What You Need to Know About Private Equity in Franchising

Franchise News - the partnership between franchising and private equity

Choosing a franchise brand is one of the most important decisions of your life. It’s a long-term commitment that can either bring you amazing rewards or much frustration.

The franchise space is full of diverse opportunities, each company with its own DNA, benefits and drawbacks. Due diligence is key when choosing the right one for you, but there are certain factors that, while they aren’t complete deal-breakers, require additional research and fact-finding.

Across the franchise space, private equity firms are picking up steam, buying controlling interests in franchise organizations, infusing them with a quick burst of capital and fresh leadership, then turning them around for a profitable sale. The benefits can be extremely tempting for franchisors, especially for brands with troubled histories, like bankruptcy or chronic lack of growth.

Done right, partnering with private equity to access additional capital and leadership can benefit a franchise brand. But done wrong, it can hurt a brand and its franchise owners. Regardless of the industry, when private equity enters a franchise, company culture can change almost overnight. That’s because some private equity firms aren’t in it for the long haul. Private equity’s goal is often to improve the bottom line both on financial statements and the Franchise Disclosure Document (FDD) — sometimes at the expense of staff, programs and franchisee support.

Before you join a franchise, it’s vital to make sure you know who owns the brand, the organization’s financial health, and everyone’s level of long-term commitment. Here’s a quick guide to private equity that can help you make an informed decision.

Understanding Private Equity (PE)

Many private equity deals represent a short-term strategy. A franchisor often partners with a private equity firm for a quick infusion of capital in the hopes of righting a troubled brand, quickly scale a burgeoning brand, or launching new initiatives. But in return, the PE firm gains partial or complete control over the brand, and typically has mis-aligned medium- to long-term goals of the franchisor and their franchisees.

A franchisor in the wrong private equity relationship could see drastic reductions in home office or franchisee support staff, cuts to national marketing programs or products, a freeze on opening new locations, etc.

Franchisees often absorb a double hit. Often, they are impacted by reduction in operational support services, innovations and new products or services, and they’re locked into a contract with a franchisor that isn’t seeing growth in the market space.

In this scenario, the damage to the franchise brand could last much longer than the capital it gains. But it doesn’t have to be that way.

What to Look For

Before you commit to joining a franchise family, I recommend looking for one that is unlikely to partner with private equity in the foreseeable future.

Scrutinize the FDD for red flags like bankruptcy or litigation. Look at the executive team and get to know them personally. How long have they been in franchising? What is their professional background?

Talk with a robust selection of franchise location owners. Are they happy with the choice they made? Are the support and services they signed on for still available? Are they thriving?

Look for stability in the franchise ownership. Brands that are owned by larger corporations with long-term history in the market space are likely to offer more stability. Their vision and strategy for their brands extend far beyond three to four years, so the level of support and stability they provide location owners will reflect that.

If there is private equity involved in the franchise, it’s not necessarily a bad choice, though. The right PE partnership can benefit a franchise, giving it the capital to launch new products, services or marketing campaigns or adding management with high-level experience in the market space. Having a longer-term PE relationship in place, makes it less likely that the strategy will be to gut programs for a fast, profitable sale.

Weigh Your Options

There is risk involved in any business venture.  You are the best judge of your own risk tolerance, but if you are looking for a business/brand where you can thrive, grow and build wealth in the long term, additional scrutiny may be needed when a PE firm is involved.

Bill McPherson is vice president of franchise development at AlphaGraphics, one of the largest U.S.-based networks of locally-owned and operated Business Centers, offering a complete range of print, visual communications and marketing products and solutions. For more information about AlphaGraphics services, visit www.alphagraphics.com. To learn about franchise opportunities, visit www.alphagraphicsfranchise.com.

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