For twenty plus years now I have been reviewing franchise opportunities in one form or another. Unlike a lot of franchise lawyers, I represent both sides of the fence. I have helped business people start franchises and I have helped hundreds of franchisees review FDDs before buying franchise opportunities. Many years ago it seemed as though franchisors were afraid of Iowa. Those franchisors thought the Iowa franchise act was too restrictive and too franchisee friendly. But over the years, franchisors could no longer ignore Iowa. The economic success of Des Moines and its metropolitan area have made our community extremely attractive for franchisors from around the country, and with that, a new crop of Iowa franchisors are finding success with the franchise business model as well.
I have written a number of times about makes a good franchise opportunity. Some things I have discussed in the past is whether the franchise is a solid brand? Do people recognize the franchise? And does the franchise have systems in place that make it repeatable and scalable? But recently I have been diving in much further into what makes a particular franchise a good investment. In conducting my research I ran across a terrific article from Clearlight Partners entitled, Franchisors vs. Franchisees: Why Private Equity Likes Both. This article shares why private equity investors now like franchises for the strong investment returns potential.
We can definitely learn a lot from private equity investors. After all, these are the pros of investment. Some private equity firms have developed businesses that are valued in the hundreds of millions, and still others that are in the billions. In other words, these pros tend to know what they are doing. So what does private equity want to see in franchises? According to the article, private equity investors consider the following:
- Product or service that is straight-forward and can be consistently replicated;
- Product or service that is sustainably “on trend”;
- Universal appeal across geographies;
- Sufficiently long operating history;
- Critical mass of units;
- Good unit economics;
- Successful franchisees;
- Runway for future growth.
The article also goes into further detail to explain each consideration and also provides a detailed discussion regarding unit economics which I found helpful. Overall, its one of the better articles I have read on franchise investment. I strongly urge you to give it a read whether you are thinking about starting a franchise or becoming a franchisee.