The Top 7 Factors Potential Buyers Look For In A Franchise System

by Patrick Galleher, originally published on Forbes.com on September 15, 2022

With consistent revenue streams from franchisee-paid royalties, limited capital investment and a replicable local business model, franchise systems continue to attract heightened interest from investors.

The increased M&A activity in franchising means more competition among franchisors to attract the right buyer. To appeal to potential buyers, franchisors must prepare for scrutinies, such as their industry and financials, to broader selling points, including franchisee and customer satisfaction and more.

Strong Numbers: Then, Now And In The Future

Before preparing your franchise system for an M&A sale, the first step is to enlist a trusted partner, such as an investment bank. Your investment bank will help you attract the right buyers, ensure efficient communication, help you identify your unique selling points and facilitate a smooth transaction.

From sales to profitability, signed agreements and market share, investors are about numbers. Your profit and loss statement will provide potential buyers with the confidence to make their decision. It will also help them understand what your company’s expenses look like and what makes it profitable. If the industry has a strong history and an impressive compound annual growth rate, that’s something you’ll also want to highlight.

From an investor’s point of view, a “healthy” franchise system is made up of satisfied, high-performing franchisees. Work with your advisor to gather specific examples and other evidence indicating consistent, strong unit-level economics (ULE) across your franchise system.

Big numbers are impressive, but smart investors will dig deep. Be upfront with what is driving those impressive numbers. Share details on your short- and long-term expansion plans and marketing tactics.

A Resilient Business Model

The past few years have taught us the importance of resiliency—especially with talks of another recession. While the pandemic and other unforeseen factors led many businesses to shut their doors, others grew stronger. If yours was among these resilient businesses that offered an essential product or service, a contactless model or hybrid solution, be prepared to provide specific examples of how you overcame external obstacles. Work with your trusted investment partner to share specific strategies on how your company is set up for success during uncertain times.

A Forward-Thinking Team

Before moving forward with an M&A transaction, investment firms will always do their due diligence. While documents and figures are key, equally important is introducing them to your people, strategies and philosophies. Speaking with those who are at the forefront of your company’s growth offers a personal connection—and ideally, added confidence in the brand’s leadership.

Any great investment bank will tell you that “every business is a people business,” and oftentimes, your leadership team can make or break a sale. Take a close look at your corporate team to ensure you have motivated individuals who share your company’s values. Be prepared to make tough decisions about removing weak links and investing in leaders who are aligned.

A Solid Franchise Agreement

Investment banks can not only help you throughout the sales process, they can also provide valuable feedback beforehand so you can best present your systems and processes. Many buyers will want to see what your franchise agreement looks like.

Make sure you have a standard franchise agreement—allowing changes will set you back when it comes time to sell your company. You should be able to provide one concise answer for buyers who ask what your agreement looks like, rather than, “Well, it depends.” A solid agreement equals a solid investment opportunity.

You should also make sure to collect all franchise disclosure document (FDD) receipts. This not only confirms distribution and protects you legally, but it also shows buyers that they’d be investing in a franchise that is tedious and dependable.

Franchisor And Franchisee Benefits

Be sure to highlight the benefits your standardized agreement offers your company and what makes it attractive to franchisees. Maximizing your rebate programs can make a huge difference to candidates who are looking at similar franchises.

Investors will also likely favor franchisors who rely more on ongoing royalties from franchisees as their primary source of revenue over those who bank on upfront franchise fees. They want to see how you are setting up your franchisees for ongoing success, in consistent recurring royalty payment revenue. An investor will turn away from deals if they sense unhealthy practices, such as a heavy focus on selling new units to collect hefty franchisee fees over supporting existing franchisees to achieve strong ULE.

Smooth Internal Operations

Take the time to walk investors through your franchise sales process in chronological order, highlighting the support you provide franchisees from the time they sign their agreement to long after their grand opening. Do you offer help when it comes to choosing a location, negotiating a lease, recruiting, training and marketing? What resources set you apart from competitors? How are operations managed and streamlined? Invest in the latest technology and outstanding customer experience to show you’ve put serious effort into your company’s future.

The most experienced advisors know how beneficial it is to provide a broader picture of your support system and can walk you through the best tactics. Show potential buyers you not only care about the success of your company as a whole but each individual location. Collect testimonials or introduce them directly to highly satisfied franchisees.

Invest In Your Reputation

It takes a serious investment to attract a serious investment. The best thing you can do when selling your business is to approach it from the investor’s viewpoint, and this can mean seeking the help of a reliable investment bank. Get to know your potential buyers’ biggest concerns and seek feedback from your partners or other investors.

Don’t underestimate the amount of research a private equity firm, or any buyer, will do. Pay close attention to what information is listed about your franchise online and consistently work on your brand, public relations efforts and social presence.

There’s no such thing as a “perfect” sales process, but if you’re consistently investing in your growth, operations, people and reputation, you’re doing it right.