The continued growth in the franchise sector has led to substantial interest by private equity firms looking to make strategic investments in businesses with high growth potential. A number of high profile franchise brands have attracted interest from private equity firms. Given the current state of the global financial markets, private equity investments in franchise networks are expected to increase as it becomes more expensive for franchisors to raise expansion capital through traditional debt sources. Franchisors that are considering raising equity capital need to ensure that their network is ready for the scrutiny that it can be subjected to during a capital raising process.
In an ideal world all businesses would be operated and managed as if the business was being prepared for sale. The commercial reality is that this does not happen in practice. It is important that a franchisor devotes sufficient time and resources into preparation if it wishes to maximise the value it can achieve from the transaction. A prospective investor, particularly a sophisticated investor such as a private equity firm, will ordinarily insist on completing due diligence (both financial and legal) on the franchise network before they are prepared to commit funds. A franchisor that conducts its own internal due diligence (even at a high level) can identify issues of potential concern to an investor and take steps to resolve them before an investor becomes involved.