Global Franchise 9.1

business owners, and it takes time to turn the ship and get franchisees on board with change. As PE investors gained experience in the franchise model, their due diligence also improved. They’re now much better at avoiding overly risky franchise bets in the first place. On the flipside, this also means that stall-outs often can’t get the strategic assistance they need – at least not from PE. Today, most private equity missteps boil down to unit level profitability issues and the relationship between the management team and franchisees. If this relationship isn’t well tended to, franchisees can lose their appetite for growth and their faith in the direction of the business. PE investors move fast and can be a bit clinical in their approach to things. Even when filtered through the management team, their blunt communication style and decision-making speed (often without franchisee input) can rub franchisees up the wrong way. For example, new fees and supply chain strategies can prompt swift rebuttal from franchisees. The fall- out from franchisee dissatisfaction may not be immediately visible in business metrics but by the time it is, PE may have a turnaround on their hands! Roark’s Subway acquisition is a significant milestone in franchising. What can we expect from this change? Roark is one of the most prolific users of whole business securitization – debt backed by franchisee royalties. Subway will take on as much as $5 billion of debt post-acquisition and we can expect Roark to take out large dividends over the next few years funded by the initial and subsequent securitizations. We can hope – but not expect – that Roark will also put money back into the business to fund remodels and improvements to the business. Subway is still a work in progress, but has an incredible brand to lean on. We can expect a huge push on international growth to offset challenges in over-stored mature markets like the U.S. Roark prefers a relatively low profile which will be impossible here. Together with the big push for remodels and likely closures still to come, we can expect ongoing public scrutiny. How Roark handles franchisees around those closures will be critically important, not only to Roark’s success with Subway, but also in terms of public opinion and the opinion of franchise regulators about private equity. ‘Big money’ is fully on display here. The sheer number of franchisees in the Subway system makes their voices impossible to ignore. It won’t be about just getting the turnaround mechanically correct. Together with good management, Roark must also demonstrate excellence in change management and relationship building to right the ship and uncover new growth. It will be interesting to watch. ABOUT THE AUTHOR Big Money in Franchising is an essential read for anyone keen to scale their franchise business. Available from Amazon and all good bookstores, it has received rave reviews from across the sector, and is one of our top business books of the year. PE’S PLAYBOOK FOR FRANCHISE GROWTH Improve unit level profitability Invest in support & growth accelerators Back office and enabling tech Improve same store sales Upgrade/add corporate talent Monitor and improve key performance metrics Add new products & services Enter new markets Create shared service platforms Reduce unit level costs Pursue tuck-in acquisitions accretive to the platform value proposition GLOBAL-FRANCHISE.COM 45