Global Franchise 9.1

firms carefully select investments according to their specific criteria and then inject capital to drive rapid growth in those chosen businesses. Consequently, the rest of the market experiences a significant uptick in competition, particularly in the recruitment of new franchisees. This heightened competition poses significant challenges for emerging brands, creating a tougher landscape than ever before. Today, founders are not only competing with emerging brands but also contending with the challenge of competing against those already backed by deep- pocketed PE firms. Additionally, PE firms are actively consolidating fragmented sectors, such as home services, into multi-brand operating platforms. These platforms can leverage various efficiencies, including supply chain optimization, cross-marketing, and cross-selling. As a result, new concepts entering the market need to launch with stronger capitalization and a more robust strategy to stand out amidst increased competition. All this PE money encourages a record number of new franchise starts. For example, in the U.S. market, more than 400 per year are now launching – up from a running average of around 250 per year during the last few years according to FRANdata. The shift has been a boon for brokers, outsourced sales organizations, and those who help new brands launch. But many founders of new brands don’t fully understand PE’s impact and aren’t prepared for its impact. They’re just learning the ropes of the franchise model and don’t realize there is now a PE dynamic to figure out as well. How can PE accelerate brand growth? Private equity firms have a straightforward playbook for growing their franchise acquisitions, but putting it all into action is no simple task. Here’s how it works: PE acquires a brand and invests in various areas like marketing, product/service enhancement, bolstering franchisee support, and streamlining construction processes to reduce costs and accelerate new site launches. Their goal is to prioritize initiatives that yield rapid returns, driving interest among franchisees for expansion. This growth trajectory can persist through multiple ownership changes within the PE realm, as long as there’s a steadfast commitment to improving profitability at the unit level. Private equity firms also love a buy-and-build approach known as “platforming.” This strategy involves starting with a strong leadership team and flagship brand and then acquiring complementary businesses, known as tuck-in acquisitions. A prime illustration of this success is Neighborly, which has expanded to include over 30 brands under its platform. Throughout this journey, there have been multiple PE ownership changes, but sponsors kept the management team focused and maintained a focus on enhancing unit-level profitability and exploring new avenues to leverage the platform’s capabilities. Another example is Inspire Brands, currently owned by Roark but likely to go public. Franchisees enjoy multi-brand expansion opportunities and marketing and supply chain efficiencies that are tough to duplicate without the scale of the Inspire platform. For founders and multi-unit franchisees, the potential for multiple arbitrage and wealth creation is stunning. That math is discussed extensively in the book. GLOBAL-FRANCHISE.COM 43 HOW PRIVATE EQUITY IS IMPACTING FRANCHISING New liquidity options at both brand and franchisee level Higher valuations for good businesses More capital and support to accelerate enterprise growth Fierce competition to recruit top franchisee talent Increased demand for outsourced services (e.g., franchise sales, marketing, real estate) More expensive and challenging to launch new concepts More new concepts entering the market