Should Franchisors Consider Private Equity Investments?
Private equity investors have grown comfortable with the predictable cash flow and exciting growth opportunities in franchising. Today many franchise companies exploring financing alternatives are looking to private equity firms for growth capital, cash for buy-out’s, or liquidity for shareholders and management. Forming an equity partner relationship can have a dramatic impact on the long-term potential of a business.
How can you be sure it’s the right choice for you? We asked Glen Kaufman, Managing Director at American Securities, a private equity firm with a consistent track record in the industry. The middle-market firm invests in companies with revenues ranging from $100 million to $1 billion.
Q: What should you expect from the franchise/private equity investor relationship?
Kaufman: You ought to expect a partner who understands your company and its culture, is supportive of the management team and its position, understands how to deliver value without infringing on management’s role, and is oriented towards the long-term successful building of your enterprise. The capital that a firm will bring is necessary, but what you really ought to be focused on are those other elements.
Q: How can you find the right equity partner?
Kaufman: There is no shortage of equity partners. You can seek equity capital directly through your relationships with law firms and accounting firms who will generally know the sources of equity capital. You can also retain an intermediary, a broker, or an investment banking firm that will connect you with potential providers of capital. Your job during the process is to effectively communicate your story and your vision in a candid way so that you ultimately get the right match.
Q: What can you do to make it succeed?
Kaufman: The key to success as in all relationships is picking the right partner that matches your style, culture, and goals. Then nurture the relationship from the earliest stages. Avoid doing negative things like portraying yourself differently than you are, over-promising, or developing an attitude that does not promote constructive dialog such as blocking the other party from the discussion.
Q: When is the right time to begin the process?
Kaufman: People want capital for many reasons. Whatever your reason, the right time to raise capital is before you need it. You never want to be in a situation where you need to do anything in business. You want to act to raise capital when you feel no pressure to have that capital.
Contact info: Glenn Kaufman, Managing Director American Securities (212) 476-8029 www.american-securities.com
The Franchise Experience
Many of the franchisees we talked with had to make a decision first on whether they would open an independent business or a franchised one. A few of their stories follow.
4 Signs a Franchisor May Not Be Around for the Long Haul
A critical part of the due diligence process for prospective franchisees is trying to discern (to the extent reasonably possible) whether the franchisor will be around for the long haul. After all, much of what you pay for in a franchise opportunity is the right to be associated with the franchisor’s brand and system, the right to use the franchisor’s proprietary materials, and in some cases, the right to an exclusive territory. If the franchisor goes out of business, all of these rights go up in the air (if not out the window), and you may well be left in a worse position than if you had just gone into business on your own in the first place.
The Franchisee & Franchisor’s Point of View
Many of the characteristics of the perfect franchisee are shared by both a franchisee and a franchisor, but there are also some slight differences. A franchisor is more concerned with how an individual franchisee will fit into their business as a whole, and not necessarily how the single franchise will operate on a day to day basis (although that’s still important to them). Meanwhile the franchisee cares almost exclusively about the success of that individual.