How Franchise Owners Are Unlocking Big Money in the Era of Private Equity

In this ongoing series, we are sharing advice, tips and insights from real entrepreneurs who are retired location doing business conflict connected a regular basis. (Answers person been edited and condensed for clarity.)

Please springiness america nan elevator transportation of your business.
My sanction is Alicia Miller. I'm nan laminitis and managing head of Emergent Growth Advisors and writer Big Money successful Franchising: Scaling Your Enterprise successful nan Era of Private Equity. We thief franchise entrepreneurs maximize their endeavor value, build pinch their goals successful mind, and find nan correct superior partners. We besides counsel backstage equity firms, family offices, and independent sponsors that are investing successful nan franchise sector.

What inspired you to create this business?
Franchising coming is not a level playing field! Everyone putting their money into a franchise business now aliases launching a caller franchise conception needs to understand that.

The "aha moment" for maine was talking to a franchise laminitis — a really smart feline pinch a bully business. But he was utterly confused and had bad accusation astir nan private equity landscape. He besides didn't understand why he was getting lowball offers erstwhile he tried to bring PE successful to accelerate his business. I realized that PE is very misunderstood, putting franchise entrepreneurs astatine a profound disadvantage. No 1 was talking astir this. Tools didn't beryllium to thief entrepreneurs get their arms astir this PE move that has truthful fundamentally changed franchising. I knew I was successful a position to supply clarity and actionable insights.

What problem does your business and your book solve?
The PE assemblage has wrapped itself successful mystique and finance lingo that makes it look unapproachable and unknowable. Not true! PE has a clear playbook. Their investing activities are predictable, particularly successful franchising.

Related: How to Franchise a Business successful 7 Steps

Everyone has a unsocial superpower. Mine is distilling complexity into a clear crippled scheme to succeed. I've spent my full profession focused connected go-to-market strategy. I realized that I could amended and empower founders, franchisees, and moreover investors themselves successful a caller way.

I decided to "reverse engineer" nan astir valuable franchises to observe really they sewage location – from nan first founding, maturation ramp, mistakes on nan way, to nan first backstage equity transaction, and consequent trades aft that. Then I documented what PE wants, and what they're consenting to salary nan astir for.

I studied hundreds of PE transactions, starting from nan first introduction of backstage equity into franchising during nan 1990s until today. I looked astatine transactions and nan histories of nan 700+ brands pinch PE history and nan 400+ PE firms who person invested successful franchising truthful acold to find nan communal links. I interviewed M&A experts and master investors. I said to founders and franchisees who person been done one, aliases moreover several, equity waste events, arsenic good arsenic attorneys, CPAs, and bankers who counsel connected transactions.

All of this accusation is truthful important now that PE dominates franchising. But nary 1 had gathered it each together to show a cogent story. No 1 created a toolkit to thief founders and franchisees create amended outcomes for themselves. As a PE advisor, investor successful franchise businesses myself, and arsenic a maturation advisor I was successful a unsocial position to distill this complexity into a playbook and methodology to thief my clients.

What should entrepreneurs see regarding description done franchising?
Franchising is truthful overmuch much competitory today! Especially nan hunt for great franchisee talent to build your system. You request to motorboat very good capitalized. It will return $2.5M to $3M of finance to turn your strategy to nan constituent wherever royalties collected from franchisees salary each nan bills. Too galore young brands motorboat undercapitalized. Then they waste a bunch of licenses – often earlier they've really proven retired nan conception – and find they can't support franchisees. Literally thousands – publication that again thousands – of concepts onshore here!

Franchising is simply a superb description model. But beryllium smart astir your introduction plan. Build astatine slightest a fewer firm locations first arsenic proof of concept and to create rate flow. Make judge everything astir your operating exemplary is replicable and teachable. Each portion should make charismatic profits. Then, guarantee you person capable superior to motorboat nan franchise effort. Use utmost be aware erstwhile letting successful your first franchisees. Really deliberation astir what type of operators tin beryllium successful successful your model. Only fto successful franchisees who fresh that profile. Once each nan first signals look good, past and only then, measurement connected nan state and prosecute much fierce description .

Related: 2024 Top New & Emerging Franchises Ranking

Keep successful mind that outsourced income organizations and brokers now thrust an estimated 40 percent of each caller licence income successful nan US. If you waste done these channels, committee will eat up your franchise fees. If you don't waste done these channels, your brands must really guidelines retired to pull integrated traffic.

What do backstage equity investors successful franchising get wrong?
I expected to find retired that over-leverage was a immense problem erstwhile PE invests successful franchise businesses. Turns out, it's not. In fact, connected 1 extremity of nan spectrum — emerging marque acquisitions are often all-cash transactions. Debt isn't a facet until overmuch greater standard is achieved. For larger systems, galore now usage full business securitization, indebtedness backed by franchise royalties and levels are comparatively modest. PE has learned to mostly debar excessive leverage successful franchise businesses. Studies show location person been fewer franchisor-level bankruptcies.

These are smart people. PE has a clear investing instruction and charismatic financial incentives to get it right. And franchising is simply a straightforward business model. If franchisees are satisfied and profitable, nan strategy continues to grow, and caller franchisees want to invest. It's simple! Most of nan examples of PE missteps successful franchising are owed to nan sponsor losing show of this basal occurrence formula. They don't nurture relationships pinch franchisees, they return their oculus connected unit-level profitability, they backmost nan incorrect guidance team, they return retired excessively galore benefits for themselves and don't reinvest capable successful nan business, and truthful on. There must beryllium equilibrium successful nan franchisor-franchisee relationship.

Thankfully, we now person galore PE firms progressive successful nan assemblage pinch beardown franchising experience. They understand nan occurrence look and execute well.

I interest much astir caller PE sponsors entering today. Hopefully, they analyse capable to study from nan missteps of others. But now and past I spot sponsors and their guidance teams doing things that destruct franchisee spot and enthusiasm for growth. Then you get a marque stall out. Once stalled, it usually takes a herculean effort and further finance to move things astir and person franchisees to judge again.

What should prospective franchisees deliberation about?
Now that nan scenery has changed, you must put backstage equity connected your radar. Is your marque presently owned by PE? Investigate and find retired whether they've been a bully sponsor. What happened to nan different franchise businesses they've owned? Talk to galore franchisees. Do they for illustration nan sponsor? Has portion profitability improved? Is guidance investing successful nan business?

Related: The 10 Hottest Trends successful Franchising

If it's a bully business it will pull buy-out offers. That guidance squad you fell successful emotion pinch could exit to PE owners during your licence term. How do you consciousness astir that? Be judge nan conception itself is coagulated because nan decision-makers whitethorn change.

If it doesn't pull PE offers, that's besides a information constituent to consider. Why doesn't PE find nan business attractive? You request to inquire franchisees and web successful nan manufacture to get these answers. But it's worthy it truthful you don't put successful a dud concept. A fewer firms person grown to beryllium rather ample without PE. Most launched agelong earlier PE was a factor. But coming it's very uncommon to scope meaningful standard without help. Of nan apical 500 brands by strategy revenue, astir person a history of PE finance astatine nan marque aliases portion level aliases both.

PE is now besides a purchaser of units wrong ample systems. Is PE a viable purchaser erstwhile you're fresh to retire? If location is nary PE activity successful nan system, this intends your only purchaser will beryllium existing aliases incoming franchisees, which will effect exit prices. Something to deliberation about.

Independent franchisee associations are besides taking announcement of each this PE activity! They are organizing earlier and becoming overmuch much proactive to guarantee franchisees' voices and perspectives are considered crossed strategy and ownership changes. This is simply a activity successful progress. I expect to spot overmuch much activity present and I'm receiving galore much inbound consulting inquiries from franchisee associations.

Where tin readers study more?
Information is power! I thief entrepreneurs take their way carefully, ever mindful of nan changed competitory landscape, and to build pinch their extremity goals successful mind. This is nan attraction connected my consulting believe astatine Emergent Growth Advisors, and besides my book, Big Money successful Franchising: Scaling Your Enterprise successful nan Era of Private Equity. Please get successful touch — I'm happy to assistance aliases supply referrals.