In January, the Capital Roundtable hosted a conference to discuss private equity investing in franchise companies. The theme of the event was “How to Identify Franchise Companies That Can Successfully Disrupt Their Marketplaces.”
Plante Moran’s Mark Fleischer, leader of the firm’s franchise practice, and Lisa Manetta, senior manager, attended this event and moderated a panel discussion. What were the big takeaways? Following are Mark and Lisa’s thoughts on the top three:
Legal and regulatory: The landscape for franchisors and franchisees is clearly changing. The National Labor Relations Board (“NLRB”) ruling on “joint employer” status could change franchisor/franchisee interactions as it pertains to employment matters. Under the NLRB decision, franchisors could be viewed as joint employers with their franchisees, thus exposing franchisors to risk and potential litigation that have traditionally been limited to the franchisees. While the issue is still up for debate and appeal, it’s causing a lot of uncertainty in the marketplace.
Another area of concern is an increase in minimum wage rates. If there is a significant increase, franchisees may have to change their approach to customer service and consider moving to more digital or less employee-driven platforms. While some franchises are waiting on final rulings before they react, others are gearing up for a change and looking at ways technology can minimize their workforce. (Welcome to the age of kiosks.)
Technology: Franchises are trying to stay ahead of the curve by employing technology that’s new or better than their competitors. Right now most seem to be looking into mobile apps, like online ordering and other customer interfacing technology, but they can be expensive. While franchisors try to determine which investments will create the most bang for their buck, they’re reminding themselves that while the cost of apps is going up, technology has helped decrease many back-end costs, like bookkeeping and in-house systems.
Another big concern is cybersecurity. If customers download franchisor’s apps and trust them with their information, franchisors need to ensure they can protect it. In addition, franchises are also trying to keep up with changes in credit card technology and the related costs of conversion.
- Push and pull between strategic investors and equity investors: The franchise market is seeing many strategic add-ons that push higher valuations. The challenge is that high valuations can be disruptive to the marketplace; while they can make sense for some companies, high valuations can cause some investors to re-think whether a concept is worth the asking price. Alternatively, it can also cause target companies to chase the highest value rather than the right investment partner. This can all result in fewer deals being completed.
While the landscape of franchising is changing, the market continues to grow and expand – making it a great time to be part of the industry.