CFA Guidebook Series: Sponsored by Diversified Royalty Corp.

CFA Guidebook Series

BEST PRACTICES FOR MAXIMIZING COMPANY VALUE Sponsored by:

FRANCHISOR FOUNDERS:

GET LIQUIDITY. KEE

It took huge effort and a long time to build your franchisor the riskiest phase is over - keep your equity and reap the e

Learn about all of your liquidity options before starting a tr transaction provides:

GET THE MOST OUT OF YOUR FRANCHISOR BUSINESS Diversified Royalty Corp. is a publicly traded company engaged in the franchisors in North America.

EP CONTROL.

r to scale. Now that you have achieved profitability - and economic rewards of continuing to scale the business.

ransaction process. Diversified Royalty Corp's royalty

business of acquiring top-line royalties from well-managed

Published by the Canadian Franchise Association

CFA Board of Directors BOARD CHAIR Ryan Picklyk*, A&W Food Services of Canada PRESIDENT & CEO Sherry McNeil*, Canadian Franchise Association 1ST VICE CHAIR Todd Wylie*, Master Mechanic

ABOUT THE CANADIAN FRANCHISE ASSOCIATION (CFA) The Canadian Franchise Association (CFA) helps everyday Canadians realize the dream of building their own business through the power of franchising. The CFA advocates on issues that impact this dream on behalf of more than 600 corporate members and over 40,000 franchisees from many of Canada’s bestknown and emerging franchise brands. Beyond its role as the voice of the franchise industry, The CFA strengthens and develops franchising by delivering best-practice education and creating rewarding connections between Canadians and the opportunities in franchising. Canadian franchises contribute over $133 billion per year to the Canadian economy and create jobs for almost two million Canadians. Learn more at www.cfa.ca or FranchiseCanada.online.

CANADIAN FRANCHISE ASSOCIATION 5399 Eglinton Avenue West, Suite 116 Toronto, Ontario M9C 5K6 Ph: 416-695-2896 or 800-665-4232 F: 416-695-1950 W: www.cfa.ca / E: info@cfa.ca © 2026, Canadian Franchise Association (CFA).

All rights reserved. Contents of this publication may not be reproduced either wholly or in part, without the consent of the CFA. Legal Disclaimer: The opinions or viewpoints expressed herein do not necessarily reflect those of the Canadian Franchise Association (CFA). Where materials and content were prepared by persons and/ or entities other than the CFA, the said other persons and/or entities are solely responsible for their content.

The information provided herein is intended only as general information that may or may not reflect the most current developments. The mention of particular companies or individuals does not represent an endorsement by the CFA. Information on legal matters should not be construed as legal advice. Although professionals may prepare these materials or be quoted in them, this information should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.

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TREASURER Lyn Little*, BDO Canada LLP SECRETARY & GENERAL COUNSEL Darrell Jarvis*, Fasken Martineau DuMoulin LLP PAST CHAIR David Druker*, The UPS Store Canada CHAIR, LEGAL & LEGISLATIVE COMMITTEE Andraya Frith*, Osler, Hoskin & Harcourt LLP CHAIR, FRANCHISE SUPPORT SERVICES Paul daSilva*, RBC DIRECTORS Andrew Arminen, Metal Supermarkets Jon Domanko, Restaurant Brands International Chuck Farrell, Pizza Pizza Dixie Ho, Mr. Lube + Tires Arno Krug Jr., CEFA Early Learning Scott McCannell, Foodtastic Ken Otto**, Redberry Restaurants Nathan Oxford, Jani-King Canada John Prittie, Koala Insulation Angela Rollins**, Great Clips Fiona Styant, CFE, MOLLY MAID Canada Cailin White, Boston Pizza Thomas Wong, CFE, Kevito Group *Executive Committee member **Franchisee Representative

CFA Guidebook Series: Best Practices for Maximizing Company Value

TABLE OF CONTENTS Liquidity Options for Founders of Franchisors ����������������������������������������������������������������� 6 Royalty Streams for Canadian Franchisors ����������������������������������������������������������������������� 8 An Alternative to Private Equity ��������������������������������������������������������������������������������������������� 11

The CFA wishes to acknowledge and thank these National Sponsors for their support throughout the year.

Find out more about these companies at www.cfa.ca/sponsorship

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LIQUIDITY OPTIONS FOR FOUNDERS OF FRANCHISORS

BY GREG GUTMANIS, PRESIDENT & CFO, DIVERSIFIED ROYALTY CORP

A

s a franchisor, you’ve grown your business to scale. Your business is profitable, you believe in its continued growth prospects, and you are looking to take some money off the table. You’ve read the headlines of other franchisors selling to private equity—what should you do?

Traditionally, the liquidity options to consider are limited to the following: debt recapitalization, outright sale, or private equity transaction. There is another option to consider: royalty transaction.

Debt Recapitalization A franchisor borrows money from a bank and pays a dividend to the owners. This approach provides modest liquidity (only roughly four times earnings before interest, taxes, depreciation, and amortization, or EBITDA), and the franchisor retains 100% control of the business. The debt must be paid back over time. This is a good solution for owners with modest liquidity needs and a desire to retain 100 per cent ownership of the business. However, recent interest rate movements have increased the cost of this option.

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This option has no impact on the business from an operational perspective, or on franchisee relations.

Outright Sale An outright sale provides the maximum liquidity to a franchisor owner. Buyers often pay a premium multiple. The “big” offset is that you have sold 100 per cent of the ownership, control, and future growth of the business. This solution is optimal for the owner of a franchisor that no longer wants anything to do with the business (as an operator or owner).

An outright sale has maximum operational impact and negatively impacts franchisee relations.

Private Equity Transaction Private equity transactions have created a lot of headlines since the early 2000s. Private equity investors often pay attractive EBITDA multiples which creates significant liquidity for business owners. Private equity investors want control and often own up to 90 per centof the business. By selling so much of the

CFA Guidebook Series: Best Practices for Maximizing Company Value

Liquidity Options for Founders of Franchisors

business, the owner has sold the vast majority of the future growth.

Private equity ownership also has maximum operational impact and creates stress in the franchisee community as the long-term relationship has changed. Private equity often seeks to make immediate changes to the business and focusses on ramping up new store openings to best position the business for resale in three to five years.

Royalty Transaction A royalty transaction allows a franchise owner to realize the best of both worlds: the liquidity of a private equity transaction and the control of a debt recapitalization.

A royalty transaction means you retain 100 per cent ownership, control, and future value from new store growth.

Each year, as new locations are added, the owner gets paid for new store growth based on a multiple of incremental cash flow created.

This option ensures no impact on the business from an operational perspective or franchisee relations.

Sponsored by:

Analysis A royalty transaction is possible because a high-quality franchisor is operating with a superior business model. The cash flow from the existing store base provides a stable cash flow stream, and as new locations are added, the profitability of the business grows predictably.

The combination of a large upfront liquidity event with annual liquidity based on new store growth results in a far superior outcome to selling equity.

If you are seeking a liquidity event and believe in the future growth prospects of your business, the royalty option must be considered.

ABOUT AUTHOR Greg Gutmanis is President & CFO of Diversified Royalty Corp., and is responsible for royalty transaction execution and due diligence, as well as overall financial reporting.

www.diversifiedroyaltycorp.com

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ROYALTY STREAMS FOR CANADIAN FRANCHISORS: UNLOCKING GROWTH WITH PREDICTABLE, TOP-LINE REVENUE

BY GREG GUTMANIS, PRESIDENT & CFO, DIVERSIFIED ROYALTY CORP

I

n today’s business landscape, Canadian franchisors face a common strategic dilemma: how to achieve a liquidity event without surrendering control or taking on onerous debt. Traditional financing— whether private equity, bank loans, or outright sale—often forces owners to trade ownership, dilute equity, or assume significant financial risk.

Enter royalty streams—an increasingly powerful alternative that monetizes predictable future revenues while letting founders retain ownership and focus on growth. Companies like Diversified Royalty Corp. (TSX: DIV) are demonstrating how these structures benefit both franchisors and investors by aligning interests around sustainable, recurring revenue.

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What Is a Royalty Stream—Especially for Franchisors?

At its core, a royalty stream is an ongoing payment based on top-line revenue—usually a fixed percentage of gross system sales— rather than profits. For franchisors, this means converting part of future cash flows into today’s capital. Unlike debt, there’s no fixed repayment schedule; unlike private equity, there’s no dilution of ownership or control.

From a franchisor’s perspective, this is especially valuable because franchise systems typically generate predictable and growing revenues as new units open and existing ones scale. Royalties allow a business to monetize that stability without sacrificing future upside.

CFA Guidebook Series: Best Practices for Maximizing Company Value

Royalty Streams for Canadian Franchisors Royalty streams for franchisors can come in different forms: • Top-line revenue royalties: percentage of system-wide sales.

• Fixed growth royalties: contractual annual payment that grows by a fixed amount each year.

Each structure has pros and cons—from risk profiles to cash-flow predictability—but all share a core benefit: upfront capital without forcing loss of control.

Why Canadian Franchisors Are Turning to Royalty Deals Traditional financing options aren’t always ideal for franchisors: • Bank debt can be restrictive and tied to tight covenants; in addition, it is limited in amount available • Private equity often means giving up significant ownership or operational control • Outright sale means foregoing all future growth For many owners, what’s needed is liquidity now without sacrificing future economic participation. Royalty deals make that possible by tying an investor’s returns to the top line, while allowing the franchisor to retain control and benefit from long-term growth.

This aligns well with franchisors who: • Have a growing network • Generate stable system-wide fees • Want to expand without ceding strategic direction Diversified Royalty Corp: A Canadian Example in Action Diversified Royalty Corp (DIV) is a Vancouver-based, publicly traded royalty company that acquires top-line royalties from well-managed multi-location businesses and franchisors in North America. Its objective is to build a diversified portfolio of predictable royalty streams and pay stable dividends to shareholders.

Sponsored by:

DIV’s royalty partners include popular Canadian brands such as: • Mr. Lube + Tires — Canada’s largest quick service auto maintenance brand • Oxford Learning Centres — Leading supplemental education franchise • Mr. Mikes — Casual dining with strong regional presence • Nurse Next Door — Growing home care franchise • Sutton — Residential real estate brokerage franchisor • BarBurrito — Canada’s largest quickservice Mexican food chain These businesses illustrate how royalties can be generated across very different sectors—from food to services to education—as long as the revenue base is recurring and scalable.

How a Franchise Royalty Transaction Works Let’s break down the mechanics of how a royalty transactions work, and why franchisors find this appealing.

1. Upfront Liquidity Without Equity Loss A franchisor with a strong brand and track record can negotiate a royalty sale with a partner like DIV to receive an immediate cash payment in exchange for future royalty streams. This provides capital for liquidity today—without giving up equity or strategic control.

For example, Mr. Lube—after achieving substantial scale—opted for a royalty transaction with DIV instead of a full sale, receiving cash comparable to an outright sale but retaining 100 per cent equity ownership.

2. Ongoing Growth Benefits Both Parties The magic of a royalty structure is that as the franchise system grows, each new franchised location can be vended into the royalty pool for additional consideration. This creates a strong incentive for the franchisor to grow the network. www.diversifiedroyaltycorp.com

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Royalty Streams for Canadian Franchisors This structure stands in contrast to most debt or private equity deals, where value accrues primarily at the point of sale rather than throughout ongoing operations.

3. Predictable, Stable Cash Flows For franchisors, the royalty payment is clear and predictable.

For investors, predictable top-line-based royalties help ensure dividends and cash returns are backed by real economic activity. This shared alignment encourages longterm thinking on both sides.

In DIV’s case, its royalty portfolio has expanded across multiple brands and industries, providing diversified revenue that supports regular dividends to shareholders.

Franchisors preparing for a royalty transaction should work with experienced financial advisors to model outcomes and ensure terms align with long-term strategic plans.

Conclusion For Canadian franchisors who have built successful multi-location systems, royalty streams represent a compelling alternative to debt or equity financing. By leveraging predictable future revenue, these structures unlock capital without sacrificing control, align incentives between franchisors and investors, and support ongoing growth and expansion.

Diversified Royalty Corp’s model illustrates how top-line royalties can benefit both franchise brands and public investors. Its diversified portfolio of Canadian and North American franchisors shows that royalty streams are not just niche arrangements— they’re a sophisticated tool in the evolving landscape of business finance. Whether you’re a franchisor thinking about liquidity or an investor exploring royalty investments, understanding these mechanisms opens the door to strategic capital solutions that foster long-term success.

Why Royalty Streams Matter for Canadian Franchisors Maintain Strategic Control Franchisors often build brands over decades.

Royalty streams allow founders and leadership teams to keep strategic direction while monetizing the business.

Access Capital Without Traditional Debt Royalty deals are not loans. There’s no principal to repay or covenants to meet. Instead, payments flex with revenue, payments with performance.

Align Interests Across Ecosystem Because payments are tied to system-wide success, royalty partners and franchisors are incentivized to grow the network together.

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CFA Guidebook Series: Best Practices for Maximizing Company Value

AN ALTERNATIVE TO PRIVATE EQUITY

A royalty transaction is a liquidity option available to owners of high-quality franchises. It provides the liquidity of an outright sale while allowing franchisor owners to retain 100% ownership

BY GREG GUTMANIS, PRESIDENT & CFO, DIVERSIFIED ROYALTY CORP

A

private equity transaction, an outright sale and a debt recapitalization have been the three standard options available to franchisor owners seeking full/ partial liquidity. But there is a fourth alternative: a royalty transaction. Franchisor owners seeking liquidity should evaluate all four alternatives to determine which one optimizes their personal objectives.

Private Equity Transaction A private equity transaction provides significant liquidity and often values franchisors at attractive multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”). If needed, private equity firms can sometimes add value by recruiting high quality board members to provide industry expertise and relationships. However, private equity firms typically require control (50 per cent ownership or more), own preferred shares, lever up the business with debt, and require an outright sale in three to seven years. By completing a private equity transaction, the franchisor owner is selling half or Sponsored by:

more of the future growth of the business in exchange for a significant liquidity event.

A private equity transaction is optimal for a franchisor owners needing help running/growing their businesses or for early stage franchisors needing capital and industry expertise to scale their businesses to profitability.

Outright Sale An outright sale provides maximum liquidity to franchisor owners. Private equity firms and strategic buyers often model synergies (cost savings) to enable paying a premium multiple of EBITDA. By completing an outright sale, the franchisor owner is selling 100 per cent of the future growth of the business for a significant liquidity event.

An outright sale is optimal for franchisor owners of a mature businesses with limited growth prospects seeking a full exit.

Debt Recapitalization A debt recapitalization (levering up the balance sheet and paying out the proceeds www.diversifiedroyaltycorp.com

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An Alternative to Private Equity to the franchisor owner as a dividend) provides the least amount of liquidity (up to four times EBITDA) but allows owners of franchisors to retain 100 per cent control of their business.

A debt recapitalization is optimal for franchisor owners with modest liquidity needs and a desire to retain 100 per cent ownership of their business.

Royalty Transaction There’s an old expression: “You can’t have your cake and eat it too.” A private equity/ outright sale transaction allows the franchisor owner to “eat their cake” (i.e. substantial liquidity) but doesn’t allow them to “have it too” as their ownership is less than 50 per cent. A debt recapitalization only provides a small slice of cake (limited liquidity). A royalty transaction allows a franchisor owners to “eat their cake” (significant liquidity event) and “have it too” (retain 100 per cent ownership of their business).

A royalty transaction is optimal for a franchisor owner that wants a substantial liquidity event, doesn’t want equity partners (especially if it means selling control) and strongly believes in the continued new store growth prospects for the business.

How Does a Royalty Transaction Work?

Imagine ABC Franchisor. This brand has 200 locations, $200 million in system sales, $10 million EBITDA, an excellent track record of same-store-sales growth, and continued prospects for new store growth.

Initial Royalty Transaction: approximately 90% of ABC’s current EBITDA would be converted to a royalty at an outright sale multiple (9-10 times) multiple for estimated proceeds of $85 million. Thereafter, ABC would pay a 4.5 per cent royalty on the sales of the existing 200 locations.

Annual Royalty Transactions: ABC has the right to sell a 4.5 per cent royalty on net new locations opened each year thereafter.

If ABC Franchisor opens 20 new locations, it has the right to sell a 4.5 per cent royalty

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on those net new stores for approximately $9 million (4.5 per cent royalty x 20 stores x $1 million average sales per new store x 10 times multiple).

Incremental Royalty Transactions: ABC has the right to sell incremental 1 per cent royalties as it becomes more profitable through continued new store growth. An incremental 1 per cent royalty could be worth $36 million when ABC gets to 400 stores (1 per cent incremental royalty x $400 million in system sales x 9 times multiple).

Who Can Do a Royalty Transaction?

A royalty transaction seems almost too good to be true, offering outright sale-like liquidity, ongoing monetization of new stores, and the retention of 100 per cent equity ownership. The key element of a successful royalty transaction is the quality of the franchisor: franchise systems that are right for royalty transactions are multi-location business with strong store-level economics, a track record of new store- and same-store-sales growth, strong new store growth opportunities, and that are market leaders in their category, profitable, with a long operating history and experienced management team. Franchisors with these characteristics are royaltyable— they are established businesses with solid franchisees and continued growth prospects. These franchisor owners are able to realize a significant liquidity event while retaining 100 per cent ownership—they can have their cake and eat it too!

Owner Objectives Determine Optimal Liquidity Event Ultimately, a franchisor owner seeking a significant liquidity event should base their decision on their personal and business objectives. A private equity transaction, an outright sale, a debt recapitalization and a royalty transaction each satisfy different objectives.

Franchisor owners that are royaltyable should explore a royalty transaction if they are considering a significant liquidity event.

CFA Guidebook Series: Best Practices for Maximizing Company Value

ABOUT THE CFA GUIDEBOOK SERIES The Canadian Franchise Association (CFA) has been advancing and supporting the franchise community since 1967, and acts as the voice of the franchise industry across Canada.

CFA Guidebooks are a resource to help readers dive deep into a franchising related topic, drawing from the expertise of franchisors, franchise support services / suppliers, and industry experts.

Find more entries in the CFA Guidebook series at www.cfa.ca/franchisecanada/fcguidebooks

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