have the right to assume control of substantially all of the assets securing such debt facility.

If we are unable to refinance or repay amounts under the securitized debt facility prior to the expiration of the applicable term or upon rapid amortization occurring as a result of our failure to maintain specified financial ratios, our cash flow would be directed to the repayment of the securitized debt and, other than management fees sufficient to cover minimal selling, general and administrative expenses, would not be available for operating our business.

No assurance can be given that any refinancing or additional financing will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and capital markets and other factors beyond our control. There can be no assurance that market conditions will be favorable at the times that we require new or additional financing.

The Securitization Senior Notes Indenture governing the securitized debt facility may restrict the cash flow from the entities subject to the securitization to us and our subsidiaries and, upon the occurrence of certain events, cash flow would be further restricted.

The Securitization Senior Notes Indenture governing the securitized debt facility requires that cash from the entities subject to the securitization be allocated in accordance with a specified priority of payments. In the

 

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ordinary course, this means that funds available to us are paid at the end of the priority of payments, after expenses and debt service for the securitized debt. In addition, in the event that a rapid amortization event occurs under the indenture governing the securitized debt (including, without limitation, upon an event of default under the indenture, failure to maintain specified financial ratios or the failure to repay the securitized debt at the end of the applicable term), the funds available to us would be reduced or eliminated, which would in turn reduce our ability to operate or grow our business.

Developments with respect to the London Interbank Offered Rate (“LIBOR”) may affect our borrowings under our debt facilities.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”) announced that it expects, by no later than the end of 2021, to cease taking steps aimed at ensuring the continuing availability of LIBOR in its current form. The FCA’s announcement was stated to be aimed at encouraging market participants to use other benchmarks or reference rates in place of LIBOR. On November 24, 2017, the FCA announced that the panel banks that submit information to ICE Benchmark Administration Limited (“IBA”), as administrator of LIBOR, have undertaken to continue to do so until the end of 2021. If IBA continues to calculate and publish LIBOR up to the end of 2021, and if it does so after that time, there can be no certainty as to the basis on which it will do so.

Our securitized debt facility provides that interest may be based on LIBOR and for the use of an alternate rate to LIBOR in the event LIBOR is phased-out; however, uncertainty remains as to any such replacement rate and any such replacement rate may be higher or lower than LIBOR may have been. The establishment of alternative reference rates or implementation of any other potential changes may lead to an increase in our borrowing costs.

Risks Related to this Offering and Ownership of Our Common Stock

Our stock price may fluctuate significantly and purchasers of our common stock could incur substantial losses.

The market price of our common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock. The following factors could affect our stock price:

 

   

our operating and financial performance and prospects;

 

   

quarterly variations in the rate of growth (if any) of our financial indicators, such as net income per share, net income and revenues;

 

   

the public reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission (“SEC”);

 

   

strategic actions by our competitors;

 

   

changes in operating performance and the stock market valuations of other companies;

 

   

overall conditions in our industry and the markets in which we operate;

 

   

announcements related to litigation;

 

   

our failure to meet revenue or earnings estimates made by research analysts or other investors;

 

   

changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;

 

   

speculation in the press or investment community;

 

   

issuance of new or updated research or reports by securities analysts;

 

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sales of our common stock by us or our stockholders, or the perception that such sales may occur;

 

   

changes in accounting principles, policies, guidance, interpretations, or standards;

 

   

additions or departures of key management personnel;

 

   

actions by our stockholders;

 

   

general market conditions;

 

   

domestic and international economic, legal and regulatory factors unrelated to our performance;

 

   

announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

security breaches impacting us or other similar companies;

 

   

expiration of contractual lock-up agreements with our executive officers, directors and stockholders;

 

   

material weakness in our internal control over financial reporting; and

 

   

the realization of any risks described under this “Risk Factors” section, or other risks that may materialize in the future.

The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, financial condition, and results of operations.

Our ability to raise capital in the future may be limited.

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to holders of our common stock to make claims on our assets and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities or securities convertible into equity securities, existing stockholders will experience dilution and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, you bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.

We are a holding company and rely on dividends, distributions, and other payments, advances, and transfers of funds from our subsidiaries to meet our obligations.

We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers, including for payments in respect of our indebtedness, from our subsidiaries to meet our obligations. The ability of our subsidiaries to pay cash dividends and/or make loans or advances to us will be dependent upon their respective abilities to achieve sufficient cash flows after satisfying their respective cash requirements, including the securitized financing facility and other debt agreements, to enable the payment of such dividends or the making of such loans or advances. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividends or other distributions to us. SeeManagement’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources.” Each of our

 

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subsidiaries is a distinct legal entity, and under certain circumstances legal and contractual restrictions may limit our ability to obtain cash from them and we may be limited in our ability to cause any future joint ventures to distribute their earnings to us. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could also limit or impair their ability to pay dividends or other distributions to us.

We are an “emerging growth company,” and are able take advantage of reduced disclosure requirements applicable to “emerging growth companies,” which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and have taken advantage of certain exemptions from various disclosure requirements applicable to companies that are “emerging growth companies.” These exemptions include reduced disclosure obligations regarding executive compensation and historical financial statements. In addition, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We cannot predict if investors will find our common stock less attractive because we rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce disclosure, there may be a less active trading market for our common stock and our stock price may decline or become more volatile and it may be difficult for us to raise additional capital if and when we need it. Upon the completion of this offering, we will no longer qualify as an “emerging growth company.”

We will incur significant costs and devote substantial management time as a result of operating as a public company, particularly after we are no longer an “emerging growth company.”

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act, the Dodd-Frank Act, as well as rules and regulations subsequently implemented by the SEC, and NASDAQ, our stock exchange, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. The rules governing management’s assessment of our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to continue incurring significant expenses and devote substantial management effort toward ensuring compliance with the requirements of the Sarbanes-Oxley Act. In that regard, we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Furthermore, these rules and regulations require us to incur legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

We will cease to be an “emerging growth company” upon the consummation of this offering, and once we cease to be an “emerging growth company,” we will not be entitled to the exemptions provided in the JOBS Act discussed under “Prospectus Summary—Implications of Being an Emerging Growth Company.” We expect to incur additional management time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed accelerated filers or large accelerated filers, including complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.

 

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We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

We will be required to pay our existing owners for certain tax benefits, which amounts are expected to be material.

We will enter into an income tax receivable agreement with our existing stockholders that will provide for the payment by us to our existing stockholders of 85% of the amount of cash savings, if any, in U.S. and Canadian federal, state, local and provincial income tax that we and our subsidiaries actually realize as a result of the realization of certain tax benefits associated with tax attributes existing at the time of the offering. These tax benefits, which we refer to as the Pre-IPO and IPO-Related Tax Benefits, include: (i) all depreciation and amortization deductions, and any offset to taxable income and gain or increase to taxable loss, resulting from the tax basis that we have in our and our subsidiaries’ intangible assets, (ii) the utilization of certain of our and our subsidiaries’ U.S. federal and Canadian federal and provincial net operating losses, non-capital losses, disallowed interest expense carryforwards and tax credits, if any, attributable to periods prior to this offering, (iii) deductions in respect of debt issuance costs associated with certain of our and our subsidiaries’ financing arrangements, and (iv) deductions in respect of our and our subsidiaries’ offering-related expenses.

These payment obligations are our obligations and not obligations of any of our subsidiaries. The actual utilization of the Pre-IPO and IPO-Related Tax Benefits as well as the timing of any payments under the income tax receivable agreement will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future.

We expect that the payments we make under the income tax receivable agreement will be material. Assuming no material changes in the relevant tax law, and that we and our subsidiaries earn sufficient income to realize the full Pre-IPO and IPO-Related Tax Benefits, we expect that future payments under the income tax receivable agreement will aggregate to between $155 million and $175 million. Any future changes in the realizability of the Pre-IPO and IPO-Related Tax Benefits will impact the amount of the liability under the income tax receivable agreement. Based on our current taxable income estimates, we expect to repay the majority of this obligation by the end of our 2025 fiscal year.

The income tax receivable agreement provides that upon certain changes of control our (or our successor’s) payments under the income tax receivable agreement for each taxable year after any such event would be based on certain valuation assumptions, including the assumption that we and our subsidiaries have sufficient taxable income to fully utilize the Pre-IPO and IPO-Related Tax Benefits. Additionally, if we sell or otherwise dispose of any of our subsidiaries in a transaction that is not a change of control, we will be required to make a payment equal to the present value of future payments under the income tax receivable agreement attributable to the Pre-IPO and IPO-Related Tax Benefits of such subsidiary that is sold or disposed of, applying the assumptions described above. Furthermore, if we breach any of our material obligations under the income tax receivable agreement, then all of our payment and other obligations under it will be accelerated and will become due and payable, and we will be required to make a payment equal to the present value of future payments under the income tax receivable agreement which is currently estimated to be between $155 million and $175 million, applying the assumptions described above. As a result of the potential acceleration, we could be required to make payments under the income tax receivable agreement that are greater than the specified percentage of actual cash savings we and our subsidiaries ultimately realize in respect of the Pre-IPO and IPO-Related Tax Benefits. In these situations, our obligations under the income tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control.

Our counterparties under the income tax receivable agreement will not reimburse us for any payments previously made if such Pre-IPO and IPO-Related Tax Benefits are subsequently disallowed (although future payments would be adjusted to the extent possible to reflect the result of such disallowance). As a result, in

 

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certain circumstances, payments could be made under the income tax receivable agreement in excess of our and our subsidiaries’ actual cash tax savings.

For additional information related to the income tax receivable agreement, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Certain Relationships and Related Party Transactions—Income Tax Receivable Agreement.”

We may be subject to securities litigation, which is expensive and could divert management attention.

The market price of our common stock may be volatile and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, and we could be subject to potential delisting, regulatory investigations, civil or criminal sanctions and litigation.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with management’s assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

Additionally, ineffective internal control over financial reporting could subject us to potential delisting from NASDAQ, regulatory investigations, civil or criminal sanctions and litigation, any of which would have a material adverse effect on our business, results of operations and financial condition.

Our Principal Stockholders will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.

Upon the completion of this offering, affiliates of our Principal Stockholders will together own approximately 73.7% of the outstanding shares of our common stock (or 72.6% if the underwriters exercise their option to purchase additional shares in full and after giving effect to the purchase of 2,067,172 shares of common stock from existing holders as described under “Use of Proceeds”). As long as affiliates of our Principal Stockholders own or control a majority of our outstanding voting power, our Principal Stockholders and their affiliates will have the ability to exercise substantial control over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including:

 

   

the election and removal of directors and the size of our board of directors;

 

   

any amendment of our articles of incorporation or bylaws; or

 

   

the approval of mergers and other significant corporate transactions, including a sale of substantially all of our assets.

Moreover, ownership of our shares by affiliates of our Principal Stockholders may also adversely affect the trading price for our common stock to the extent investors perceive disadvantages in owning shares of a company

 

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with a controlling shareholder. For example, the concentration of ownership held by our Principal Stockholders could delay, defer, or prevent a change in control of our company or impede a merger, takeover, or other business combination which may otherwise be favorable for us. In addition, our Principal Stockholders are in the business of making investments in companies and may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers. Many of the companies in which our Principal Stockholders invest are franchisors and may compete with us for access to suitable locations, experienced management and qualified and well-capitalized franchisees. Our Principal Stockholders may acquire or seek to acquire assets complementary to our business that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue, and as a result, the interests of our Principal Stockholders may not coincide with the interests of our other stockholders. So long as our Principal Stockholders continue to directly or indirectly own a significant amount of our equity, even if such amount is less than 50%, our Principal Stockholders will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions, and as long as our Principal Stockholders maintain ownership of at least 25% of our outstanding common stock, they will have special governance rights under the Stockholders Agreement. “See “Certain Relationships and Related Party Transactions—Stockholders Agreement”.

We are a “controlled company” within the meaning of NASDAQ rules and, as a result, qualify for and intend to rely on exemptions from certain corporate governance requirements.

Following this offering, our Principal Stockholders will continue to control a majority of the voting power of our outstanding voting stock, and as a result we will be a controlled company within the meaning of NASDAQ corporate governance standards. Under NASDAQ rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirements that:

 

   

a majority of the board of directors consist of independent directors;

 

   

the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

We may utilize these exemptions as long as we remain a controlled company. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of NASDAQ. After we cease to be a “controlled company,” we will be required to comply with the above referenced requirements within one year.

Our organizational documents and Delaware law may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium on their shares.

Provisions of our certificate of incorporation and bylaws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our board of directors. These provisions include:

 

   

providing that our board of directors will be divided into three classes, with each class of directors serving staggered three-year terms;

 

   

providing for the removal of directors only for cause and only upon the affirmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class, if less than 40% of the voting power of our outstanding common stock is beneficially owned by our Principal Stockholders;

 

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empowering only the board to fill any vacancy on our board of directors (other than in respect of our Principal Stockholders’ directors (as defined below)), whether such vacancy occurs as a result of an increase in the number of directors or otherwise, if less than 40% of the voting power of our outstanding common stock is beneficially owned by our Principal Stockholders;

 

   

authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;

 

   

prohibiting stockholders from acting by written consent if less than 40% of the voting power of our outstanding common stock is beneficially owned by our Principal Stockholders;

 

   

to the extent permitted by law, prohibiting stockholders from calling a special meeting of stockholders if less than 40% of the voting power of our outstanding common stock is beneficially owned by our Principal Stockholders; and

 

   

establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

Additionally, our certificate of incorporation provides that we are not governed by Section 203 of the Delaware General Corporation Law (the “DGCL”), which, in the absence of such provisions, would have imposed additional requirements regarding mergers and other business combinations. However, our certificate of incorporation will include a provision that restricts us from engaging in any business combination with an interested stockholder for three years following the date that person becomes an interested stockholder, but such restrictions shall not apply to any business combination between our Principal Stockholders and any affiliate thereof or their direct and indirect transferees, on the one hand, and us, on the other.

Any issuance by us of preferred stock could delay or prevent a change in control of us. Our board of directors will have the authority to cause us to issue, without any further vote or action by the stockholders, shares of preferred stock, par value $0.01 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges, and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices, and liquidation preferences of such series. The issuance of shares of our preferred stock may have the effect of delaying, deferring, or preventing a change in control without further action by the stockholders, even where stockholders are offered a premium for their shares.

In addition, as long as our Principal Stockholders beneficially own at least 40% of the voting power of our outstanding common stock, our Principal Stockholders will be able to control all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and certain corporate transactions. Together, these certificate of incorporation, bylaw and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as the significant common stock beneficially owned by our Principal Stockholders and their right to nominate a specified number of directors in certain circumstances, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of us, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition. For a further discussion of these and other such anti-takeover provisions, see “Description of Capital Stock—Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws and Certain Provisions of Delaware Law.

Our certificate of incorporation will provide that certain courts in the State of Delaware or the federal district courts of the United States for certain types of lawsuits will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any

 

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derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to us or our stockholders, creditors, or other constituents (iii) any action asserting a claim arising pursuant to any provision of the DGCL or of our certificate of incorporation or our bylaws, or (iv) any action asserting a claim related to or involving the Company that is governed by the internal affairs doctrine. The exclusive forum provision provides that it will not apply to claims arising under the Securities Act of 1933, as amended, (the “Securities Act”), the Exchange Act or other federal securities laws for which there is exclusive federal or concurrent federal and state jurisdiction. Unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and, to the fullest extent permitted by law, to have consented to the provisions of our certificate of incorporation described above. Although we believe this exclusive forum provision benefits us by providing increased consistency in the application of Delaware law and federal securities laws in the types of lawsuits to which each applies, the choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, other employees or stockholders, which may discourage such lawsuits against us and our directors, officers, other employees or stockholders. However, the enforceability of similar forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings. If a court were to find the exclusive choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition and results of operations.

Our certificate of incorporation will contain a provision renouncing our interest and expectancy in certain corporate opportunities.

Under our certificate of incorporation, none of our Principal Stockholders, any affiliates of our Principal Stockholders, or any of their respective officers, directors, agents, stockholders, members or partners, will have any duty to refrain from engaging, directly or indirectly, in the same business activities, similar business activities, or lines of business in which we operate. In addition, our certificate of incorporation provides that, to the fullest extent permitted by law, no officer or director of ours who is also an officer, director, employee, managing director or other affiliate of our Principal Stockholders will be liable to us or our stockholders for breach of any fiduciary duty by reason of the fact that any such individual directs a corporate opportunity to any Principal Stockholder, instead of us, or does not communicate information regarding a corporate opportunity to us that the officer, director, employee, managing director, or other affiliate has directed to a Principal Stockholder. For instance, a director of our company who also serves as a director, officer, or employee of one of our Principal Stockholders or any of their portfolio companies, funds, or other affiliates may pursue certain acquisitions or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. Upon consummation of this offering, our board of directors will consist of eight members, three of whom will be our Principal Stockholders’ directors. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations, or prospects if attractive corporate opportunities are allocated by one of our Principal Stockholders to itself or its affiliated funds, the portfolio companies owned by such funds or any affiliates of a Principal Stockholder instead of to us. A description of our obligations related to corporate opportunities under our certificate of incorporation are more fully described in “Description of Capital Stock—Conflicts of Interest.”

Investors in this offering will experience immediate and substantial dilution.

Based on our pro forma net tangible book value (deficit) per share as of September 26, 2020 and the initial public offering price of $22.00 per share, we expect that purchasers of our common stock in this offering will experience an immediate and substantial dilution of $27.57 per share, or $27.15 per share if the underwriters exercise their option to purchase additional shares in full and after giving effect to the purchase of 2,067,172

 

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shares of common stock from existing holders as described under “Use of Proceeds”, representing the difference between our pro forma net tangible book value (deficit) per share and the initial public offering price. This dilution is due in large part to earlier investors having paid substantially less than the initial public offering price when they purchased their shares. See Dilution.”

You may be diluted by the future issuance of additional common stock or convertible securities in connection with our incentive plans, acquisitions or otherwise, which could adversely affect our stock price.

After the completion of this offering, we will have 735,290,443 shares of common stock authorized but unissued. Our certificate of incorporation will authorize us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. At the closing of this offering, we will have approximately 5,408,278 options outstanding, which are exercisable into approximately 5,408,278 shares of common stock. We have reserved approximately 6,951,462 shares for future grant under our Omnibus Equity Plan. See Executive Compensation—Post-IPO Equity Compensation Plans—2021 Omnibus Incentive Plan.” Any common stock that we issue, including under our Omnibus Equity Plan or other equity incentive plans that we may adopt in the future, as well as under outstanding options would dilute the percentage ownership held by the investors who purchase common stock in this offering.

From time to time in the future, we may also issue additional shares of our common stock or securities convertible into common stock pursuant to a variety of transactions, including acquisitions. Our issuance of additional shares of our common stock or securities convertible into our common stock would dilute your ownership of us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our common stock.

Future sales of our common stock in the public market, or the perception in the public market that such sales may occur, could reduce our stock price.

After the completion of this offering and the use of proceeds therefrom, we will have 164,709,557 shares of common stock outstanding. The number of outstanding shares of common stock includes 132,891,375 shares beneficially owned by our Principal Stockholders and certain of our employees, that are “restricted securities,” as defined under Rule 144 under the Securities Act, and eligible for sale in the public market subject to the requirements of Rule 144. We, each of our officers and directors, affiliates of our Principal Stockholders and all of our other existing stockholders have agreed that (subject to certain exceptions), for a period of 180 days after the date of this prospectus, we and they will not, without the prior written consent of certain underwriters, dispose of any shares of common stock or any securities convertible into or exchangeable for our common stock. See “Underwriters.” Following the expiration of the applicable lock-up period, all of the issued and outstanding shares of our common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding periods, and other limitations of Rule 144. The underwriters may, in their sole discretion, release all or any portion of the shares subject to lock-up agreements at any time and for any reason. In addition, our Principal Stockholders have certain rights to require us to register the sale of common stock held by our Principal Stockholders, including in connection with underwritten offerings. Sales of significant amounts of stock in the public market upon expiration of lock-up agreements, the perception that such sales may occur, or early release of any lock-up agreements, could adversely affect prevailing market prices of our common stock or make it more difficult for you to sell your shares of common stock at a time and price that you deem appropriate. See “Shares Eligible for Future Sale” for a discussion of the shares of common stock that may be sold into the public market in the future.

There has been no prior public market for our common stock and there can be no assurances that a viable public market for our common stock will develop or be sustained.

Prior to this offering, no public market for our shares of common stock existed and an active, liquid and orderly trading market for our common stock may not develop or be maintained after this offering. If you purchase

 

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shares of our common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay the price that we negotiated with the representatives of the underwriters, which may not be indicative of prices that will prevail in the trading market. The price of our common stock in any such market may be higher or lower than the price that you pay in this offering. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. Furthermore, an inactive market may also impair our ability to raise capital by selling shares of our common stock.

The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering.

The initial public offering price was determined by negotiations between us and representatives of the underwriters, based on numerous factors which we discuss in “Underwriters,” and may not be indicative of the market price of our common stock after this offering. If you purchase our common stock, you may not be able to resell those shares at or above the initial public offering price.

We do not anticipate paying dividends on our common stock in the foreseeable future and, consequently, your ability to achieve a return on your investment will depend on appreciation of the value of our common stock.

We do not anticipate paying any dividends in the foreseeable future on our common stock. We intend to retain all future earnings for the operation and expansion of our business and the repayment of outstanding debt. Our securitized financing facility contains, and any future indebtedness likely will contain, restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on certain of our subsidiaries’ ability to pay dividends and make other restricted payments. As a result, any return to stockholders will be limited to any appreciation in the value of our common stock, which is not certain. While we may change this policy at some point in the future, we cannot assure you that we will make such a change. See “Dividend Policy.”

If securities or industry analysts do not publish research or reports about our business or publish negative reports, our stock price could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us, our business or our market. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company issues adverse or misleading research or reports regarding us, our business model, our stock performance or our market, or if our operating results do not meet their expectations, our stock price could decline.

We may issue preferred securities, the terms of which could adversely affect the voting power or value of our common stock.

Our certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred securities having such designations, preferences, limitations, and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred securities could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred securities the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred securities could affect the residual value of the common stock.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management, and expected market growth are forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business” and include, among other things, statements relating to:

 

   

our strategy, outlook and growth prospects;

 

   

our operational and financial targets and dividend policy;

 

   

general economic trends and trends in the industry and markets; and

 

   

the competitive environment in which we operate.

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Important factors that could cause our results to vary from expectations include, but are not limited to:

 

   

our ability to compete with other businesses in the automotive aftermarket industries, including other international, national, regional and local repair and maintenance shops, paint and collision repair shops, oil change shops, automobile dealerships, and suppliers of automotive parts;

 

   

advances and changes in automotive technology, including, but not limited to, changes in the materials used for the construction of structural components and body panels, changes in the types of paints and coatings used for automobiles or materials used for tires, changes in engines and drivetrains to hybrid and electric technology, increased prevalence of sensors and back-up cameras, and increased prevalence of self-driving vehicles and shared mobility;

 

   

changes in consumer preferences, perceptions and spending patterns;

 

   

changes in the cost of, availability of and shipping costs of automobile supplies, parts, paints, coatings and motor oil;

 

   

changes in the availability or cost of labor, including health care-related costs;

 

   

our ability to attract and retain qualified personnel;

 

   

changes in interest rates, commodity prices, energy costs and other expenses;

 

   

global events, including recent additional tariffs and Brexit;

 

   

the ability of our key suppliers, including international suppliers, to continue to deliver high-quality products to us at prices similar to historical levels;

 

   

disruptions in the supply of specific products or to the business operations of key or recommended suppliers;

 

   

the willingness of our vendors and service providers to supply goods and services pursuant to customary credit arrangements;

 

   

our ability to maintain direct repair program relationships with insurance partners;

 

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changes in general economic conditions and the geographic concentration of our locations, which may affect our business;

 

   

the operational and financial success of franchised, independently-operated and company-operated locations;

 

   

the willingness of franchisees to participate in and comply with our business model and policies;

 

   

our ability to successfully enter new markets and complete construction, including renovations, conversions, and build-outs of existing and additional locations;

 

   

risks associated with implementing our growth strategy, including our ability to open additional domestic and international franchised, independently-operated and company-operated locations and to continue to identify, acquire, and refranchise automotive aftermarket businesses, and the willingness of franchisees to continue to invest in and open new our franchises;

 

   

the potential adverse impact of strategic acquisitions;

 

   

additional leverage incurred in connection with acquisitions;

 

   

potential inability to achieve Acquisition EBITDA adjustments included in Acquisition Adjusted EBITDA;

 

   

our Acquisition Adjusted EBITDA is based on certain estimates and assumptions and is not a representation by us that we will achieve such operating results;

 

   

the effect of the media’s reports and social media on our reputation;

 

   

the effectiveness of our marketing and advertising programs;

 

   

the seasonality of our operations;

 

   

increased insurance and self-insurance costs;

 

   

our ability to comply with existing and future health, employment, environmental and other government regulations;

 

   

our ability to adequately protect our intellectual property;

 

   

the adverse effect of litigation in the ordinary course of business;

 

   

a significant failure, interruption or security breach of our computer systems or information technology;

 

   

catastrophic events, including war, terrorism and other international conflicts, public health issues (including the ongoing coronavirus outbreak) or natural causes;

 

   

the effect of restrictive covenants in the Securitization Senior Notes Indenture, and other documents related to indebtedness on our business; and

 

   

other risk factors included under “Risk Factors” in this prospectus.

These forward-looking statements reflect our views with respect to future events as of the date of this prospectus and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. You should read this prospectus and the documents filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, merger, dispositions, joint ventures, or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

We expect to receive approximately $652 million of net proceeds from the sale of the common stock (or approximately $751 million if the underwriters’ option to purchase additional shares from us is exercised in full) after deducting underwriting discounts and commissions, offering expenses that have been paid by us, and estimated offering expenses payable by us.

 

We currently expect to use the net proceeds from this offering and cash on hand to repay in full the outstanding $722 million in aggregate principal amount of indebtedness under the senior credit facilities assumed in the ICWG Acquisition (the “Car Wash Senior Credit Facilities”). The interest rate, maturity date and other terms of the outstanding indebtedness under the Car Wash Senior Credit Facilities are set forth in the section of this prospectus titled “Description of Material Indebtedness.” If the underwriters exercise their option to purchase additional shares from us, we intend to use a portion of the net proceeds therefrom to acquire from certain of our existing stockholders shares of our common stock at the price paid by the underwriters for shares of our common stock in this offering and to use any remaining proceeds for general corporate purposes. None of the existing stockholders we purchase shares from will be an existing employee, executive officer or director or Principal Stockholder of the Company. While we currently have no specific plan for the use of the remaining net proceeds of this offering, we may use a significant portion of these proceeds to implement our growth strategies and generate funds for working capital. We do not have current plans to enter into any specific material merger or acquisition. Our management team will retain broad discretion to allocate the net proceeds of this offering. The precise amounts and timing of our use of any remaining net proceeds will depend upon market conditions, among other factors.

 

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DIVIDEND POLICY

We currently do not intend to pay cash dividends on our common stock in the foreseeable future. However, we may, in the future, decide to pay dividends on our common stock. Any declaration and payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, cash flows, capital requirements, levels of indebtedness, restrictions imposed by applicable law, our overall financial condition, restrictions in our debt agreements, and any other factors deemed relevant by our board of directors.

As a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries. Our ability to pay dividends will therefore be restricted as a result of restrictions on their ability to pay dividends to us under our securitized financing facility and under future indebtedness that we or they may incur. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources” and “Description of Material Indebtedness.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, and our capitalization as of September 26, 2020 on:

 

   

an actual basis, as adjusted to give effect to the Stock Split; and

 

   

a pro forma basis to give further effect to (i) the Reorganization, (ii) the issuance and sale of 31,818,182 shares of our common stock in this offering at the initial public offering price of $22.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (iii) the application of the net proceeds of this offering as described under “Use of Proceeds” and (iv) the impact of the liability pursuant to the income tax receivable agreement as described under “Certain Relationships and Related Party TransactionsIncome Tax Receivable Agreement.

You should read this table together with the information included elsewhere in this prospectus, including “Prospectus Summary—Summary Historical Consolidated Financial and Other Data,” “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited financial statements and related notes thereto.

 

     As of September 26, 2020  

in thousands (except per share data)

   Actual     Pro Forma  

Cash and cash equivalents

   $ 184,356     $ 124,982  
  

 

 

   

 

 

 

Total debt

   $ 2,098,092     $ 1,422,102  
  

 

 

   

 

 

 

Shareholders’ equity:

    

Common stock—$0.01, par value; 10,000 shares authorized, 1,430 shares issued and outstanding (actual); 900,000,000 shares authorized, 164,709,557 shares issued and outstanding (pro forma);

           1,647  

Preferred stock—$0.01, par value; no shares authorized, issued or outstanding (actual); 100,000,000 shares authorized, no shares issued and outstanding (pro forma);

            

Additional paid-in capital

          
446,929
 

Accumulated earnings

     1,092,959       1,095,311  

Accumulated other comprehensive loss

     (9,918     (9,918

Non-controlling interest

     1,830       1,830  
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 1,084,871     $ 1,535,799  
  

 

 

   

 

 

 

Total capitalization

   $ 3,182,963     $ 2,957,901  
  

 

 

   

 

 

 

 

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DILUTION

Purchasers of the common stock in this offering will experience immediate and substantial dilution to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after giving effect to this offering. Pro forma net tangible book value per share represents the book value of our tangible assets less the book value of our total liabilities divided by the number of shares of common stock then issued and outstanding.

Our historical net tangible book deficit as of September 26, 2020 was approximately $1.4 billion or $10.30 per share. Our historical net tangible book deficit represents the amount of our total tangible assets (total assets less goodwill and total intangible assets) less total liabilities. Historical net tangible book deficit per share represents historical net tangible book deficit divided by the number of shares of common stock issued and outstanding as of September 26, 2020, as adjusted for the Stock Split.

Our pro forma net tangible book deficit as of September 26, 2020 would have been $0.9 billion or $5.57 per share, based on 164,709,557 shares of our common stock outstanding, which gives effect to our sale of 31,818,182 shares of common stock in this offering at the initial public offering price of $22.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table illustrates the dilution per share of our common stock, assuming the underwriters do not exercise their option to purchase additional shares of our common stock:

 

Initial public offering price per share

     $ 22.00  

Historical net tangible book deficit per share as of September 26, 2020

     (10.30  

Increase per share attributable to this offering

     4.73    
  

 

 

   

Pro forma net tangible book value (deficit) per share after this offering

     (5.57  

Dilution in net tangible book deficit per share to new investors participating in this offering

       27.57  

Dilution is determined by subtracting pro forma net tangible book value (deficit) per share after this offering from the initial public offering price per share of common stock.

The following table summarizes, as of September 26, 2020, the total number of shares of common stock owned by existing stockholders and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by new investors in this offering at the initial public offering price of $22.00 per share, calculated before deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased      Total Consideration      Average
Price per
Share
 

in thousands (except share, per share)

   Number      Percent      Amount      Percent  

Existing stockholders

     132,891,375        81%      $ 1,294,987        65%      $ 9.74  

Investors in the offering

     31,818,182        19%        700,000        35%        22.00  
  

 

 

       

 

 

       

Total

     164,709,557        100%      $ 1,994,987        100%      $ 12.11  

To the extent the underwriters’ option to purchase additional shares is exercised, there will be further dilution to new investors.

If the underwriters were to fully exercise their option to purchase additional shares of our common stock and we were to purchase shares from existing holders as described under “Use of Proceeds”, the percentage of common stock held by existing investors would be 78%, and the percentage of shares of common stock held by new investors would be 22%.

 

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The foregoing tables and calculations are based on 132,891,375 shares of our common stock outstanding as of September 26, 2020, and except as otherwise indicated:

 

   

excludes 12,533,984 shares of common stock reserved for issuance under our 2021 Omnibus Incentive Plan (the “Omnibus Incentive Plan”), including:

 

   

Stock options to purchase 5,349,109 shares of our common stock at an exercise price equal to the price to the public in this offering to be issued to certain holders of profits interests in Driven Investor LLC;

 

   

197,049 shares of common stock underlying performance share units or restricted share units to be granted to certain of our employees in connection with this offering; and

 

   

Stock options to purchase 36,364 shares of our common stock at an exercise price equal to the price to the public in this offering to be issued to certain of our directors in connection with this offering. See “Executive Compensation”;

 

   

excludes stock options to purchase 22,805 shares of our common stock with a weighted-average exercise price of $12.08 per share to be issued to holders of existing options to purchase units in Driven Investor LLC;

 

   

excludes 1,790,569 shares of our common stock that will become available for future issuance under our Employee Stock Purchase Plan, or the ESPP, and shares of our common stock that become available pursuant to provisions in the ESPP that automatically increase the share reserve under the ESPP;

 

   

gives effect to the completion of the Reorganization prior to the closing of this offering, as a result of which there will be an aggregate of 132,891,375 shares of common stock outstanding (including 4,788,723 shares of restricted stock) based on the initial public offering price of $22.00 per share as further described in the section titled “Reorganization”; and

 

   

assumes no exercise of the underwriters’ option to purchase up to 4,772,727 additional shares of common stock in this offering.

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

On August 3, 2020 (the “Acquisition Date”), Driven Investor LLC, the parent company of Driven Brands Holdings Inc. and Subsidiaries (collectively referred to as “Driven Brands” or the “Company”), completed the ICWG Acquisition. As a result of the ICWG Acquisition, the Company has expanded its service offerings by entering into the car wash business. Under the merger agreement, ICWG’s shareholders received 217,980 Class A common units of Driven Investor LLC. Driven Investor LLC contributed ICWG to Driven Brands Holdings Inc. in exchange for 430 shares of the Company’s common stock.

The following unaudited pro forma condensed consolidated financial information is presented to illustrate the estimated effects of: (i) the ICWG Acquisition based on the historical results of operations of Driven Brands and Shine Holdco and (ii) the Reorganization, the completion of this offering, adjustment to include the impact of the income tax receivable agreement, elimination of Roark management fees, and the application of the net proceeds of this offering as described under “Use of Proceeds (the “IPO Transaction” and, together with the ICWG Acquisition, the “Transactions”). It is presented as follows:

 

   

The unaudited pro forma condensed consolidated statement of operations for the year ended December 28, 2019 was prepared based on (i) the historical audited consolidated statement of operations of Driven Brands for the fiscal year ended December 28, 2019 and (ii) the historical audited consolidated income statement of Shine Holdco (UK) Limited, the parent company of ICWG, for the fiscal year ended December 31, 2019.

 

   

The unaudited pro forma condensed consolidated statement of operations for the nine months ended September 26, 2020 was prepared based on (i) the historical unaudited condensed consolidated statement of income of Driven Brands for the nine months ended September 26, 2020 and (ii) the historical unaudited consolidated income statement of Shine Holdco from January 1, 2020 through August 2, 2020.

 

   

The unaudited pro forma condensed consolidated balance sheet as of September 26, 2020 was prepared based on the historical unaudited condensed consolidated balance sheet of Driven Brands as of September 26, 2020.

The ICWG Acquisition was accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations” (“ASC 805”), with the Company deemed to be the acquirer for financial accounting purposes.

The historical consolidated financial statements of Shine Holdco were originally prepared using British pounds sterling (“GBP”) as the reporting currency. The Shine Holdco income statements presented within the unaudited condensed consolidated statements of operations herein have been translated from GBP to U.S. Dollars (“USD”) using the average monthly exchange rates for the periods and are presented in accordance with U.S. GAAP accounting guidance.

Assumptions underlying the Transaction Accounting Adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma condensed consolidated financial information. The unaudited pro forma condensed consolidated statement of operations data for the year ended December 28, 2019 and the nine months ended September 26, 2020 give effect to the Transactions as if they had occurred on December 30, 2018, the beginning of the Company’s fiscal year 2019. The unaudited pro forma condensed consolidated balance sheet data as of September 26, 2020 gives effect to the Transactions as if they occurred on September 26, 2020.

The unaudited pro forma condensed consolidated financial information has been prepared by the Company for illustrative and informational purposes only in accordance with Regulation S-X Article 11, “Pro Forma Financial Information”, as amended by the final rule, “Amendments to Financial Disclosures About Acquired

 

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and Disposed Businesses”, as adopted by the SEC on May 21, 2020. The Company elected to voluntarily comply with the amended rules in advance of the mandatory compliance date. The unaudited pro forma condensed consolidated financial information has been prepared for illustrative purposes only and is not necessarily indicative of what the combined company’s condensed consolidated results of operations actually would have been had the Transactions been completed as of the dates indicated. In addition, the unaudited pro forma condensed consolidated financial information does not purport to project the future operating results of the combined company. The unaudited condensed consolidated pro forma financial information does not include adjustments to reflect any potential revenue synergies or cost savings that may be achievable in connection with the Transactions.

The acquisition method of accounting requires the total purchase price to be allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the acquisition date. The excess of the purchase price over the amount assigned to tangible and intangible assets acquired and liabilities assumed is recognized as goodwill. Management’s estimates of fair values of tangible and intangible assets acquired and liabilities assumed is based in part on preliminary third-party valuations. The preliminary allocation of the purchase price reflected in this unaudited pro forma condensed consolidated financial information is based upon preliminary valuation, and the Company’s estimates and assumptions are subject to change. Therefore, upon additional analysis, it is possible that the fair values of assets acquired and liabilities assumed could differ from those presented in the unaudited pro forma condensed consolidated financial information and such differences could be material.

The unaudited pro forma condensed consolidated financial information reflects Transaction Accounting Adjustments that the Company believes are necessary to present the Company’s unaudited pro forma condensed consolidated financial information following the closing of the Transactions as of and for the periods indicated. The Transaction Accounting Adjustments are based on currently available information and assumptions that the Company believes are, under the circumstances and given the information available at this time, reasonable, directly attributable to the Transactions, and reflective of adjustments necessary to report the Company’s balance sheet and statements of operations as if Driven Brands completed the Transactions as of September 26, 2020 for the balance sheet and the beginning of fiscal 2019 for the statements of operations. In addition, the unaudited pro forma condensed consolidated financial information will differ from the final purchase accounting for a number of reasons, including the fact that the estimates of fair values of assets acquired and liabilities assumed are preliminary and subject to change when the formal valuation and other analyses are finalized. Upon completion of the valuation analysis, there may be additional increases or decreases to the recorded book values of Shine Holdco’s assets and liabilities, including, but not limited to trademarks and property, plant, equipment. The differences between the preliminary estimates and the final purchase accounting could have a material impact on the accompanying unaudited pro forma condensed consolidated financial information. The preliminary estimates associated with purchase accounting are expected to be finalized within the measurement period provided by ASC 805.

 

74


Table of Contents

Unaudited Pro Forma Condensed Consolidated Statement of Operations

for year ended December 28, 2019

(Dollars in thousands, except per share data)

 

     Historical     Transaction Accounting Adjustments      
     Driven
Brands
(Historical)
    U.K.
GAAP
Shine
Holdco
(in GBP)
    U.K. GAAP
to U.S.
GAAP
Adjustments

(in GBP)
          Shine Holdco1
(in USD)
    Reclassification
Adjustments
    ICWG
Acquisition
          IPO
Transaction
        Pro Forma
Combined
 

Revenues:

                      

Franchise royalties and fees

   $ 114,872     £ —       £ —         $ —       $ —       $ —         $ —         $ 114,872  

Shine Holdco turnover

     —         262,852       —           335,946       (335,946     —           —           —    

Company-operated store sales

     335,137       —         —           —         144,766       —           —           479,903  

Independently-operated store sales

     —         —         —           —         185,316       —           —           185,316  

Advertising contributions

     66,270       —         —           —         —         —           —           66,270  

Supply and other revenue

     83,994       —         —           —         5,864       —           —           89,858  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total revenue

     600,273       262,852       —           335,946       —         —           —           936,219  

Operating expenses:

                      

Shine Holdco cost of sales

     —         146,932       —           187,719       (187,719     —           —           —    

Company-operated store expenses

     218,988       —         —           —         78,359       (642     N       —           296,705  

Independently-operated store expenses

     —         —         —           —         106,293       669       N       —           106,962  

Advertising expenses

     69,779       —         —           —         —         —           —           69,779  

Supply and other expenses

     57,700       —         —           —         3,067       —           —           60,767  

Administrative expenses – excluding profit on disposal

     —         118,690       (35,240     A,B,C,D,H       106,408       (106,408     —           —           —    

Selling, general, and administrative expenses

     142,249       —         —           —         59,843       —           (4,144   P     197,948  

Acquisition costs

     11,595       —         —           —         —         13,592       K       —           25,187  

Store opening costs

     5,721       —         —           —         —         —           —           5,721  

Depreciation and amortization

     24,220       —         —           —         39,862       9,075       I,J       —           73,157  

Asset impairment charges

     —         —         —           —         6,703       —           —           6,703  

(Profit) loss on disposal of tangible assets

     —         (51,250     53,604       D       4,258       —         —           —           4,258  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Operating income

     70,021       48,480       (18,364       37,561       —         (22,694       4,144         89,032  

Interest receivable and similar income

     —         (507     —           (647     647       —           —           —    

Interest payable and similar expense

     —         77,552       (31,844     D,E,F       58,566       (58,566     —           —           —    

Interest expense, net

     56,846       —         —           —         57,919       11,505       M       (64,442   Q     61,828  

Loss on debt extinguishment

     595       —         —           —         —         —           —           595  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Income before taxes

     12,580       (28,565     13,480         (20,358     —         (34,199       68,586         26,609  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Tax on loss on ordinary activities

     —         2,907       (3,237     G       (500     500       —           —           —    

Income tax expense (benefit)

     4,830       —         —           —         (500     (20,391     O       16,541     R     480  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Net income (loss)

   $ 7,750     £ (31,472     16,717         (19,858     —         (13,808     $ 52,045         26,129  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

 

75


Table of Contents
     Historical     Transaction Accounting Adjustments        
     Driven
Brands
(Historical)
    U.K.
GAAP
Shine
Holdco
(in GBP)
    U.K. GAAP
to U.S.
GAAP
Adjustments

(in GBP)
          Shine Holdco1
(in USD)
    Reclassification
Adjustments
    ICWG
Acquisition
          IPO
Transaction
          Pro Forma
Combined
 

Net income (loss) attributable to non-controlling interest

   $ 19     £ (65   £ —         $ (83   $ —       $ —         $ —         $ (64
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Loss for the financial year attributable to: Shareholders of Shine Holdco’s parent company

     —       £ (31,407   £ 16,717       $ (19,775     19,775       —           —           —    
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Net income (loss) attributable to Driven Brands Holding, Inc.

   $ 7,731       —         —           —         (19,775   $ (13,808     $ 52,045       $ 26,193  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Earnings per share:

                      

Basic and diluted

   $ 7,731                       $ 0.21  

Weighted average shares outstanding

                      

Basic and diluted

     1,000                         122,999,213  

1 – The Shine Holdco (in USD) column is equal to the U.K. GAAP Shine Holdco (in GBP) column plus U.K. GAAP to U.S. GAAP Adjustments (in GBP) column translated by using the average monthly exchange rates for the period presented.

 

76


Table of Contents

Unaudited Pro Forma Condensed Consolidated Statement of Operations

for nine months ended September 26, 2020

(Dollars in thousands, except per share data)

 

     Historical     Transaction Accounting Adjustments        
     Driven
Brands
(Historical)
    January 1
through

August 2,
2020
U.K.
GAAP
Shine
Holdco
(in GBP)
    U.K. GAAP
to U.S.
GAAP
Adjustments

(in GBP)
          Shine
Holdco1
(in USD)
    Reclassification
Adjustments
    ICWG
Acquisition
          IPO
Transaction
          Pro
Forma
Combined
 

Revenues

                      

Franchise royalties and fees

   $ 94,214     £ —       £ —         $ —       $ —       $ —         $ —         $ 94,214  

Shine Holdco turnover

     —         158,601       —           200,286       (200,286     —           —           —    

Company-operated store sales

     323,339       —         —           —         102,250       —           —           425,589  

Independently-operated store sales

     30,595       —         —           —         94,991       —           —           125,586  

Advertising contributions

     42,429       —         —           —         —         —           —           42,429  

Supply and other revenue

     125,115       —         —           —         3,045       —           —           128,160  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total revenue

     615,692       158,601       —           200,286       —         —           —           815,978  

Operating expenses

     —         —         —           —         —         —           —           —    

Shine Holdco cost of sales

     —         93,587       —           118,168       (118,168     —           —           —    

Company-operated store expenses

     202,333       —         —           —         59,587       (386     N       —           261,534  

Independently-operated store expenses

     17,995       —         —           —         57,036       403       N       —           75,434  

Advertising expenses

     42,429       —         —           —         —         —           —           42,429  

Supply and other expenses

     70,167       —         —           —         1,545       —           —           71,712  

Administrative expenses – excluding profit on disposal

     —         71,221       (32,886     A,C, D, H       48,399       (48,399     —           —           —    

Selling, general, and administrative expenses

     153,162       —         —           —         24,062       4,700       L, K       (6,431     P       175,493  

Acquisition costs

     13,287       —         —           —         —         (6,773     K       —           6,514  

Store opening costs

     1,921       —         —           —         —         —           —           1,921  

Depreciation and amortization

     32,656       —         —           —         24,337       148       I, J, L       —           57,141  

Asset impairment charges

     6,732       —         —           —         —         —           —           6,732  

(Profit) loss on disposal of tangible assets

     —         (22,097     28,269       D       6,724       —         (35,644     L       —           (28,920
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Operating income

     75,010       15,890       4,617         26,995       —         37,552         6,431         145,988  

Interest receivable and similar income

     —         (270     —           (340     340       —           —           —    

Interest payable and similar expense

     —         45,943       (16,472     D, E, F       37,646       (37,646     —           —           —    

Interest expense

     64,973       —         —           —         37,306       (738     L, M       (41,047     Q       60,494  

Loss on debt extinguishment

     673       —         —           —         —         —           —           673  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Income before taxes

     9,364       (29,783     21,089         (10,311     —         38,290         47,478         84,821  

Tax on loss on ordinary activities

     —         1,744       (2     G       2,205       (2,205     —           —           —    

Income tax expense (benefit)

     6,109       —         —           —         2,205       766       O       11,574       R       20,654  

Net income (loss)

   $ 3,255     £ (31,527   £ 21,091       $ (12,516   $ —       $ 37,524       $ 35,904       $ 64,167  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

 

77


Table of Contents
     Historical     Transaction Accounting Adjustments        
     Driven
Brands
(Historical)
    January 1
through

August 2,
2020
U.K.
GAAP
Shine
Holdco
(in GBP)
    U.K. GAAP
to U.S.
GAAP
Adjustments

(in GBP)
          Shine
Holdco1
(in
USD)
    Reclassification
Adjustments
    ICWG
Acquisition
          IPO
Transaction
          Pro Forma
Combined
 

Net income (loss) attributable to
non-controlling interest

   $ (34   £ (42   £ —         $ (53   $ —       $ —         $ —         $ (87
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Loss for the financial year attributable to: Shareholders of Shine Holdco’s parent company

     —       £ (31,485   £
 

21,091
 
 
    $ (12,463     12,463       —           —           —    
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Net income (loss) attributable to Driven Brands Holding, Inc.

   $ 3,289       —         —           —         (12,463   $ 37,524       $ 35,904       $ 64,254  
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Earnings per share:

                      

Basic and diluted

   $ 3,029                       $ 0.49  

Weighted average shares outstanding

                      

Basic and diluted

     1,086                         130,991,282  

1 – The Shine Holdco (in USD) column is equal to the U.K. GAAP Shine Holdco (in GBP) column plus U.K. GAAP to U.S. GAAP Adjustments (in GBP) column translated by using the average monthly exchange rates for the period presented.

 

78


Table of Contents

Unaudited Pro Forma Condensed Consolidated Balance Sheet

as of September 26, 2020

(Dollars in thousands)

 

     Driven Brands
(As Reported)
    Transaction
Accounting
Adjustments –
IPO Transaction
           Pro Forma
Combined
 

Assets

         

Current assets:

         

Cash and cash equivalents

   $ 184,356     $ (59,374     V      $ 124,982  

Accounts and notes receivable, net

     88,291       —            88,291  

Inventory

     42,527       —            42,527  

Prepaid and other assets

     17,078       (4,705     S        12,373  

Income tax receivable

     1,831       —            1,831  

Advertising fund assets, restricted

     32,472       —            32,472