FranchiseChat: What Private Equity/Franchising Don't Get About Each Other ...

FranchiseChat: What Private Equity/Franchising Don't Get About Each Other ...

1. Thinking of Selling Your Franchise to a Private Equity Firm? Here Are 9 Ways to Build a Valuable Reputation

FranchiseChat: What Private Equity/Franchising Don't Get About Each Other


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Through this constant evaluation and weeding-out process, each PE firm active in franchising ends up watching a subset of opportunities that look interesting.

 

They still keep tabs on the remaining field for valuation data, competitive activities, trends and so on. Some also keep an eye on emerging brands.

 

There are a few firms that specifically target emerging brands. But most prefer to wait until a concept is more proven and profitable before investing — or their required check size only permits larger acquisitions.

 

This entire exercise can be outsourced.

 

Data can be inexpensively and automatically collected and curated. So, it costs the private equity firm very little effort to stay on top of industry trends and your activities.

 

Feel like you're being watched? You are.

 

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2. How Emerging Franchises Can Thrive in a Crowded Market


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According to FRANdata, an average of 250 new franchise brands have launched every year in the U.S. since 2001.

 

That's as many as 5,250 brands launched over the last 21 years. Yet in 2022, FRANdata counted only 4,000 total active franchises — up from 3,000 in 2010, which was flat also at 3,000 back in 1990.

 

So, where did all those emerging brands go?

 

The fact that several thousand brands stopped actively franchising doesn't mean those companies failed or closed down.

 

Some switched back to a corporate model, were acquired and re-flagged by competitors, or stopped adding new franchise units.

 

Their franchising efforts went from "active" to "inactive" while the business entity itself carried on.

 

And yes, some emerging franchise brands also failed. Franchisees who thought they were joining something destined to become bigger were sorely disappointed.

 

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3. Meet our Expert on Private Equity: Alicia Miller, Catalyst Insight Group


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For Franchisors:

 

We help brands create sustainable growth and drive maximum value for both brand stakeholders and franchisees.

 

With deep experience and a network of expert development, financial, real estate, legal, marketing, technology and other growth partners, Catalyst Insight Group acts as an extended part of a brand's leadership team.

 

For Franchisees:

 

Catalyst Insight Group is a due diligence partner to identify risk and develop a post-acquisition plan to maximize ROI. 

 

Our private equity clients leverage our due diligence expertise to uncover the true value potential within brands together with strategic recommendations to extract maximum upside from those investments.

 

We also create breakout strategies for existing portfolio investments that have stalled or failed to grow to get those brands back on track, and thus create more lucrative exit outcomes. 

 

Lastly, with our industry knowledge, we advise clients on timing -- when to exit -- as markets are constantly changing. 

 

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4. Higher Acquisition Prices Bring More Growth Pressure to Franchise Sector


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High brand-level acquisition prices increase pressure to open every franchise unit sold. PE may add partners such as construction firms or real estate brokers or incentives to ensure this happens.

 

This will heighten competition for the best sites.

 

Leasing and construction costs are already high, meaning that new franchisees’ business cases will be under significant pressure.

 

Look for every opportunity to bring franchisee start-up costs down and improve their profitability ramp-up to offset this.

 

If you’re a founder planning to sell, know that PE will crawl through your development funnel with an even bigger a microscope to verify viability (or will hire someone like me to do it).

 

They’re too smart to pay extra because you stuffed the funnel with unrealistic development agreements, so don’t do it.

 

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5. How Private Equity Operators Are Changing Franchising


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PE is jumping into significant deals with established brands that were quick to adapt their business model to changed consumer behavior—both by buying existing units and infusing remodeling capital, and by acquiring the rights for new units.

 

Perhaps more surprisingly, PE is also venturing into the emerging brand operator market, which is largely a new phenomenon.

 

Finally, the pandemic forced some reevaluation of multi-unit operator diversification strategies.

 

A QSR franchisee that bought into a fitness brand was often influenced by diversification factors.

 

Now we have learned that much of retail is influenced by the same macroeconomic factors.

 

This has led to changes in brand interest by multi-unit operators and where they go, and PE has been following, especially in service sectors where PE was rarely seen in the past. And all this isn’t just happening in the domestic market.

 

U.S.-based PE has also sought operator investments (mostly through master franchisee opportunities) with international franchisees of U.S. brands.

 

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Alicia Miller, NACD.DC, CMAA, CFE writing on private equity and franchising is one of the more informative behind the scenes player. A true insider.

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