Published September 23, 2022
Over the past few years, private equity firms have become increasingly optimistic about franchising and the acquisitions trend that started gaining momentum during the pandemic shows no signs of slowing down. You may know Franchise Business Review has worked with over 1,200 brands since 2005 measuring franchisee feedback. What you may NOT know is we also work with investors doing due diligence on franchise systems before they pull the trigger on the purchase. They want an independent analysis of the strengths and weaknesses of a brand and data to be able to predict future performance.
If you are a private equity investor (or a franchisor in acquisition mode), these are some of the basic questions you should be asking for each brand you’re investing in.
Private Equity Investors Should Be Asking These Questions Before Buying a Franchise Brand
1. Is the product or service easily replicated?
Is it a NEED to have product or service, or is it trendy now, but may not make sense in five years when the next “new thing” pops up? It’s important to understand if the business will work in ANY market. Also consider how reliant it is on maintaining a lot of employees. If it’s a low employee model, that’s a huge plus. Finding great employees is consistently a significant challenge for franchisees and should be part of your decision on how easily this business can be run.
2. Has the concept been proven?
Look at how many locations are up and running, and whether they are all corporate, or have some franchisees open and operating. Running corporate locations is different than getting franchisees to run their locations using the model. The longer franchisees have been in business, the better; it’s more likely they have worked out the kinks in running the business efficiently, and addressed at least some of the initial growing pains.
3. How clean and detailed is the FDD?
We always recommend having an attorney who specializes in franchising help with this very complex document. The FDD can help you uncover how transparent the brand is, and some key financial information, like unit level economics (if they have a detailed Item 19), the ROI from build out costs, and same store growth information.
4. How happy are franchisees?
Are new sales coming from new partners, or existing partners growing as well? If there are multi-unit franchisees, it is one indicator that franchisees are happy enough to open more. Candidates don’t want to be “sold” by the development team. They want data to show the satisfaction of the existing franchisees, or something to back up the sales team claim that they are. Smart franchisors know how to answer this by sharing information collected by third party companies. (If they don’t have it, we can help you get it.) PE firms like to also find out what franchisees intentions are if they are coming up for renewal soon, to get a picture of renewals and potential sales or closures.
5. Is there room for growth?
The last important factor to consider when looking at the strategy is white space. If you’re looking for the brand to grow, but they’re out of territory, you’re limited to rolling out additional products and services to existing franchisees to grow the revenue.
The core work FBR does is measuring franchisee satisfaction and validation. Our goal is to help franchise systems stay (or become) healthy and continue growing, and to prevent investors – whether candidates, PE firms, or franchisors looking to acquire others – from making a bad purchase by giving them all the information they need to know upfront before making a purchase.
If you don’t have the data you need to answer these questions, we can help. I’m happy to share what we ask on our standard satisfaction survey – just reach out any time. We’d also love to hear what other important questions you ask as you investigate investment opportunities, so that we can add to the list and continue to raise the bar in franchising!
6 Things Private Equity Investors Need to Know About Franchising
More private equity firms have turned their focus to potential investments in franchising, and with the impact of Covid-19 it’s likely we will see even more consolidations and purchases in the next year. Here are six things private equity investors need to know before acquiring a franchise brand.