6 Things Private Equity Investors Need to Know About Franchising

The Importance of Franchisee Satisfaction Data in Due Diligence and Post-Acquisition Growth

Driven by the attractive growth prospects and scalability of franchise models, private equity firms are increasingly focused on potential investments in the franchising sector. Post-Covid we saw transactions pick up, and recent transactions indicate this won’t slow down soon: 

• Empower Brands was formed in 2022 with private equity firm MidOcean Partners. They currently have 11 brands under the umbrella.
• In April 2024 Roark Capital completed it’s purchase of Subway.
• Blackstone purchased two big brands, first Tropical Smoothie Cafe in April 2024, and most recently Jersey Mike’s in November 2024.
• In 2021 KKR, a global investment firm, acquired Neighborly from Harvest Partners. This transaction underscores the interest of private equity in the home services sector and Neighborly’s strong position with its diverse portfolio of 28 brands and over 4,800 franchises.

The importance of due diligence in the franchise industry is similar to any potential business acquisition:

• Understand historical and current financial performance of the brand
• Evaluate growth potential of the brand and the market sector
• Review the business operations and systems for scalability
• Benchmark business performance to others in the industry

The Link Between Franchisee Satisfaction and Franchise Performance

One additional critical step in franchising is to understand the franchisee/franchisor relationship. When you purchase a company, you can mandate changes and new processes to employees. With franchise systems, you have to win over the franchisees and that can be a much slower process without a strong relationship. That requires trust in leadership and systems from franchisees that their best interests are being considered. And like most people, franchisees want to feel heard and involved. They have experience “in the trenches” and want that experience valued.

We believe there are two things that help predict the stability and success of a franchise system: unit-level economics and franchisee/franchisor relationships. Franchise Business Review’s research clearly shows the link between satisfaction and franchise performance, but franchisee satisfaction data can be used in potential and post-acquisition scenarios:

1. Industry Benchmarking: Having worked with over 1,300 brands, we have a lot of data and insights to provide. Benchmarking a brand against hundreds of other franchise companies (and even a more specific segment like senior care or QSR), provides context as you dig in. Where are the brand’s biggest operational challenges? This becomes the top priority for the team to address. Are there any scores above benchmark that can become conversations to help drive development? Instead of guessing the strengths and weaknesses, we provide a detailed look at franchisees’ perceptions, and actionable insights to move the brand forward.

 2. Confirm Valuation of the Investment: Franchisee satisfaction data identifies major strengths or weaknesses within the system that may not be apparent from the Franchise Disclosure Document (FDD) or executive team discussions. This affects long-term growth potential and should be factored into the overall valuation of the deal. 

3. Identify Training Opportunities or Need for Outsourced Skills: Having data from the franchisees allows you to tackle issues they are experiencing in running and growing their businesses.  You can then evaluate whether your internal corporate team has the bandwidth or knowledge to take it on, or if there is a need for outsourced expertise to help you get the issue addressed quickly and effectively.

4. Reduce Emotion in Hard Conversations: Presenting third-party data on how franchisees perceive their franchisor can help align corporate employees and franchisees, and focus on areas that will move the brand forward.

5. Establish a Respectful and Productive Relationship: As a newcomer to the brand (whether you become the new owner, or a passive/active investor), starting the relationship with a key performance indicator (KPI) around franchisee satisfaction helps build trust and a culture of continuous improvement. Setting expectations for gathering franchisee feedback, what’s to come from the data, delivering on that, and then asking again is a feedback loop that ensures everyone is invested in the brand’s growth.

6. Future Growth of the Brand: Sharing franchisee satisfaction data demonstrates transparency and sets realistic expectations for new franchisees. This is particularly important in a competitive market where candidates are more educated and discerning in their search for franchise opportunities.

By incorporating franchisee satisfaction data into their due diligence and post-acquisition strategies, private equity firms can make more informed investment decisions, mitigate risks, and drive the growth and expansion of the acquired brands. If you are looking to invest in a franchise system, let’s talk about our confidential process to gather feedback from franchisees and/or corporate employees.This approach not only enhances the value of the investment but also fosters a strong, collaborative relationship between the franchisor and franchisees, which is essential for long-term success.

Related Resource:

Big Money and Franchising: An Interview with Alicia Miller

Alicia Miller, founder of Emergent Growth Advisors and author of Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity, discusses the misconceptions about private equity, the impact of PE investment on franchise brands, and how founders and franchisees alike can effectively leverage private capital to take their businesses to the next level of performance.

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