Private Equity Investing in Franchises
When focusing on retail segments, we often discover franchised businesses. The primary argument supporting the franchise model is that entrepreneurial, heavily invested and closely aligned individuals operate each of the stores. If you compare this to salaried employees working just another job (as managers of stores), you can see how franchising makes a lot of sense.
In most franchise businesses, there’s constant conjecture around the ideal balance of franchised versus company-owned stores. Prima facie, you may think company-owned stores breach the idea of the franchise model, but we also interminably hear how repurchased stores operate more profitably when company-owned.
Maybe franchises only work in certain industries, maybe it’s just not easy to find great entrepreneurs to run stores, or maybe the fault lies with franchisors.
As a private equiteer, it’s important to analyse the dynamics and differences between franchised and company-owned stores. But, more importantly, be wary of bold plans to repurchase stores just because the franchisor thinks they’ll become more profitable. I see countless deals solely based on this premise, but I just don’t buy it. If anything, these audacious repurchase plans seem to be exercise in palliation, rather than value creation. And, they’re especially questionable if the businesses success was founded on the original franchise model.
With all of that said, company-owned stores are great for franchisee training, market and product testing, and benchmarking; they’re not all bad like it may sound. There are also situations in which the franchise model was only originally needed as a workaround for limited capital. And in these situations, it’s hard to make a case against a franchisor looking to buy back great money earners with the support of a friendly private equiteer.
Just be wary of spurious claims and Band-Aid solutions for terminal problems.
