Whether you plan to sell your franchisee next year or in 20 years, start setting yourself up for success now
Since 1851, business owners across the country have been using franchising to take their businesses to the next level. They grew as much as they could on their own, then decided to offer their established, successful brands to entrepreneurs who open new locations through their own funds, with the support of the franchisor. For many franchisors, growing their systems with franchisees has helped them expand much quicker than if they tried to do it all on their own.
However, there are many cases when a franchisor grows quickly through franchising, then finds themselves stuck again. Maybe they’ve outgrown the span of their knowledge base and don’t have the capital or expertise to continue growing. Other times, someone might have spent years building up a franchise system and is ready to monetize the wealth rather than having it tied up in the value of the business. In either situation, the franchisor starts thinking about ways to get an investor’s attention.
Incline Equity Partners Partner Wali Bacdayan is a private equity expert and consistently hears from franchisors looking to sell their systems for various reasons. While the most common reasons franchisors reach out to Incline are for help growing or for monetizing their business, Bacdayan says that some franchise systems are more attractive to the private equity firm than others.
“The situations that are typically the most attractive are the ones where a franchisor’s team finds themselves stuck,” Bacdayan said. “That’s the realization that most owners come to eventually – they’ve grown broader than they could have imagined and need some help, whether it’s strategic counseling or money. On the other hand, someone else might be 65 and prefer to retire on the money than having it tied up in the business. Those are the two most common situations, but of course there are other exceptions as well.”
Whether or not you’re thinking about eventually selling your franchise system, there are a few things you should start doing right away in order to best attract investors down the road.
Maintain comprehensive information on your system.
The first, and perhaps most important, thing you should do is ensure that you have good information laid out about your franchise system. Any data relative to how the franchisees are doing, how your royalty streams are coming in, documentation on processes and procedures, material on how you communicate with franchisees, system wide policies – basically anything that will help facilitate someone to analyze the system – should be very organized.
“Perhaps the biggest mistake we see franchisors make is not having access to all of that info,” Bacdayan said. “An investor wants to know the health of the system and how well the franchisees are run. It’s hard to grow a system if it already has an unhappy franchisee base, and while a lot of franchisors do have anecdotal evidence on the happiness of the system, many don’t have exact data or feedback.”
Once all of the information is in place, a private equity firm will be able to simply see what you have established, what your franchisee base is like and what your target franchisee looks like. That way, you can analyze together how you’ll be able to grow with private equity funding.
Be prepared to discuss your corporate management team.
The next step, after analyzing the current franchisee system, is much more qualitative. The investor will want to see who will be continuing to lead the business – is it someone who is ready to retire and make an exit? If so, they’ll want to know who will be left on the management team. Will they need to recreate the management team from scratch, or will the leaders just need some advice and capital?
“From this point, it’s largely a ‘fit’ discussion,” said Bacdayan. “You’re looking for a partner who can help you accomplish things you don’t think you can accomplish on your own, so it’s getting to know someone like us and how we might align on how things get done so that once we do agree on objectives, you find yourself with someone you want to work with.”
While Bacdayan might prefer to work with a team that will be sticking around, some investors are happy recreating a management team for a retiring franchisor. There are a wide range of private equity investors, and a large part of selling a franchise system is finding the right partner that will help achieve long-term goals.
Selling a franchise system can be a lengthy process. Even after the conversations with investors begin, it might take anywhere from three months to over a year, but ultimately, for the benefit and well-being of both parties, it’s important to find the right partner for you and your business. So, knowing that you won’t be able to sell your system overnight, it’s important to keep things well-organized and documented as soon as possible in order to set yourself up for future success.