Commanding a Premium Franchise Sale in a Cautious 2024 Private Equity Investment Climate Perfect market timing is difficult to pull off, but excellent preparation and building a valuable business in the first place is much more under your control.
By Alicia Miller •
Key Takeaways
- The valuation of private equity exits in 2023 has seen a significant drop compared to the boom in 2021.
- This shift requires franchise owners to recalibrate their strategies when considering a sale.
- To attract premium offers, businesses need to stand out with unique value propositions and robust operational efficiencies.
Opinions expressed by Entrepreneur contributors are their own.
In the dynamic world of private equity (PE) transactions, the landscape for selling franchise businesses in 2024 presents a nuanced picture. According to industry insights from Pitchbook, the valuation of PE exits in 2023 significantly trailed the heights achieved in the boom year of 2021, registering at only 70% of the peak values. This trend suggests that the frenzied market of recent years has given way to a more sober and cautious approach from buyers.
For franchise owners contemplating a sale, this shift has critical implications. While the market's apex may have passed, opportunities for selling remain, albeit at potentially lower multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization) than those seen at recent peaks. This requires a strategic recalibration from sellers.
Timing for maximum value
The businesses that will stand out and attract premium offers are those demonstrating unique value propositions and robust operational efficiencies. If you want to trade for maximum value, you can: (1) wait for the market to improve (as has been said, hope is not a strategy), or (2) drive significant operational improvements to make sure your business gets a premium valuation no matter when you choose to sell.
Perfect market timing is difficult to pull off, but excellent preparation and building a valuable business in the first place is much more under your control. In my experience, many owners say they want to "wait for market conditions to improve" but then end up changing very little about the underlying business to improve their valuation and chances of attracting an aggressive bidder.
Value Creation Plan
You need a documented Value Creation Plan (VCP) that will close the gap between the price the business would command right now and the presumably higher price you want. Hoping the market will simply move toward you is wishful thinking. While impressive pro forma projections can lull you into feeling good, without a concrete plan you're unlikely to achieve your best growth case. Worse, potential buyers will ask to see historical pro forma projections. Prior forecast misses only make future projections look more suspect.
You need a documented Value Creation Plan (VCP) that will close the gap between the price the business would command right now and the presumably higher price you want - and then act on it.
Studies confirm that multiple expansion (e.g. inflation in the multiple paid) was responsible for more than half of recent buyout value creation, much more than operational and revenue improvements.
Buyers may have gotten a bit ahead of themselves in the last two large waves of trades between 2015-2019 and then again between the second half of 2020 and the first half of 2022. Holders of those businesses need to deliver on their acquisition business case. And as businesses trade several times among private equity firms, it gets more challenging for the next buyer to successfully "do something different" with the asset.
If you don't know what to put in your VCP, consider challenges identified by your franchisees as a great place to start your strategic planning. Closing these gaps can deliver a high impact on the existing business and also reap recruiting and growth benefits as validation improves and existing franchisees return to purchase more territories.
Related: Want to Become a Franchisee? Run Through This Checklist First.
Longer due diligence periods
Remember that due diligence is taking longer. So you will also "live with" your growth projections in real time while trying to close the deal - not the time to miss those projections! Buyers are less bullish in our current inflationary environment and are deeply scrutinizing growth and margin expansion potential. As I have said in prior articles, now is a great time to be a talented operator both on the corporate side and on the franchisee side. PE demand for great talent to help deliver on an aggressive growth business case has never been higher. On the flip side of course, underperforming franchisees will be under increased pressure. Owners will move faster to bring in stronger operators.
Now is a great time to be a talented operator both on the corporate side and on the franchisee side.
If you're planning to bring your business to market in the next few years, it's crucial to prepare. Start by creating a VCP that targets and closes the most significant value gaps in your business. Once these are identified, develop detailed operating plans aimed at bridging these gaps, and importantly, assign clear accountability to your team members for each aspect of the plan. It's essential to prioritize effectively, as not all gaps will have the same impact on your business's value. Focus on areas that will yield the highest payoff, ensuring a more efficient and targeted approach to improving your business's market appeal.
An 'exit pileup' may be looming
Robust trading between 2015-2019 means that many high-quality franchise businesses are already PE-backed, and now several years later many of those same businesses are bumping up against the preferred PE-hold periods. PE-backed companies will be ready to move quickly when owners develop the conviction that the time is right to pursue transactions. These businesses have had the benefit of PE capital infusions and operational coaching over the last several years, and thus should be more valuable businesses. This is your competition for market attention – and not just for buyers. Prospective franchisees also have many attractive choices.
In a crowded and hyper-competitive marketplace dominated by private equity, a proactive approach is needed to command a market premium.
Buyers have a no-nonsense list of items they will ask for in the first round of due diligence to buy a franchise business. At a minimum, keep that initial list of data files current.
Don't wait for the market to move toward you or you risk being passed over. Yes, PE is under pressure to deploy unused capital. But they will also be more cautious knowing that greater operational efforts will be needed to execute the strongest exits when its time for the business to trade again.
