PRIVATE EQUITY IS MORE ART THAN SCIENCE: Tips for determining your need, navigating the process and finding the right investor.

Author:Beagelman, Steve
 
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In franchising, the ultimate goal for many brands is an investment from, or acquisition by, a private equity firm. As you are growing your franchise brand, the thought of private equity has likely crossed your mind at some point. Securing private equity takes many shapes and forms, and is often a complex process. Your approach to pursuing an investment should be strategic, thoughtful, and most importantly, the right fit for your brand and for you as the franchisor.

TV shows like Shark Tank or The Profit offer a good illustration of the variety of forms a private equity deal can take, in terms of investment level and ownership stake. In some cases, contestants turn down offers after realizing that selling even a portion of their business is not right for them. This is exactly how it works--private equity firms do not take a one-size-fits-all approach to investing in a brand. Before pursuing an investment, franchisors need to understand how it works and what to be aware of during the process.

Anatomy of a P/E Deal

The major benefit of a private equity investment is an influx of capital to grow your business that you wouldn't be able to get on your own. What should also be considered is the level of sophistication, like accountability, structure, controls and fiscal responsibility, that an investor will look for. Most investors will help you focus on improving the company's profitability--including creating budgets, reviewing proformas and costs of goods--and sharing their connections to new vendor partners, industry knowledge and other resources the franchisor might not already have.

Unfortunately, there isn't a proven formula to securing an investment. It's more of an art than a science, and many factors come into play. Brands typically start getting interest from investors when they reach 25 to 50 units. That doesn't mean that smaller brands can't get an investment; it just needs to be under the right circumstances.

In 2016, K-9 Resorts Daycare & Luxury Hotels received a multi-million dollar investment from Navigator Partners. At the time, the brand had four units, which is relatively early for PE, but the company's excellent unit-level economics, operational systems and the very hot pet industry made it stand out from the pack. The owners remain majority shareholders and control the day-to-day operations, and secured the resources they needed to scale. This is a win-win scenario for all, and the PE firm added great resources and skills to...

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