Investors Love Franchise Opportunities
Acquisitions of franchise systems by the private equity industry are commonplace, to say the least. Franchise systems are inherently appealing to private equity firms due to their contractual relationships, a long-established stream of cash flow, and a lack of variation in both physical assets and employee skills. Furthermore, the gross margins of middle-sized franchises that have established steady cash flow are relatively high.
Future growth consists of exponential profit due to the nominal nature of the marginal cost of economic unit change, thus rendering the scalability of franchisors extremely high. The fundamental theorem of the franchise’s business model has been proven through its establishment; adding newfound capital to the equation yields a product of maximized business potential.
Confidentiality is Key To Your Franchise’s Success
In spite of this, it is not a sort of panacea and there still exist various risks on the part of the private equity firm and the acquired franchise including the franchisees. Thus, it is absolutely necessary for the franchisor to maintain the confidentiality of the existence of a deal or the franchise’s status being “for sale” which may ultimately interfere with the desire of the buyer to attain the maximum amount of information regarding the health of a franchise system.
Furthermore, coupled with the sale of a franchise are a plethora of different agreements and contracts, verbal agreements meant to be honored by the existing franchisees, and other miscellaneous agreements that constitute the franchisor-franchisee relationship. Albeit no legal obligation exists to force an acquiring firm to abide by the rules of the past, it is in the firm’s best interest to maintain the trust of its franchisees by not drastically altering the status quo by failing to deliver on long-held promises. Risk is ever-present, and the best remedy to avoid said risk is to gather knowledge regarding the franchise system being acquired..
Franchise Experience Matters
An experienced franchise attorney is paramount to any franchisor pondering an exit strategy through a private equity firm, capable investor, or family investment office considering the franchising market.
The spoils of penetrating the market are abundant as is clear by the margins in the status quo, yet with high returns inherently comes heightened risk. Knowledge pertaining to a franchise system is the greatest weapon to counter risk in this instance.
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