Partnering With a Private Investment Group

Learn what investors look for and key ways to make your brand stand out. 

By Erik Herrmann, CapitalSpring 

When it comes to franchise investment opportunities, private equity funds offer a unique opportunity to spur growth and development that shouldn’t be ignored. Should private equity choose to invest in an emerging brand, the potential for scaling and even segment dominance is high. Or say an investment group opts instead to fund a more established brand. That support can equip the brand to move to the next stage of expansion and operational enhancement. 

Put simply, the restaurant industry at large, and franchise concepts in particular, provide investors the possibility of driving value to a degree that many other investment opportunities cannot. The way for franchisors to gain investors’ attention, however, is to make sure they put their best foot forward. By knowing which metrics investment companies are focused on, franchisors can take care to anticipate scrutiny and position themselves for success.

Here are the top three factors that franchisors should be sure to optimize if they want to not only make it to the starting line, but all the way to signing on the dotted line.

1. A truly differentiated concept.

In 2019, the competitive nature of the restaurant industry is more evident than ever. Demand hasn’t necessarily kept pace with the number of seats in the industry at large. There’s a surplus of brands all clamoring for market share, meaning that the motto of the American restaurant industry these days could feasibly be summed up as: “Differentiate or disappear.” 

To capture an investor’s attention, franchise brands must first demonstrate their understanding of the fundamental need to differentiate. Showcase that you started with a consumer’s need and identified an opportunity set in the market by finding the right combination of price/value, convenience/hospitality and dining occasion. And remember that, just because your concept might have strong bones and successfully differentiated at the onset doesn’t mean you can’t, or shouldn’t, learn. Investors want to see that brands know how to “read the consumer” and adapt to significant marketplace changes without losing their brand integrity.

Restaurant franchises can certainly evolve over time, but the ones that do it right have a differentiated foundation to begin with and evolve in ways that leverage versus distort their core identity. Ultimately, franchisors looking for capital infusion need to demonstrate that they are unique enough in their space that they minimize competitors’ reach and supply a sufficiently differentiated offering. Differentiation is what draws market share from other concepts and that’s the key to brand longevity.

2. A strong financial profile.

As a franchisor, you know that your growth is primarily tied to your ability to entice new franchisees or to incentivize existing franchisees to grow their unit count. Prospective investors know this too. In order to achieve unit growth as a franchisor, you need an attractive financial profile overall compared to that of the competition. 

There’s no shortage of franchisors trying to attract the right franchisees. Strong restaurant franchises sustain because they have strong franchisees executing their brands. That dynamic allows larger, more sophisticated “platform” franchisees their choice of brands to add to their portfolios. As a franchisor focused on growth — regardless of the franchisee you are targeting — you face a plethora of competitive franchise options in the marketplace. The key is breaking out from the herd.

Investors will ask themselves: What is a given restaurant brand’s financial footprint? How do the brand’s metrics compare to those of similar concepts? When you look at system growth rates, unit ROI, AUV and EBITDA, what story are the numbers telling on a relative basis? If you haven’t asked yourself these questions already — and made sure your FDD and franchise literature showcases a positive story — you leave yourself at a disadvantage.

3. A proven and aligned leadership team.

It goes without saying that most investors are not operators. Investors are focused on backing experienced management teams to execute a shared vision for the business. As a result, tremendous value is placed on the capability, breadth and cohesion of the leadership team. Lacking the right team is a desk kill for most investment funds, so attention should be given to building the right bench before engaging with potential investors.

In my experience, those investor-franchisor partnerships that face challenges usually do so as a result of a lack of alignment, whether short- or long-term. Investor-franchisor relationships without alignment are destined to fail because, without a shared vision at the top, execution — whether unit growth, brand evolution or core operations — will deviate from the investor’s investment goals that formed the basis of the partnership. 

Franchisors, therefore, should make sure their brand culture, vision and business strategy permeate every level of the organization — and that culture flows from the top. Any investment group will be looking to see if a franchisor’s leadership team has a strong, clear vision for the business that aligns with their own investment objectives.

Franchisors must also demonstrate a willingness to open up and broaden the executive team as needed, especially if the investment group looking to partner is growth-oriented. CapitalSpring has stepped into relationships where the level of leadership was hitting all the marks for the present status quo, but wasn’t fully equipped to scale. Pushing down on the accelerator always comes with the need for more resources, so if a franchisor doesn’t have the bandwidth to scale their footprint without stretching leadership too thin, that brand needs to be open to adding more talent.

Overall, the key to any partnership is alignment. The more you can foster alignment across all players when it comes to long-term direction right up front, the stronger the investor-franchisor alliance will be. 

Erik Hermann is a Partner with CapitalSpring and Head of Restaurant Investment Group. Find out more about Capital Spring here.