During the past decade, we have seen private equity investors taking more interest than ever to bet their money in the franchise system, and the trend is continuing since then. The interest has been in both, the franchisors, and the franchisees.
The year 2018 saw a spate of franchisor acquisitions by private equity funds, which included Jamba Juice (USD 200 Mn), Zoe’s Kitchen (USD 300 Mn) and Sonic Drive-In (USD 2.3 Bn). 2019 saw a similar investing spree conducted by PE firms, and the franchisors that benefited from the same, comprised CorePower Yoga, WhataBurger, and Hooters.
With the soaring trend of PE firms making increased investments into franchised systems, more employment opportunities in private equity have emerged off late, thereby resulting in a lot of careers taking off in the said sector.
Who are ‘Franchisors’ and ‘Fanchisees’?
Franchisor: It is the system that provides for the entire infrastructure of business. It establishes the tradename or trademark. Franchisors earn money by levying on its franchisees an upfront entry fee and a royalty fee, alongside. Royalties are earnings by franchisors which they make by charging a certain percentage as their share in the franchisee’s revenues, mostly around 5-6 %.
Franchisee: An individual, or group of individuals, who are interested in starting a small business in a business sector of their interest wherein they need to pay a fee in the form of royalty, plus the added initial upfront fee to the franchisor, is called a ‘franchisee’. After paying the fee, whatever profits they make, are their own earnings. More often that not, successful franchisees purchase multiple units in a franchised infrastructure, or system.
What Do Private Equity Investors Seek in an Ideal Franchise System
Talking specifically about US private equity firms, they look for factors such as sustainability of the product, demand in the market, global appeal of the product they are investing into, among many other such attributes. We are going to discuss in detail below, regarding the factors that private equity investment professionals consider vital to an impressive ROI.
The top private equity firms would consider the below mentioned elements important, while investing on franchisors and franchisees:
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Product That Can be Replicated with Much Ease
A franchisor’s growth is usually determined by the success of its franchisees. And therefore, the product or service on which PE funds are investing, must be something that can be easily mastered upon by a new business owner with little to no experience in the related industry.
Product or Service’s Global Appeal
It is among the crucial factors that decide how much a top private equity firm would invest into a franchisor or a franchisee. A private equity investor would always seek a franchised system to invest into, that has its products thriving in the local markets, alongside showcasing a growing demand in the international markets. A perfect example would be McDonald’s, who has its branches spread across the world.
Considerably Long & Impressive Track Record
Similar to the investment strategies applied in non-franchised systems, PE professionals do prefer franchised systems that have a longer history of successful operations. It mitigates the overall risk factor. Besides, such type of franchised systems boast of a long-term business viability. On the other hand, a newly-formed franchised system may pose a significant risk in terms of investments for a long term.
Single Location Franchised Systems
These are also called unit economics franchised infrastructures. Under the said kind of franchised model, the infrastructure setup is executed in a single location. The essential traits or attributes of a successful ‘unit economic’ franchised system would be a great ROI and attainment of an impressive same-store-sales growth.
Intelligent franchisors know and understand that their success is solely dependent on the profitability of their franchisees. And hence, it is always a great indication of a franchisor’s success that its franchisees have managed to own multiple units within the system, and have expanded to more than one location. Systems possessing successful franchisees have better chances of making a significant growth in the future.
We hope that the article has made you aware of how the PE investors make investment decisions when it comes to franchised systems, and why there has been a significant growth, been registered off late, in the amount of PE investments in the said domain.