Understanding Private Equity - What You Should Know Before You Jump In!

Understanding Private Equity - What You Should Know Before You Jump In!

Private equity firms are an active force in the industry due to the rewarding investment opportunity the franchise business possess. They use their capital as a strategy for growth, or provide it as an option to those looking for a way out. There is no doubt that as a franchise owner, private equity (PE) provides you options. However, if you find yourself considering PE as a strategy, make sure you understand some of the unintended consequences in relation to your purpose and future business vision.

As an operator who is looking to grow, PE can be attractive. They can be your financial partner providing the capital resources necessary for growth, but without careful consideration you can also find yourself in your worst nightmare. Before you make a commitment to a PE partnership, it is critical to consider and understand the rules of engagement. Simply, make sure you know how to form the appropriate partnership in regards to your goals, and how you get out of it.

In a PE partnership, you have to come to terms with how involved you will want to be in your enterprise, along with how much control you are willing to give up. With any partner you bring into your business, decisions and strategies you put in place now involve more than just you. It goes beyond saying that having an air-tight partnership or employment agreement is important with PE groups who are simply seeking one thing: return on investment.

Private equity can also be a path to an exit strategy. Emerging concepts, changing consumer behaviour, restricting legislation, and evolving technology continue to infiltrate the industry, often outpacing our ability to understand it. As time goes by, consumers continue to become more impatient, more educated. Additional challenges are present for those that own a family enterprise. Sibling rivalries, multiple shareholders, mismatched expectations, and commitment levels are simply a few that are associated with operating and succeeding through multiple generations of ownership.

Therefore, PE has a place in facilitating an exit strategy if you are simply burned out and want to move on. However, keep in mind, in general, the ancillary benefits associated with ownership pale in consideration to the after-tax proceeds of a sale. But, if you decide the headache is no longer worth it, PE can provide the liquidity event you have been looking for. While you work through the deal in your head, make sure to consider other factors when seeking PE as an outlet from the industry such as:

  • Will they be in alignment with maintaining an acceptable culture for your employees and the core values you have worked hard to establish over time?
  • How will key partners or management be treated in the sale, and will they be along for the ride or find themselves working for new bosses who have not shared the same principals you have held dear?

Sale of the business is a valid succession option. However, that is only if the sale is to a buyer who is compatible to your culture and cares about your people. In general, PE has no knowledge of the franchise business and how it operates. They deal through front men who have sold them on the great returns in this market. The actual investors lack for nothing that money can buy. Sure, knowledgeable and aggressive brokers or consolidators represent them, but these "fronters" are serving their own interests. Once acquired, they are potentially seeking their own exit strategy and expect to bolster the return on sale. Unfortunately, as a succession planner, in the face of a high multiples opportunity for your franchise(s), I cannot challenge the reasonable nature of questions associated with a sale, like, "Why should I put up with crap from my siblings, my partners, my franchiser, my bank when I can cash that check?"

So, what are you to do, while considering the future of your organization and facing what appears to be an extraordinary temptation of looking for or being sought after by PE?

  • Take your business vision seriously and listen to both your personal instincts and the objective assessment of your succession planners. If it is growth you seek, assess your situation and "team" and decide if you have the players (family or non-family) needed for the kind of commitment you are seeking.
  • Go for business growth dreams, but accept that if you don't have capable, competent and most important committed successors, then growth can be a fleeting dream. And remember: how did you form your partnership and how do you get out?
  • If it is an exit strategy you seek, remain focused on ensuring your culture be maintained or move to a new city. The outcome of your exit from the business will impact your reputation in the community.

Fundamentally be aware of the succession challenges created by private equity. They can provide an excellent alternative source of liquidity that provides you options if you know the rules of engagement. Remember in building sustainable business legacies, we are dealing with the marathon, not the sprint. Think long term and don't give way to reason.

Being a part of his own family's business, Champ has a unique insight into the difficulties, challenges and triumphs families face when combining family and business. Champ Rawls has been officially associated with The Rawls Group since 2012, although it could be said he become a part of the team in 1984, when he was born into the family business. For more information visit www.rawlsgroup.com.

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