Private equity investment in franchise operations

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When considering financing for operations or expansion, business owners may lean toward traditional institutional lenders. However, the historically low interest rates that businesses were able to take advantage of post-COVID have since faded. Although not a new financial phenomenon for franchise owners in need of liquidity, private equity can be a viable alternative given the correct circumstances. Investment in a franchise operation may be appealing to a franchise owner and private equity funds for a variety of reasons.

Franchise investment benefits for private equity funds

Investment in a franchise may be appealing to private equity for a number of reasons. Private equity may view the franchise operation as a successful generator of revenue with its current structure, but with an additional investment of capital, such revenue may be able to improve or expand. The investment could be utilized to revamp or renovate current franchise locations or provide the franchise operation the ability to enlarge its geographic footprint with new locations. Private equity may also view such investment as an opportunity to expand its current holdings, particularly if the investment opportunity results in a new, internal synergetic relationship. Specifically, could the investment result in an “economy of scale” situation where buying power increases and cost savings can be spread across holdings to the benefit of all? Lastly, and likely most importantly, could a reasoned and well-structured investment result in a successful return on invested capital? For private equity, each investment is a unique opportunity and there is not necessarily a universal investment timeframe. However, it may be determined that with the correct deployment of capital with a suitable franchise operation, and with the utilization of both internal and external personnel, the opportunity is more likely than not to result in a successful profit at such time private equity decides to exit.

Benefits of private equity for franchise owners

For a franchise operation and its owners, private equity may likewise be beneficial for several reasons. Ideally, private equity’s contribution would not only include necessary funding but also experience and sophistication in the particular franchise segment. This could be in the form of current investment in similar concepts, or the form of professionals on staff with legitimate experience in the franchise industry to improve operations. Private equity may also provide a level of business sophistication, whether through professional skill or business connections, that can be leveraged with the franchise operation’s current ownership and management to propel the franchise operation moving forward. Lastly, and rather simply, private equity may provide for another “voice in the room” bringing fresh ideas and concepts that may not have necessarily occurred to the franchise operation and its owners.

Notwithstanding the potential benefits of private equity investment, before accepting or agreeing to an investment franchise owners should consider what the particular private equity company “brings to the table.” In doing so, factors to consider include, but are not limited to, the private equity company’s track record in the particular franchise segment, their traditional hold time for similar investments, and, potentially most important, what is the extent of ownership and control that the private equity company is requiring for its investment? Even with a significant need for liquidity, and institutional interest rates where they currently sit, franchise owners may decide that it is in their best business judgment to accept the higher costs in lieu of losing an unacceptable level of autonomy and equity.

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