Is This the Right Time to Sell your Franchise to a Private Equity Firm? The CEO of iFranchise Group maintains that right now has never been a better point to consider the move.
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If you follow what is happening in the franchise world, it will come as no surprise to you that there is a virtual feeding frenzy going on in the marketplace, with private equity firms buying franchise companies at a record pace. Not only are deals getting done at a frenetic pace, but the valuations that PE companies are paying in today's market are nothing short of stratospheric. Every firm is interested in the rapid growth of franchise companies and they are sitting on mountains of cash that they have to put to work or else face the wrath of their big money investors.
Of course, not every franchisor's dream is to grow his or her concept into a big deal that will attract a private-equity company's bankroll. Even if selling you business is the goal, timing is key from the standpoint of readiness and business valuation. But if a sale is a part of future plans, there may never be a better time to consider the move. Bear in mind that even if you cannot achieve your financial goals with a sale today, many PE firms will allow you to remain on board to run the company and hold a significant piece of the equity. So when they sell – and most firms buy businesses with the intent to resell in a five to seven-year time frame – you will get "a second bite at the apple."
Advantages of going the PE route
The benefits are considerable: They range from the obvious cash infusion, to the ability to leverage management expertise and corporate connections. Often a PE firm will insist on bringing on top talent to your company, which may add substantially to your ability of selling your franchise network.
One of the ways that PE firms have been getting involved in franchising of late is through the creation of "platform companies," where multiple brands that share certain common market characteristics are consolidated under a single company that allows them to spread overhead and support costs across a broader network, thereby increasing overall profitability. Back-office systems can be much more efficient with multiple bands on the same platform. In some cases, cross-referrals at the consumer level can improve franchisee unit economics in these platform companies. Moreover, franchisees of one platform concept may buy additional platforms to fill out their portfolio and benefit from their cross-referrals. Ultimately, these improvements in the business model can allow PE firms to improve valuations when it is time for them to resell.
Those that deploy this platform model range from those that invest in a single segment, such as food or home improvement, to ones that buy brands with similar operational structures. The good news for some smaller franchise systems is that these firms are now targeting much smaller franchisors than they did in previous years.
Related: A Beginner's Guide to Private Equity
Downsides of the wrong investor input
With an outside cash infusion, you will have to give up a degree of control and investors will want to be involved in any major decisions. Founders who are used to making all of the strategic decisions may find this challenging.
Assuming you have decided to bring in outside capital, it is often advantageous to consider hiring an investment banker who can take your company to market and help you obtain multiple offers. Remember, it's often not the final selling price but the terms of the deal that are most important and these advisors can be invaluable in helping you to understand the implications of the deal terms. Don't try to go it alone unless you have done this numerous times in the past.
If you are ready to make the leap, understand that PE firms are looking for good unit economics, a portable concept that has market adaptability, and a strong, stable relationship with its profitable franchisees.
A strong management team that can grow a concept with the help of an infusion of cash is an ideal scenario. Be able to tell the PE firm precisely how you will use that cash infusion to take your concept to the next level.
Upsides of the right information
Before reaching out to investors, complete an assessment of your competition and start gathering information on your own concept that an outside funding source will expect you to have at your fingertips. This includes, but isn't limited to, historical financial statements, capital needs, unit level economics and the drivers of unit-level profitability.
Your legal documents should be in good order and your intellectual property properly protected. The market has changed, along with consumer spending habits, so you'll want to show you have adapted to the new world order.
Finally, make sure your financials are "clean" and there are no skeletons in the closet. Due diligence by PE people will uncover everything, so if there is anything that might pose an unpleasant surprise? It will be up to you to bring it their attention rather than hiding it. Be transparent.
Take your time to reflect and research and make sure, as with any relationship in franchising, that there is a good financial fit on all sides.
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Mark Siebert is CEO of the leading franchise consulting firm iFranchise Group. Reach him at 708.957.2300 or email@example.com. His book is Franchise Your Business: The Guide to Employing the Greatest Growth Strategy Ever.