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How to Build and Grow a Franchise System That You Can Sell to Private Equity

How to Sell Your Franchise to Private Equity

Learn how to develop a private equity buyout exit strategy that prioritizes franchisee success.

Key Takeaways

  • Building a franchise system that can be sold to private equity firms can create profitable exit opportunities for emerging franchisors.

  • By prioritizing franchisee profitability early on, franchisors can increase their brand’s private equity value while developing a strong franchise system.

  • A growth-oriented mindset, solid foundation and realistic goals can also make a brand more attractive to future investors.

Because of its potential for growth and financial opportunities, an exit strategy centered around private equity can be an appealing option for new and emerging franchisors.

For entrepreneurs who take the right approach early on, a private equity buyout is a realistic goal that can fall within reach as their brand matures. According to data from the International Franchise Association’s 2024 Franchising Economic Outlook Report, there were nearly 806,270 franchise establishments in the U.S. in 2023 – up 2.2% from the previous year. That growth was partly spurred by private equity investment, which is expected to continue this year. As the economy remains challenging for business owners, though, franchisors should follow best practices to stay relevant to investors in a highly competitive industry.

In this guide, we’ll explore strategies that can help new and emerging franchisors develop valuable franchise systems that can be sold to private equity investors in the future while avoiding common mistakes and missed opportunities along the way.

What is private equity valuation in franchising?

In franchising, private equity valuation is the process that private equity firms use to decide the value of a franchise system. To achieve the highest valuation, franchisors must meet specific key performance indicators (KPIs) and differentiate their brand from competitors in ways that increase its value from a private equity perspective.

How to Position Your Brand for a Private Equity Buyout

When it comes to planning an exit strategy as a new or emerging franchisor, beginning with the end in mind is key. For those hoping to exit their franchise system via private equity buyout, taking steps early on to ensure your brand is both well-prepared and attractive to investors is critical.

1. Focus on franchisee profitability

When it comes to franchising, the success of a brand’s franchisees determines the success of the overall franchise system. Because of that, setting franchisees up for success early on is critical for getting on the radar of private equity investors – and staying there.

“If you focus on making sure your franchisees are profitable and they're getting the payback that they feel is fair for their effort and their capital then, in the end, you're probably going to win whether you’re an emerging brand or whether you're a large brand,” says Alicia Miller, founder and managing director of Emergent Growth Advisors, a strategic advisory firm that works with franchisors and private capital firms.

To support franchisees in their success, consider the following strategies:

  • Be transparent. Know the numbers, be straightforward about the franchise offering and shape your marketing strategy around the brand’s opportunity profile.

  • Recruit smart. Define your ideal franchisee and recruit candidates whose goals and values are aligned with the offering.

  • Develop systems and processes. Figure out what works for your brand and create systems and processes that are a recipe for franchisee success.

By supporting franchisees in achieving their economic and personal goals, franchisors will not only build a stronger, more successful business but will also make their franchise system more attractive to private equity investors in the future.

2. Emphasize process-based business models

Because private equity investors often look for brands that take a systematic approach to business, having tried-and-true systems and processes in place at franchise locations and corporate locations is important. Often, this can involve creating a franchise operations manual to support franchisees in their daily work.

Depending on the franchise brand, systems and processes might include the following:

  • Franchise sales

  • Recruiting and hiring

  • Onboarding and training

  • Customer service and more

“If you can get the infrastructure in place, or at the very least get more of a process approach in place early, then you can leapfrog that element and you can get to recruiting franchisees who are more process-based. That's what really drives scale in a franchise system,” Miller says.

3. Prioritize growth initiatives

Because of recent challenges that have made private equity firms more cautious about acquisitions, including shifting interest rates and inflation, franchisors should focus their efforts on initiatives that support growth.

“(Private equity is) going to look across all these levers of, where can they drive out? How realistic is it? And they'll be willing to lean into the future and pay a little bit more for a business that they can control, compared to something that's not as proven or that is going through some sort of transition in their growth trajectory,” Miller says.

To keep growth at the forefront – and help investors notice their business – franchisors should consider focusing on marketing, customer support, new products and services, and utilizing technology that increases purchase frequency and customer loyalty.

4. Highlight your brand's unique advantages

To ensure recruiting efforts are reaching the right demographic of prospective buyers, understanding the unit economics and opportunity profile of your franchise offering is critical as an emerging franchisor.

“For me, one key factor that I see for new franchisors is that they don't understand the economic opportunity (their brand offers),” says Charles N. Internicola, a franchise attorney with over 25 years of experience and a founding partner at The Internicola Law Firm.

Because opportunity profiles fall across a spectrum of unique qualities that differ from brand to brand, make sure to evaluate factors such as:

  • Estimated initial investment

  • Return-on-investment (ROI) potential

  • Reserve capital requirements and more

By defining the opportunities their franchise offering provides to franchisees, emerging franchisors can give their franchise sales process a competitive edge while recruiting good-fit franchisees.

What mistakes should franchisors avoid before selling to private equity?

Knowing which mistakes to avoid as a franchisor can set a brand apart from competitors when it comes to private equity. By staying proactive and maintaining a growth mindset, new franchisors can head off potential mistakes – and their consequences – as their brand matures.

1. Unrealistic expectations

New franchisors can sometimes fall into the trap of setting unrealistic expectations about franchising. Those misconceptions often include believing that selling franchises is easy, or that franchisors don’t need to continue supporting franchisees once their location is open.

To keep a realistic mindset as an emerging franchisor, remember that franchising requires hard work and commitment, and success rarely happens overnight. It can also be smart to avoid selling multiple territories immediately to first-time franchisees; instead, wait until they’re capable of handling more. Over-expansion can also be detrimental to growth, so consider focusing on strategic, sustainable growth over time while over-supporting initial franchisees rather than scaling too quickly.

2. Inadequate reserve capital

Another common mistake made by startup franchisors is failing to ensure new franchisees have enough reserve capital to stay afloat until achieving profitability. Without an adequate cushion to survive, franchisees can fail prematurely – and lose the interest of private equity in the process.

“In terms of the FDD Item 7, the regulatory recommendation is three months reserve capital. Focus on six months or more there, especially with service businesses – and focus on franchisee profitability,” Internicola says.

3. Neglecting critical KPIs

When building a franchise system that’s positioned for private equity acquisition, it’s critical to pay attention to KPIs from the perspective of an investor.

For emerging franchise systems, important KPIs to maintain include:

  • Steady annual revenue growth

  • Speed in opening new locations

  • Franchisees achieving profitability quickly

  • Thriving multi-unit franchisees

  • Franchisee validation

  • Recurring income from royalties and rebates

“If you come back in two years and all is good and, in addition, you've added quite a lot of EBITA (earnings before interest, tax and amortization) because the business is growing – now you've got something pretty exciting,” Miller says.

4. A poorly structured legal foundation

When it comes to positioning your franchise system for a future private equity sale, making sure its structure and legal foundation are rock-solid is important.

“I tell so many of our new clients to view the first two years as seasoning and building the foundation and really amplifying what's special about their brand. Sure, we have the FDD and it's structured the right way, but what comes next?” Internicola says.

To ensure your brand is properly structured with a strong foundation, including the documents to start a franchise, make sure to work with an experienced franchise attorney. Creating a five-year success plan and keeping in mind that franchising requires years of hard work, seasoning and dedication before scaling is also critical.

By being proactive and turning to experts for help when developing your franchise system’s foundation, you can avoid setbacks and false starts early on while positioning your brand to sell to private equity in the future.

Need help preparing your franchise system for a successful future exit? Contact us to learn about the services we offer franchisors at every stage of their journey.

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