An investment from a private equity firm can be incredibly valuable in accelerating the growth of an emerging concept or re-igniting a more mature franchise brand.

By Mike Rotondo and Tom Wells

The franchising industry is a powerful driving force in today’s business landscape and its ongoing success has triggered a new trend in franchising, with more and more private equity firms recognizing the immense potential of the franchise business model. An investment from a private equity firm can be incredibly valuable in accelerating the growth of an emerging concept or re-igniting a more mature franchise brand.

As private equity firms enter a franchise system, it is important for both franchisors and franchisees to understand the potential impact of a new outside investor and address potential opportunities and pitfalls that may emerge. The foundation of a successful franchise is open communication and transparency between the franchisor and the franchisees and this relationship is more important than ever after a private equity firm invests in your brand.

Address Fears, Foster Excitement

The transition period that comes with an outside investor entering a franchise system can be stressful to franchisees and create uncertainty in the system. Franchisors must focus on effectively communicating your message in a way that addresses anticipated fears or concerns among franchisees to successfully foster excitement and positivity from the franchise network. Failing to do so will only create unnecessary tension within the system. It’s human nature to be resistant to change and this is especially true for franchisees, who chose to own their own franchise business rather than a traditional corporate career. It is natural to face skepticism when the actions of a new investor may directly impact their business.   

As a franchisor, it is essential to:

– Emphasize that focusing on the health of the brand is also good for franchisees.
– Illustrate how potential growth opportunities created through new investment capital can benefit the brand and all franchisees.
– Focus on the reasons for making changes to the system; franchisees deserve to understand the “why” behind decisions being made.
– Demonstrate a focus through words and actions to ensure franchisees remain in a position to be successful financially.

However, it’s equally important to understand that investments from private equity firms also have the potential to have negative consequences for franchisees if mishandled, and resistance or anxiety immediately following the announcement can be expected. 

The Right Fit

The best thing you can do to protect the interests of your franchise organization is to do your homework and make sure that the private equity firm you decide to work with is the right fit for the brand. The amount of capital the firm is willing to invest is only one factor. It’s equally important to identify a private equity firm with values that align with your brand and its franchisees. It’s understandable that franchisees may feel blindsided by their franchisor making such a key decision without consultation, and if you bring on board a private equity firm that instantly attempts to introduce new products or marketing strategies without giving the franchise network a chance to adapt, it will be incredibly disruptive to internal operations.

When BIP Capital invested in Tropical Smoothie Cafe in 2012, leadership at both companies made sure to immediately identify roles, responsibilities and boundaries, and doing so helped us avoid the backlash that other franchisors have suffered. When coming on board, BIP Capital understood that if a new initiative was to be implemented or changes were to be made, franchisees needed to hear the message from someone they knew and trusted, such as a company executive. When the initial announcement was made, most of Tropical Smoothie Cafe’s franchisees were uneasy about the news. Company leadership understood that and took the time to answer any questions or address any concerns they may have had. This was done through in-person meetings with groups of franchisees and ensuring accessibility to the leadership team.

The franchisees were used to transparency and open communication before BIP Capital joined Tropical Smoothie Cafe. Both parties were committed to ensuring that relationship didn’t change and continued to promote the importance of honest dialogue within the system. As a result, they were able to focus on changes that would positively impact Tropical Smoothie Cafe’s franchise network, like the growth in infrastructure to support franchisees, which helped create goodwill in the system. In time, franchisees came to understand the value that BIP Capital brought and began to view the firm as an extension of their team.

Private Equity Can Bring Growth, Efficiency, Expertise

At the end of the day, franchisees want to know that they have unwavering support from their franchisor and that decisions made at the corporate level will have a positive impact on their business. Franchisors and franchisees can benefit from the growth, efficiency and expertise that a private equity firm can bring to a franchise system. With that, it’s crucial to present a cohesive message from the franchisor and private equity firm in order to bring comfort to franchisees and reinforce the shared goals of system-wide success.

Mike Rotondo is CEO of Tropical Smoothie café. His distinguished career in franchising and foodservice spans three decades with brands like Arby’s, Wendy’s International and HoneyBaked Ham. Under Mike’s leadership, Tropical Smoothie Cafe has reported double-digit comp sales growth since 2013 and he has increased the system’s AUV by nearly 58 percent over the last five years.

Tom Wells is Vice President at BIP Capital, a venture capital firm that provides capital and operational support to emerging, high-growth companies. He leads BIP Franchise Accelerator, a division of BIP Capital that utilizes the firm’s deep franchise experience to assist emerging franchisors in scaling their businesses.

Search