Private equity has become a dominant force in the franchising world, with over 700 US brands attracting PE investment at either the brand level, franchisee level, or both. This trend is not limited to the US, as PE investment can also be seen in markets outside the country with attractive growth prospects. However, despite the prevalence of PE in franchising, not all franchise systems attract PE interest. Only 17.5% of brands in the US have attracted PE investment, even after over 30 years of PE activity in the industry.
PE investing model typically involves a six-year hold time for investments and around a ten-year fund life, emphasizing the need for quick growth and profit. PE success in franchising often involves buying strong brands with proven customer demand, backing strong management teams, funding growth initiatives, and maintaining or improving franchisee profitability. However, many franchise systems do not meet the criteria required to attract PE investment, as PE generally avoids excessive risk-taking and prefers proven, stable brands with growth potential.
The franchise model, executed through independent franchisees, can be difficult to turn around when faced with stagnation or decline. Change initiatives must be adopted by franchisees, who may resist change due to trust issues, communication breakdowns, or management missteps. While there are some high-quality, closely held brands that remain attractive to PE investors, there is a long tail of smaller, unattractive franchise systems that do not appeal to PE buyers due to limited growth potential.
With many high-quality brands already under PE control, larger firms often wait for new opportunities to arise within the small group of closely held brands. Some investors focus on building platforms that target acquisitions of emerging brands, while others invest in infrastructure companies serving the franchise sector. Founders looking to tap into PE capital should focus on strengthening their brand’s operating model, unit economics, customer demand, franchisee satisfaction, and management team to make themselves more attractive to PE firms.
Businesses aiming to attract PE investment should have strong unit level economics, proven growth potential, sustained customer demand, good franchisee satisfaction, at least $2 million EBITDA, and a competent management team. If a business does not attract PE interest, it is important to assess market feedback, improve the brand’s fundamentals, and demonstrate growth potential to attract investment. The Forbes Business Council provides a platform for business owners and leaders to grow and network within the industry.
