Making Dollars & Cents of Private Equity

As the recent downturn continues to fade from investors’ collective memory and the enthusiasm to find quality deals persists, the amount of money allocated to private equity deals is on the rise.

According to data sourced from the Pitchbook Platform, more than $500 billion of private equity (PE) funds were
invested globally in 2014, compared to $316 billion in 2013.

For the successful franchisor or franchisee, this could translate into strong growth opportunities, as investors look for favorable investment prospects. If you’re looking to actively attract PE interest as part of an exit strategy, to take cash off the table, to fuel growth, or for professional management assistance as you strive for even higher growth opportunities, here are four considerations that will maximize your company’s appeal.

Substance Over Flash

PE companies are looking to invest in organizations that have a unique value proposition, a sustainable competitive
advantage, and customer loyalty. Take a burger concept, for example. A restaurant that’s reminiscent of all the others is unlikely to be a prime target for investors. On the other hand, an organization that takes the fast casual burger concept and elevates it, offering a variety of unique fresh ingredients and a distinctive service model or environment, stands out.

PE investors look for long-term viability, not what might be trending up at the moment. Solid brand recognition, customer and brand loyalty, long-term viability, and a unique model will keep one’s strategy from becoming a falling star.


Are there opportunities for growth? A concept that has limited barriers of entry into new markets and a proven
infrastructure can help to ensure a scalable model, an important characteristic for PE investors.

PE investors are looking for vibrant concepts devoid of market saturation or other geographic boundaries that inhibit future growth. In addition, diversity of cash flows is important. While recurring monthly revenues from royalty fees provide a stable source of income, franchisors that have multiple revenue sources that can bolster the bottom line are attractive to investors. Both restaurant and service franchisors often generate revenue from the distribution of food, supplies, and additional services (technology, enhanced training, etc.) in addition to royalties and franchise fees. Finally, a franchisee or franchisor with multiple concepts under one umbrella may be more attractive, due to the diversification of offering to consumers.

Key Performance Indicators

PE investors will look for strong metrics when evaluating whether a deal makes sense. They want to invest in concepts with a solid bottom line and consistent performance. However your franchise system defines a “unit” (a store, a truck, a territory, and so forth), PE firms will want to clearly understand the strength and consistency of your unit performance and the quality of those measurements. Common measures companies look at are year-over-year same-store sales, gross margin, labor costs, and average customer sales. While strong unit economics are important, other factors such as customer counts, average growth rates exclusive of price increases, number of troubled units, and number of closures and re-sales will be analyzed as well. If your failure rate
(i.e., franchisee closings) is low and your unit economics are strong, these traits are the underpinnings for growth and they’re indicative of a strong future.

Sell-Side Due Diligence

For those considering an exit, this intense self-assessment involves analyzing your business in much the way that a
prospective buyer would perform an evaluation. During this process, you’ll want to review every facet of your
operations, addressing any perceived weaknesses. For instance, reviewing your franchise network to determine whether there is operational consistency. Are there struggling units in part of your system that are pulling down sales? Improving the performance of weaker groups will help strengthen the overall appeal of your brand. If you are a franchisor, do you have uniformity in your franchise agreements? Do you consistently monitor compliance and status? Do you have a strong management and development team? Best in class companies address these potential weaknesses, thus enhancing profitability and marketability.

Other Considerations

Other factors to consider include:

• A concepts international footprint
(American concepts are very popular
• Franchisee satisfaction
• Customer relationships and satisfaction
• An organization’s closure ratio

While PE firms differ in their approach some are looking for a long-term investment relationship while others seek a quick return on investment all will look for the most attractive, financially sound company in which to invest. Anything that you do in advance of that scrutiny to bolster your strengths while minimizing your potential weaknesses will increase your value and return.

Mark Fleischer
Partner, Franchise Practice Leader

Lisa Manetta
Senior Manager

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