Growing franchises: Making dollars & cents of private equity
As the recent downturn continues to fade from investors’ collective memory, the amount of money allocated to private equity deals is on the rise. According to data sourced from the Pitchbook Platform, more than $152 billion of private equity (PE) funds were invested globally in the first quarter of 2014, up more than 10 percent from the same period in 2013.
For the successful franchisor or franchisee, this could translate into strong growth opportunities, as investors look for favorable investment prospects.
If you’re looking to actively attract PE interest as part of an exit strategy, in order to take cash off the table, to fuel growth, or for professional management assistance as you strive for even higher growth opportunities, here are four considerations that will maximize your company’s appeal:
Substance over flashPE investors look for long-term viability, not what might be trending up at the moment. Solid brand recognition, long-term viability, and a unique model will keep one’s strategy from becoming a falling star.
ScalabilityA franchise that has limited barriers of entry into new markets ensures a scalable model, an important characteristic for PE investors.
Key performance indicatorsPE investors will look for strong metrics when evaluating whether a deal makes sense. If your failure rate (i.e., franchisee closings) is low and your unit economics are strong, that’s a great start.
Sell-side due diligenceFor those considering an exit, this intense self-assessment involves analyzing your business in much the way that a prospective buyer would perform an evaluation. During this process, you’ll want to review every facet of your operations, addressing any perceived weakness. For instance, if you’re a franchisor, review your franchise network to determine whether there is operational consistency. Are there struggling units in part of your system that are pulling down sales? Improving the performance of weaker groups will help strengthen the overall appeal of your brand. Best-in-class companies address these weaknesses, enhancing profitability and marketability.
While PE firms differ in their approach — some are looking for a long-term investment relationship while others seek a quick return on investment — all will look for the most attractive, financially sound company to invest in. Anything that you do in advance of that scrutiny to buttress your strengths while minimizing your weaknesses will increase your value and return.