Why Private Equity is So Excited About Multi-Unit Franchisees

The combination of record fundraising, ample unused capital (aka “dry powder”), and a post-pandemic business boom has sparked increased activity from private equity (PE) firms interested in scooping up franchised locations. Here are a few factors behind the trend and some tips on how franchisees can make their companies attractive for acquisition.

What PE Firms Like About Franchisees

Historically, PEs have been interested in doing business with franchisors, but now many are focused on franchisees. Private equity investors like franchisees because of their:

• Proven business concept
• Potential for growth
• Low risk

More specifically, PE investors find multi-unit franchisees more predictable when it comes to a return on their investment because franchisees have proven methods that make them profitable. Fifth Third Bank sums this up nicely, saying, “Private equity seeks to earn a return on the capital it invests. The most common measures are the internal rate of return (IRR) and the multiple of invested capital (MOIC). Therefore, successful franchise businesses can be an attractive investment for a PE firm because franchisees have tested systems that have worked repeatedly, which can make the IRR/MOIC reasonably predictable.”

What PE Firms Look For

Services and Products With Broad Appeal – Services and products must have a broad, universal appeal regardless of geographical setting. PE investors will look to see how original locations are performing and how franchisees are doing in new geographical markets.

Services and Products With Longevity – In a similar vein, PE firms are experienced investors and, therefore, able to sift out services and products with staying power versus those more “flash in the pan” in nature.
Straightforward business model and robust operations/systems – the ability to easily replicate business producers, operations, and systems are paramount to an acquirer’s interest.

Growth Potential – While investors want to see a successful track record, they also need to see room for growth. A PE firm will likely have an exit strategy, so they’re looking for upside.

Low Capital Expenditure – Shared resources and the ability to leverage economies of scale make multi-unit franchisees appealing.

Multi-Unit Franchisees – Multi-unit operators are compelling for PE firms because they assume an operator who opens additional locations is building on success. Most PE firms aren’t interested in small deals; they generally look for franchisees with 50+ units.

The Key Benefits PE Offers Franchisees

Access to Experts – PE firms bring access to business, financial, managerial, and legal experts. This wealth of knowledge can drastically improve operations and efficiency.

Access to Capital – Capital fuels growth, and a well-funded PE firm can support a level of growth not always possible through bootstrapping.

Access to Relationships – Similar to access to experts, PE firms bring access to new relationships and networking opportunities, which will provide value and potential growth avenues.

How Franchisees Can Prepare For PE Acquisition

Robust preparation is essential for franchisees looking to engage with a PE firm. Franchisees should:

Organize Critical Data – Key data includes, but is not limited to, all the reports the franchisee is required to send to the franchisor. For multi-unit franchisees, one aspect of this is lease obligations and financials, which can be easily stored using location-management software such as Leasecake. Additional information includes reporting on managerial style, culture, and potential growth strategies.

Collecting and organizing data will help during the beginning engagement with potential acquirers and subsequent deal stages. It also sets the stage for smoother due diligence. Consequently, utilizing a virtual data room (VDR) is wise.

Develop Marketing Material – After collecting and organizing crucial data, present it in marketing material to help woo potential PE suitors. The presentation should include, at a minimum: business operations, key players, financial summaries, and success stories.

Find the Best Match – The relationship between the PE firm and the franchisee is essentially a partnership; therefore, the franchisee needs to research firms to find the best partner for its journey.

In general, PE investors bring positive growth for franchisees by adding financial value and business expertise to the franchisee’s systems. In order to be an attractive target, however, franchisees must be well-organized and offer a positive history of sound financials with an eye toward future growth.