For Founders Considering Outside Investors, ‘Have a Plan’
Attracted largely by the stable revenue stream of royalties, private equity’s growing presence in franchise investments and acquisitions has in turn driven many founder-led and emerging brands to target such groups for third-party capital. Strategic investors, too, are active in franchising, and emerging brands are also the mark for a growing list of franchisors looking to acquire ownership interest in complementary while providing capital and other resources to help them scale.
When outside investors come calling, though, money isn’t the only factor. As Slim Chickens CEO Tom Gordon shares in this month’s Upstart, he wanted to retain the ability to make long-term decisions for the brand, which is why he said “no” plenty of times before saying “yes.”
“We had a lot of suitors for a lot of years,” says Gordon, “but we wanted to wait as long as we could to really maximize the first tranche investment that we took.” The “like-mindedness” of Atlanta-based 10 Point Capital, which came in with a minority investment in July 2019, was another factor in getting the deal done.
Gordon & Co. knew they wanted to retain their ability to hire and make investments in infrastructure and technology, but that to make those investments and accelerate growth they’d benefit from outside capital.
An understanding of what exactly they want is something too many franchise founders overlook before jumping into talks with outside investors, said Anthony Polazzi, president and CEO of AP Franchised Concepts, which he established in 2016 to invest in and operate restaurant and retail concepts. Among his portfolio brands are Honor Yoga, Zoom Room and Raw Jūce.
“Most important is to know what you really want from outside capital, long before you bring it in,” said Polazzi. “Are you giving up majority control? That’s a huge transition. And do you want to stay on” as the founder? Another question founders must ask themselves, he said, is how much do they care if new owners make changes to the concept.
“Have a plan and focus on what you want to accomplish,” he stressed.
From his position on the investor side, Polazzi, a former managing director at Sun Capital Partners, said among the many factors he considers when evaluating a brand is where and how many units are in a given market. That comes into play when determining the density of units a market can support.
“If you have 20 locations but they’re all in different markets, you don’t know how many units will work in one market,” said Polazzi. For founders who envision an eventual exit, that geographic component is important to the franchise development and sales strategy.