The Rise of Private Equity in Franchising

Private equity (PE) investment in franchising has been around for some time, but recent years have seen exponential growth beyond the traditional brick-and-mortar categories like quick-service restaurants and hotels. This shift highlights the increasing sophistication of franchisors, the growing benefits of scale, and the opportunities presented by franchise owner fragmentation.

The drivers of PE growth in franchising

Several factors are fueling the expansion of PE in the franchising space:

• Sophistication of franchisors: Franchisors are adopting more advanced operational and financial strategies, making them attractive targets for PE firms.
• Benefits of scale: Investments in technology, brand recognition, and operational efficiencies are easier to achieve at scale, creating substantial value for franchisors and franchise owners alike.
• Fragmented franchise owner base and independent companies: Many franchise systems have a diverse network of franchise owners, offering PE firms opportunities to drive efficiencies through responsible consolidation. Moreover, many PE firms have acquired independent companies, merging them into the franchise operation.

These factors can make franchising an increasingly compelling opportunity for PE investment, particularly in categories beyond traditional industries.

Structuring win-win partnerships

For PE investments, the relationship between franchisors and franchise owners must be mutually beneficial. PE firms can provide valuable resources, from financial capital to operational expertise, but a stronger partnership hinges on collaboration and alignment:

• Learning and sharing best practices: Franchisors and franchise owners can learn from each other by sharing insights and best practices to drive system-wide improvements.
• Commitment to the franchise model: PE-backed franchise owners must adopt and adhere to the franchisor’s established model. Straying from the system risks undermining the brand’s integrity.

At Authority Brands, we emphasize the importance of maintaining alignment with franchise owners and fostering a culture of collaboration. That’s why we’re focused on providing franchise partners with the resources they need to receive the maximum benefit of the franchise system.

The value of capital investment

One of the primary advantages of PE involvement is access to capital, which enables franchises to invest in:

• Comprehensive training and recruitment programs
• Advanced technology and operational systems
• Responsible expansion into new markets

However, financial backing alone is not enough. Investments also require execution expertise to help continue growth and innovation. Supporting an experienced operator, including the franchise location’s founder when applicable, has the potential to help both franchise owners and franchisors see a positive return on investment.

Responsible multi-unit expansion

Multi-unit expansion is another area where PE can create significant value. For franchise owners, it offers opportunities for accelerated organic growth, cost synergies, and multiple arbitrage. For franchisors, it fosters a more cohesive network and provides a structured path for scaling operations. Inorganic multi-unit growth can be achieved through three primary strategies:

• Acquiring new whitespace territory: Expanding into untapped regions allows franchisors to introduce their brand to new markets and attract a broader customer base. Entering whitespace markets can provide new territory for expansion and opportunities to repeat operational playbooks in new markets.
• Acquiring existing franchise owners: Acquisitions involving current franchise owners can offer a streamlined path to growth. These transactions capitalize on existing branding and culture, minimizing integration challenges. For franchisors, acquiring franchise owners can enhance network cohesion and provide exit opportunities for owners seeking to retire or monetize their investments. For franchise owners, these acquisitions can create synergies, reduce costs, and drive operational efficiencies.
• Acquiring independent operators: The acquisition of independent operators within a market brings distinct advantages. It enhances organic growth by integrating established businesses into the franchise system and expands market penetration through conversion. By leveraging the customer base and assets of independents, franchisors and PE investors can strengthen their presence in key areas while creating value for all stakeholders.

It is critical that rapid expansion be managed responsibly. Franchisors must balance growth with system diversification to maintain brand integrity. Collaboration between PE firms and franchisors is essential in helping keep expansion plans sustainable and beneficial to the overall system’s health.

Looking ahead

By fostering responsible partnerships and maintaining alignment between franchisors, franchise owners, and PE firms, the franchising sector can continue to thrive.

Elliot Rosenbaum is the chief of staff with Authority Brands.