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Unbridled Capital

Finding a Growth Partner

Video

04.02.2019

I have the pleasure of working with all sorts of people in the franchise industry. But perhaps my favorite is helping the mid-size franchisee who wants to grow. This person might be a second generation franchisee, or maybe a young operator or financial buyer who has made their first or second acquisition with their own money. They may have also built their business slowly, and over time through smaller acquisitions. In many cases, this type of franchisee wants to grow, has the passion to do it. It needs access to deeper pockets to take advantage of current opportunities. We are seeing a huge increase in the amount of mid to larger scale operators who partner with private equity and family office investors. In some brands, there are very few remaining independent operators with more than 50 units. So let me give you a few points to consider.

First, as the M&A industry has gotten more competitive in recent years, mid-scale operators now have access to investors in ways they didn't in the past. Several years ago, most PE and family office groups would not invest in businesses with less than eight to $10 million in EBITDA. Today, however, many groups have lessened this criteria to three to $5 million. New investor groups are looking for a beachhead investment in any given brand. This typically amounts to at least 15 to 50 units for their first investment. Investors by nature, do not know how to operate. They know how to invest. These groups will not acquire franchise investments without strong operators in place. It's really difficult to find good operators. I happen to know hundreds of them, and still it's difficult. The best operator is the one who has successfully operated their own company for a long time. Some of the indicators are well-known. Good standing with the franchisor, above average system AUVs, good operating margins, well maintained assets, strong leadership skills, and a team building approach to operations and growth.

Investor groups therefore looking for these types of operators who own their own businesses, they want to buy a majority share in a franchise like this, giving the franchisee a big initial paycheck, an equity stake ongoing, a salary bonus in M&A structure, and incentives to grow. These relationships can be incredibly fruitful for the franchisee who can attract above average pricing in several ways. First, the current M&A market continues to be very strong. Second, most investor groups will pay above average pricing to get the right partner. And third, the franchisee can command a great future compensation structure.

These relationships don't come without risks though. So careful study of the right PE or family office group is needed. A franchisee is an entrepreneur by nature, and accepting a buyout means that you as a franchisee must now answer to a boss. Careful consideration is therefore needed about rights, responsibilities, and chain of command. Overall, I've seen these relationships greatly enrich some of my best friends and colleagues. I've seen smaller franchisees and corporate operators become very large franchisees, and have watched their net worth increased dramatically over time. I'm happy for them.

Even if this relationship or one like it doesn't end with a wild success, partnering with an investor is a great hedge in a frothy market to lock in a big valuation on a life's work. At Unbridled Capital, we know hundreds of these groups, and their interest in different brands, sizes, and geographies. Any franchisee desiring to explore this process will need a substantial amount of expertise. Call us any time. We're here to help you.