6 Things Private Equity Investors Need to Know About Franchising
2020 Shows Increased Private Equity Investments and Acquisitions in 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.
Last month, LYNX Franchising acquired FRSTeam, and there have been two announcements this week alone: Neighborly Brands has acquired HouseMaster and Radiance Holdings, parent company of SOLA Salon Suites, just acquired The Woodhouse Day Spas.
Due diligence in the franchise industry is similar to any potential business acquisition:
- Understand historical and current financial performance of the brand
- 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
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 takes trust in the leadership and systems 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 their 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:
- Industry benchmarking. Having worked with over 1,100 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 scores above benchmark that 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.
- Confirm valuation of the investment. Franchisee satisfaction data identifies major strengths or weaknesses within the system that may not be otherwise apparent from reading the FDD or talking with the executive team. This could affect long-term growth potential and should be factored into the overall valuation of the deal.
- Identify training opportunities or a need for outsourced skills. Having data from the franchisees allows you to tackle issues they are experiencing in running and growing their businesses. Understanding if 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.
- Third-party data reduces emotion in hard conversations. Presenting how the franchisees perceive their franchisor can be tough when the executive team is surprised at the feedback. Knowing how franchisees feel collectively can help align corporate employees and franchisees, and focus on the areas that will move the brand forward together.
“Building a relationship and culture of trust will help get everyone rowing in the same direction.”
- Establishing a respectful and productive relationship from the start. As a newcomer to the brand (whether you become the new owner, or a passive/active investor), it’s a great way to start the relationship with a KPI around asking franchisees to tell you how you are doing, and to use that feedback in how you look to strengthen and grow the brand. Building a relationship and culture of trust will help get everyone rowing in the same direction. Setting expectations of what’s to come from the data, then delivering on that, and then asking again — this is the continuous feedback loop of a strong culture with everyone invested in feedback.
- Future growth of the brand. We are officially in a recession, which means franchising will be a great opportunity for all those searching for the next move. Candidates are more educated in their search than ever before, and want content to help in their decision-making. Sharing franchisee satisfaction data shows transparency, and sets realistic expectations for those joining the system.
If you are looking to invest in a franchise system, let’s talk more about our confidential process to gather feedback from franchisees and/or corporate employees. Connect with us to learn more about how we can facilitate your franchise due diligence process, lower your investment risk, and help move your transaction forward.