Why Private Equity is So Excited About Multi-Unit Franchisees

The combination of record fundraising, ample unused capital (aka “dry powder”), and a post-pandemic business boom has sparked increased activity from private equity (PE) firms interested in scooping up franchised locations. Here are a few factors behind the trend and some tips on how franchisees can make their companies attractive for acquisition.

What PE Firms Like

Historically, PEs have been interested in doing business with franchisors, but now many are focused on franchisees. Private equity investors like franchisees because of their:

• Proven business concept
• Potential for growth
• Low risk

More specifically, PE investors find multi-unit franchisees more predictable regarding a return on their investment because franchisees have proven methods that make them profitable. Fifth Third Bank sums this up nicely: “Private equity seeks to earn a return on the capital it invests. The most common measures are the internal rate of return (IRR) and the multiple of invested capital (MOIC). Therefore, successful franchise businesses can be an attractive investment for a PE firm because franchisees have tested systems that have worked repeatedly, making the IRR/MOIC reasonably predictable.”

How Franchisees Can Prepare

Robust preparation is essential for franchisees looking to engage with a PE firm. Franchisees should:

Organize Critical Data – Key data includes, but is not limited to, all the reports the franchisee is required to send to the franchisor. For multi-unit franchisees, one aspect of this is lease obligations and financials, which can be easily stored using location-management software such as Leasecake. Additional information includes reporting on managerial style, culture, and potential growth strategies.

Collecting and organizing data will help during the beginning engagement with potential acquirers and subsequent deal stages. It also sets the stage for smoother due diligence. Consequently, utilizing a virtual data room (VDR) is wise.

Develop Marketing Material – After collecting and organizing crucial data, present it in marketing material to help woo potential PE suitors. The presentation should include, at a minimum: business operations, key players, financial summaries, and success stories.

Find the Best Match – The relationship between the PE firm and the franchisee is essentially a partnership; therefore, the franchisee needs to research firms to find the best partner for its journey.

In general, PE investors bring positive growth for franchisees by adding financial value and business expertise to the franchisee’s systems. In order to be an attractive target, however, franchisees must be well-organized and offer a positive history of sound financials with an eye toward future growth.

To learn more about how location management software helps franchisees get organized and prepare for due diligence, visit Leasecake.com.

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