Latest Franchise Investment Trends

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Recently, I moderated a panel for an International Franchise Association webinar called “From Venture Capital to Private Equity: Franchise Investment Trends and Terms”.  I was fortunate to have fantastic panelists: Satya Ponnuru (General Partner of NewSpring Franchise), Vanessa Yakobson (CEO of Blo Blow Dry Bar), Bernard Markey (Navigator Partners) and Ed Teixeira (Franchise Grade).  I wanted to share some of the takeaways of that panel.

First, to differentiate, the panel covered everything from early stage growth equity investments (venture capital) to later stage private equity buyouts – a lot to fit into one hour!  Both venture capital and private equity have grown exponentially in the last few years – the first half of 2021 approximating the first 2/3 of 2020 in private equity funding according to the Pitchbook Q2 2021 US PE Breakdown report.  And interest in the franchise sector has grown at all stages.

One of the main takeaways was the emphasis all panelists placed on a healthy relationship between the franchisor and the franchisee.  Clearly, a franchise system will not be a strong business unless the financial metrics are solid at the franchisee level – if the franchisees are not making money, the system will ultimately fail.  But also general communication between the franchisor and franchisee and satisfaction with that relationship was an important aspect of strong franchise business.

Second is making sure that the partnership between the founders and others involved in the franchise system and the investors is solid and that goals are aligned between the two.  They will be working together, hopefully for a long time, so it is important to take time to be confident of the relationship.

Third, for a franchise system to make strong efforts to keep your books and records in order.  If you don’t have someone on your team that is in charge of legal, compliance and/or the financial end of the business, that needs to be added.  Everything from the basics of making sure receipts and franchise agreements are properly signed to gathering solid data on your franchisee businesses should be undertaken from the beginning.

And all seemed to agree that, except in rare circumstances, a solid Item 19 Financial Performance Representation is important.  A lack of an Item 19 was viewed as a warning sign.

Of course, pointers relating to the due diligence process and the negotiation of the transaction were covered, but it is important to keep these high-level tips in mind as well.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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