What Private Equity Investors Want in a Franchise Deal
Scott Porter, managing director at Brightwood Capital Advisors, offers insight into private equity deal-making during a panel discussion at IFE.
How important is cultural alignment and the relationship factor between franchisor and private equity firm? “It’s all people, you can’t automate this business,” said Scott Porter, managing director at Brightwood Capital Advisors as he offered advice to franchisors looking to bring private equity investment to their brands. “If you’re meeting with private equity folks, take them outside the board room, take them to a restaurant and if the guy is a jerk to the waiter, pass.”
Culture is everything, agreed Michael Iannuzzi, a partner in Citrin Cooperman’s franchise practice. “We’ll walk away from tons of deals if the partners can’t get along,” he said Thursday during a panel discussion at the International Franchise Expo in New York City. Another hallmark of an ideal fit: a complete reference list from the private equity firm, “including those that didn’t go as planned,” said Grant Mareks, a principal at Atlantic Street Capital. “A good firm will offer every business they’ve invested in as a reference list. So it’s what happened when things didn’t go exactly as planned.”
The intricacies of a private equity acquisition of or major capital investment in a franchisor go beyond that cultural fit, of course, the panelists all said, with unit economics, franchisee satisfaction, and a stable and growing royalty revenue stream at the forefront.
At Citrin Copperman, Iannuzzi’s team will analyze everything from franchisee food costs to their lease agreements to fully understand the unit economics, also calling on the franchisees to ask them, would you buy another one? And franchisors had better know their franchisee validation situation before seeking a private equity partner because “A lot of times PE folks are calling franchisees and they’re getting a different response than what the ‘zor is saying,” said Iannuzzi.
Happy franchisees are a must, noted Porter as he recalled something NRD Capital’s Aziz Hashim told him: “If on the unit economic basis the person can’t make an honest living, you’re doomed.”
“If you have miserable people on the ground, you’re in trouble,” said Porter, and that comes into play as Brightwood Capital digs into factors such as remodel expenses and other ongoing franchisee obligations to determine the long-term impact on the system.
“We’re looking at what kind of capital has to go into the business and what’s the corresponding sales lift and how long is it going to last,” said Porter. “Ultimately there’s only so much money in the system, so those commitments can loom large.”
A disparity in a franchisor’s units sold to units open ratio is a major red flag, noted Atlantic Street’s Marcks, because it indicates flaws in the system’s infrastructure.
“Where we’ve seen people trip, and getting stars in their eyes, is they’ve got that big check and then they’re not able to get open or able to get profitably open,” he said. “We prefer owner-operators who’ve methodically scaled units over time.”
The International Franchise Expo continues through Saturday at the Javits Center in New York City.