How Private Equity is Changing in the Franchising Industry

Joe Mathews, CEO of franchise consultancy Franchise Performance Group, understands that franchising is not simply a tool, it is a business unto itself. Since 2002, that philosophy has made Franchise Performance Group one of the most effective and sought-after consultancies in the industry. Franchise Performance Group has partnered with more than 120 brands to help them achieve breakthroughs, and works with up to 20 brands at any given time in order to provide a high-service, consultant-driven approach.

“Back in the day, there wasn’t much a sandwich franchise and a hair salon franchise had in common,” Mathews said. “Today, they can rely on very similar models to grow much faster and much more effectively than ever before. And that’s our primary innovation: treating the franchise industry not as a collection of unrelated brands, but as a singular business model that can be applied to nearly any type of business.”

When it comes to the role of private equity in franchising, Mathews notes that it has been a similar learning process. “The first wave of private equity in franchising was centered around consumers,” he said. “Soon, private equity realized that they needed to focus on the franchisees — people who built a personal brand in franchising. Now, the third wave of private equity is about aligning with companies like ours that have the expert staff and intellectual property to realize a brand’s full market potential. Franchise Performance Group has the metrics, processes, systems and teams to evaluate the franchise opportunity and optimize lead generation and franchisee recruitment. The role of private equity in franchising is becoming more about providing that winning opportunity.”

In response to COVID-19, Mathews says many private equity firms are now waiting it out to see which brands stay afloat.

“Marginal brands aren’t going to survive,” he said. “Many of the private equity firms we work with are waiting to see which franchisors have the infrastructure to make it through.”

On the other hand, this creates consolidation opportunities for private equity to purchase multiple brands with similar concepts and rebrand them under one larger name. “Private equity likes to do business in fragmented industries, and the franchising industry is certainly fragmented right now,” said Matthews.

Harry Loyle of Cybeck Capital Partners, a private equity firm that frequently works with Franchise Performance Group, says that COVID-19 has accentuated many of the industry’s existing issues.

“If franchisors had problems before, whether that be with unit level economics or development, those issues will be even harder to face now,” he said. “Having a strong franchise system in place is more important than ever. Franchisors with strong fundamentals and support will be even more attractive to private equity companies moving forward.”

Cybeck has partnered with Franchise Performance Group in the past to provide development assistance for struggling franchise systems. “We are experienced franchisors so we understand the fundamental unit level economics,” Loyle said. “After that, we bring in FPG’s development perspective in order to establish a strong franchise system ready to grow. We frequently look to challenged franchise systems — if there is a franchise system that is struggling, we don’t just want to add money, we want to add expertise.”

Another private equity company that works with Franchise Performance Group echoed a similar statement: “In many ways, private equity in franchising isn’t changing — we are continuing to look for brands that can perform well through the recession,” a representative from the firm said. “That is why companies like Franchise Performance Group are so vital in that they can provide that expertise and recruit qualified franchisees who are likely to thrive within the brand. Private equity in general wants to be buying high-quality businesses and as certain concepts fail and others succeed, it will create a clear line of sight into what is working and what isn’t.”

Moving forward, Matthews is confident that there will be an increased interest in franchising as more and more people are at home considering entrepreneurship.

“Brands that are succeeding through COVID-19 need to show the strength of a franchise model relative to being independent,” he said. “Only 3% of small businesses that start out, start out as a franchise. In order to reach the other 97 percent of people out there considering entrepreneurial opportunities, prospects need to know what brands are doing to support franchisees and how they are adapting. The role of private equity in franchising moving forward will be finding the brands that are able to tell that story.”

For more information, visit: https://franchiseperformancegroup.com.