What Strategic Buyers and Private Equity Firms Value Most When Looking at Your Franchise
Even if your franchise is in its nascent stages, it is not too early to organize your business for a strategic buy-out or for an infusion of private equity in the future. This is not to say that a budding franchise would be able to enter into such an agreement before proving itself; rather, much of what investors look for can be cultivated early on in the business and are generally reflective of a successful franchise, with or with investors.
Predictably, investors look to the profitability and the scalability of a business and prefer stable corporate growth followed by deliberate franchising choices. Businesses with one corporate location seeking to franchise as quickly as possible are perceived as an investment risk, as well as a risk to the entire franchising industry. Franchising for the sole sake of raking in franchise fees not only reflects financial instability, but may also negatively affect the quality of the brand in the long-run.Investors look for pattern recognition and proof of concept, which is better demonstrated over time by perfecting the concept and its method of replication at the corporate level, and then expanding through franchising with trusted franchisees.In other words, having a large number of franchised units is only impressive if they are each stable, profitable, and can provide investors with a recurring revenue stream.
Management’s knowledge of its own unit economics is very important to investors, particularly to private equity firms. Unlike strategic buyers, private equity investments result in a kind of partnership rather than a buy-out. Therefore, private equity firms are most likely to examine management’s current role and whether it is capable of continuing to guide the business to maximum profitability down the line. This kind of knowledge can be developed early on by gathering uniform financial data from all franchised and affiliate locations, analyzing it for areas of improvement, and deliberately growing the business with this data in mind.
Private equity investors generally seek to keep the original management because of the institutional knowledge that they bring to the table, rather than undergo a change of management that could also disturb the relationship between a franchisor and its franchisees. Investors also look favorably on franchises with solid succession plans that can carry the franchise forward when members of the current management retire or otherwise leave the business.
Regardless of whether a franchise is ready for and/or wants to work with private equity firms or strategic buyers, a stable, profitable franchise operated by knowledgeable management is something all businesses should strive for.
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