In this ongoing series, we are sharing advice, tips and insights from real entrepreneurs who are out there doing business battle on a daily basis. (Answers have been edited and condensed for clarity.)
Please give us the elevator pitch of your business.
My name is Alicia Miller. I'm the founder and managing director of Emergent Growth Advisors and author Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity . We help franchise entrepreneurs maximize their enterprise value, build with their goals in mind, and find the right capital partners. We also advise private equity firms, family offices, and independent sponsors that are investing in the franchise sector.
What inspired you to create this business?
Franchising today is not a level playing field! Everyone putting their money into a franchise business now or launching a new franchise concept needs to understand that.
The "aha moment" for me was talking to a franchise founder — a really smart guy with a good business. But he was utterly confused and had bad information about the private equity landscape. He also didn't understand why he was getting lowball offers when he tried to bring PE in to accelerate his business. I realized that PE is very misunderstood, putting franchise entrepreneurs at a profound disadvantage. No one was talking about this. Tools didn't exist to help entrepreneurs get their arms around this PE dynamic that has so fundamentally changed franchising. I knew I was in a position to provide clarity and actionable insights.
What problem does your business and your book solve?
The PE sector has wrapped itself in mystique and finance lingo that makes it seem unapproachable and unknowable. Not true! PE has a clear playbook. Their investing activities are predictable, especially in franchising.
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Everyone has a unique superpower. Mine is distilling complexity into a clear game plan to succeed. I've spent my entire career focused on go-to-market strategy. I realized that I could educate and empower founders, franchisees, and even investors themselves in a new way.
I decided to "reverse engineer" the most valuable franchises to discover how they got there – from the initial founding, growth ramp, mistakes along the way, to the first private equity transaction, and subsequent trades after that. Then I documented what PE wants, and what they're willing to pay the most for.
I studied hundreds of PE transactions, starting from the first entry of private equity into franchising during the 1990s until today. I looked at transactions and the histories of the 700+ brands with PE history and the 400+ PE firms who have invested in franchising so far to find the common links. I interviewed M&A experts and professional investors. I spoke to founders and franchisees who have been through one, or even several, equity sale events, as well as attorneys, CPAs, and bankers who advise on transactions.
All of this information is so important now that PE dominates franchising. But no one had gathered it all together to tell a cogent story. No one created a toolkit to help founders and franchisees create better outcomes for themselves. As a PE advisor, investor in franchise businesses myself, and as a growth consultant I was in a unique position to distill this complexity into a playbook and methodology to help my clients.
What should entrepreneurs consider regarding expansion through franchising?
Franchising is so much more competitive today! Especially the hunt for great franchisee talent to build your system. You need to launch very well capitalized. It will take $2.5M to $3M of investment to grow your system to the point where royalties collected from franchisees pay all the bills. Too many young brands launch undercapitalized. Then they sell a bunch of licenses – often before they've really proven out the concept – and find they can't support franchisees. Literally thousands – read that again thousands – of concepts land here!
Franchising is a brilliant expansion model. But be smart about your entry plan. Build at least a few corporate locations first as proof of concept and to create cash flow. Make sure everything about your operating model is replicable and teachable. Each unit should generate attractive profits. Then, ensure you have enough capital to launch the franchise effort. Use extreme caution when letting in your first franchisees. Really think about what type of operators can be successful in your model. Only let in franchisees who fit that profile. Once all the initial signals look good, then and only then, step on the gas and pursue more aggressive expansion.
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Keep in mind that outsourced sales organizations and brokers now drive an estimated 40 percent of all new license sales in the US. If you sell through these channels, commission will eat up your franchise fees. If you don't sell through these channels, your brands must really stand out to attract organic traffic.
What do private equity investors in franchising get wrong?
I expected to find out that over-leverage was a huge problem when PE invests in franchise businesses. Turns out, it's not. In fact, on one end of the spectrum — emerging brand acquisitions are often all-cash transactions. Debt isn't a factor until much greater scale is achieved. For larger systems, many now use whole business securitization, debt backed by franchise royalties and levels are relatively modest. PE has learned to mostly avoid excessive leverage in franchise businesses. Studies show there have been few franchisor-level bankruptcies.
These are smart people. PE has a clear investing mandate and attractive financial incentives to get it right. And franchising is a straightforward business model. If franchisees are satisfied and profitable, the system continues to grow, and new franchisees want to invest. It's simple! Most of the examples of PE missteps in franchising are due to the sponsor losing sight of this basic success formula. They don't nurture relationships with franchisees, they take their eye on unit-level profitability, they back the wrong management team, they take out too many benefits for themselves and don't reinvest enough in the business, and so on. There must be balance in the franchisor-franchisee relationship.
Thankfully, we now have many PE firms active in the sector with strong franchising experience. They understand the success formula and execute well.
I worry more about new PE sponsors entering today. Hopefully, they investigate enough to learn from the missteps of others. But now and then I see sponsors and their management teams doing things that destroy franchisee trust and enthusiasm for growth. Then you get a brand stall out. Once stalled, it usually takes a herculean effort and additional investment to turn things around and convince franchisees to believe again.
What should prospective franchisees think about?
Now that the landscape has changed, you must put private equity on your radar. Is your brand currently owned by PE? Investigate and find out whether they've been a good sponsor. What happened to the other franchise businesses they've owned? Talk to many franchisees. Do they like the sponsor? Has unit profitability improved? Is management investing in the business?
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If it's a good business it will attract buy-out offers. That management team you fell in love with could exit to PE owners during your license term. How do you feel about that? Be sure the concept itself is solid because the decision-makers may change.
If it doesn't attract PE offers, that's also a data point to consider. Why doesn't PE find the business attractive? You need to ask franchisees and network in the industry to get these answers. But it's worth it so you don't invest in a dud concept. A few firms have grown to be quite large without PE. Most launched long before PE was a factor. But today it's very rare to reach meaningful scale without help. Of the top 500 brands by system revenue, most have a history of PE investment at the brand or unit level or both.
PE is now also a buyer of units within large systems. Is PE a viable buyer once you're ready to retire? If there is no PE activity in the system, this means your only buyer will be existing or incoming franchisees, which will impact exit prices. Something to think about.
Independent franchisee associations are also taking notice of all this PE activity! They are organizing earlier and becoming much more proactive to ensure franchisees' voices and perspectives are considered across system and ownership changes. This is a work in progress. I expect to see much more activity here and I'm receiving many more inbound consulting inquiries from franchisee associations.
Where can readers learn more?
Information is power! I help entrepreneurs choose their path carefully, always mindful of the changed competitive landscape, and to build with their end goals in mind. This is the focus on my consulting practice at Emergent Growth Advisors , and also my book, Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity . Please get in touch — I'm happy to assist or provide referrals.
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