FranConnection 2016: Private Equity Hot on Franchise Brands for Acquisition; What You Need to Know Before Selling

Many franchisors are getting calls from private equity firms inquiring about their interest in selling a piece or all of their business, and on day two of FranConnection, FranConnect’s user conference, a private equity panel of the pros discussed the ups and downs of potential exit or partnership.

The leadership panel included various levels of expertise and opinions from Gay Burke, Chairman of Alphagraphics & Working Partner of Black Street Capital; Jeremy Holland, Principal of The Riverside Company; Michael Skitzki, COO of Franwork; Kevin Wilson, CEO of Mosquito Joe; and Christopher Fountain, CEO of FranConnect.

When considering a PE partnership, Holland suggested thinking about a pool of unlimited funds, so that a true growth strategy can be defined.

“If money is no object what would you do? PE firms sometimes try to get the management team to think unlimited funds and more broadly so that they can create a pathway to ROI,” he said. “One of the things private equity brings to the table is that they don’t look at capital as a constraint.”

Burke said that having an accelerated growth strategy in place will help define the future valuation and that PE firms are looking for early wins when acquiring a growth brand.

“We are looking for a management team who can articulate the plan, who understands what it takes to achieve the plan, and who will have a reasonable expectation of what it will take to earn reasonable ROI,” she said.

While strategy and execution is critical to the success of a potential acquisition target, the definition of the founder, in a founder-run target, is something carefully researched in due diligence.

“You can’t teach passion. If the founder doesn’t have the fire to drive the business, it probably won’t be a good fit,” Hollard said. “Self-awareness, in that they see their weaknesses as opportunities, is essential. We need someone who is open to a partner, open to input, open to hiring additional management. We want the entrepreneur to look at the hats they are wearing and which one they like the least. We want to leverage their time where they can really move the needle.”

Franchisee satisfaction is critical in the transition decision process, the panel said.

“Very often in the process we work in, we are not allowed to directly talk with those franchisees until the deal is close to done,” Holland said. “We can see indicators, though. If you have franchisees buying additional units, something is going right or they wouldn’t be doubling down on the brand or the concept. At the 11^th hour we will get direct access. We have to know what the franchisees are thinking. It is not all positive, but we can find out if they are addressable concerns and, often times, their input leads you to knowing how to grow the brand.”

Fountain said entrepreneurs must do their homework before making the decision to completely change their business.

“When using OPM, other people’s money, is in place, you need to recognize the new fiduciary responsiblity you have,” Fountain said. “Everything about your business is going to change. You should talk with people who have raised money before. PE firms are custodians of other people’s money, therefore, they will hold you accountable. It does put a rigor around the business that didn’t exist before.”

When dealing with PE, missing numbers carries very stressful moments.

“The second worst thing that can happen to you when working with PE is missing your numbers. The worst thing is not having knowledge that it is going to happen,” Fountain said. “If you can’t predict that you will miss numbers, you will be in bad shape, as bad news never ages well with PE. You should have a true pulse on your business so that you can demonstrate that you have a high level of control over your business. It is important to be able to foresee challenges before it happens.”

Once a transition takes place, Wilson mentioned finding the easy wins.

“The biggest area of opportunity when looking at franchisors is an under investment in marketing requirement for franchisees,” he said. “That ends up stifling franchisees’ growth because they don’t spend enough to market their business. We would strongly encourage the management team that if that team doesn’t have the resources in house, partner with a team who can help establish that marketing process.”

While partnerships and exits to PE are appealing because of the cash deal, Fountain said brands should get ready to run.