Private Equity And Your Franchise Brand – Growing Together

Unlocking the potential of your franchise brand through strategic private equity investments.

Entrepreneurs have created amazing franchise companies over the years with proven business models where they have built, expanded, and grown their brands. When bringing on franchisees, the businesses are able to operate in communities regionally, nationally, and even internationally.

With the success from these franchise systems, it has become very attractive for the private equity (PE) industry to get involved. Private equity has seen immense opportunities in franchising especially over the last several years.

Private equity firms usually provide an influx of capital needed to accelerate new and future growth. Today, we are seeing franchises of all stages and sizes being sought after by PE investors. There has been a significant uptick in both small boutique PE firms and larger PE firms getting into and expanding in the franchise industry through acquisitions of franchise brands.

The PE firms are developing new and creative ways to get a piece of the ever-expanding franchise industry. In the past, for a PE firm to invest in a franchise company most of them would require a controlling interest in the franchisor. This is still a majority of PE transactions today in the franchise industry. However, today more firms are willing to take a minority stake of a franchise brand just to be a part of the franchise business.

No matter the stage of the franchise, it might be time to consider private equity. Whether it is providing the capital needed to open new franchises or corporate locations, the expertise provided to grow the brand, the infrastructure to support expansion, or the knowledge to improve performance, the private equity firms add significant value to franchise brands.

Unlike before, PE firms are now even interested in smaller emerging brands. One of the really popular strategies in PE investing today is through platform investments. If this strategy is executed correctly, it is a great way to help brands to accelerate their growth. Through these opportunities, PE firms will fold in the smaller brands into a platform company. The platforms will then leverage several areas of their current infrastructure—operations, technology, accounting, marketing, and franchise support and development— to help bring the franchise concept to the next level.

PE firms are more excited today than ever before to look at emerging brands where they can integrate them into an existing company and add value. Many times, the PE firm will ask the owner to stay on with the company and still lead the growth of the brand. In many of these cases, it will still provide the opportunity for the founder to maintain an equity stake in the company as well.

Depending on the circumstances, the founder and/or the PE firm may decide it is time for the founder to exit the business. When this occurs, the founder usually receives some form of compensation, which includes a “liquidity event” and/or stock in the new entity upon the exit. These structures vary tremendously based on the transaction. Most PE firms will work with the founder to figure out a structure that works for all parties involved.

Make sure to get to know the PE firm you are working with and ensure they have the same or a similar vision and culture for the company that you do. Due diligence should happen on both sides before completing a transaction. It is very important for both parties to make sure the transaction is the right fit for all stakeholders.

The private equity industry and the franchise sector continue to complement each other well and could be a smart move to consider for accelerating growth of your franchise brand. As more and more franchise founders are looking to pursue PE as their next stage of growth, both sides of the industry should be excited and optimistic. There are endless possibilities for expanding and developing businesses when private equity firms and franchise brands team up.

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