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Private Equity and Your Franchise Brand – Growing Together

by Ana Lopez
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Unlock the potential of your franchise brand through strategic private equity investments.

Entrepreneurs over the years have created great franchise businesses with proven business models in which they have built, expanded and grown their brands. When attracting franchisees, the companies can operate in communities regionally, nationally and even internationally.

With the success of these franchise systems, it has become very attractive for the private equity (PE) industry to get involved. Private equity has seen huge opportunities in franchising especially in recent years.

Private equity firms usually provide an inflow of capital needed to accelerate new and future growth. Today, we see PE investors looking for franchises of all stages and sizes. Both small boutique PE companies and larger PE companies have grown significantly by entering the franchise industry and expanding through franchise brand acquisitions.

The PE firms are developing new and creative ways to be part of the ever-expanding franchise industry. In the past, most of them required a majority stake in the franchisor to invest in a franchise business. This is still the majority of PE transactions in the franchise industry. Today, however, more companies are willing to take a minority stake in a franchise brand just to be a part of the franchise business.

Regardless of the stage of the franchise, it may be time to consider private equity. Whether providing the capital needed to open new franchises or business locations, the expertise provided to grow the brand, the infrastructure to support expansion or the knowledge to improve performance, the private equity firms add significant value to franchise brands.

Unlike before, PE companies are now even interested in smaller emerging brands. One of the really popular strategies in PE investing these days is through platform investing. When done correctly, this strategy is a great way to help brands accelerate their growth. These opportunities will see PE companies collapsing the smaller brands into a platform company. The platforms will then leverage different areas of their current infrastructure – operations, technology, accounting, marketing, and franchise support and development – ​​to take the franchise concept to the next level.

PE companies today are more excited than ever to look at emerging brands where they can integrate them into an existing business and add value. Often the PE company will ask the owner to stay with the company and still lead the growth of the brand. In many of these cases, it still offers the founder the option of also retaining an equity interest in the company.

Depending on the circumstances, the founder and/or the PE company may decide that it is time for the founder to leave the company. When this happens, the founder usually receives some form of compensation, including a “liquidity event” and/or shares in the new entity at exit. These structures vary wildly based on the transaction. Most PE firms will work with the founder to work out a structure that works for all parties involved.

Make sure you get to know the PE company you are working with and make sure they have the same or similar vision and culture to the business you are doing. Due diligence must be done on both sides before a transaction is completed. It is very important for both parties to ensure that the transaction is suitable for all stakeholders.

The private equity industry and the franchise industry continue to complement each other well and could be a smart move to consider to accelerate the growth of your franchise brand. With more and more franchise founders looking to pursue PE as their next stage of growth, both sides of the industry should be excited and optimistic. There are endless opportunities for business expansion and development when private equity firms and franchise brands work together.

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