What’s Scaring Off Potential Franchise Owners Right Now?

Let’s jump right in (even if this post pisses off private equity executives).

Here’s the huge new fear prospective franchise owners are beginning to have:

That the franchisor they’re signing their agreement with will end up selling to a private equity firm. And they’re right to be fearful.

Heck, if I was thinking about buying a franchise, I’d be worried about it too.

The Growth of Private Equity in Franchising

“Roark Capital to Buy _______”

“Princeton Equity Buys _________”

Etc.

It’s become apparent that more and more private equity deals are happening.

Now, these deals are great for the founders of the franchise concepts being gobbled up.

After all, who wouldn’t want a check for $750,000 or $1.5 million directly deposited into their checking account? Or more?

And it’s not like these franchise CEOs haven’t worked hard to grow their franchises. But…

What about their franchisees?

What happens to them?

Not nothing, me thinks.

The Scary Thing Private Equity Companies Focus On

Hint: it’s not the franchisees.

Private equity firms treat franchise like any other asset to be stripped for parts. Their approach is fundamentally different from traditional franchise development.

Specifically, while successful franchise systems historically focused on franchisee profitability – as they should, because profitable franchisees meant sustainable royalty streams – private equity operates on a completely different timeline and philosophy. This:

They're not interested in long-term success.

They want maximum “extraction” in 3-7 years before they flip the brand to the next buyer.

In other words, it’s all about their ROI. Which is good for them. But is it good for franchisees?

Can Franchisees Get Hurt When Private Equity Enters The Picture?

Part of the value of buying into a franchise system comes from upfront and ongoing support – training, marketing, operational guidance, and brand development. Private equity firms can potentially gut these support systems because they represent costs without immediate returns.

Next, the new company may eliminate field visits and the employees who make them.

And training programs could potentially become more automated and impersonal.

Another thing that could happen is that marketing becomes more generic and corporate-focused rather than locally relevant.

Worse, the human relationships that make franchising work get replaced by automated systems and offshore call centers. Yuck!

That means when you, as a franchisee, need help solving an operational problem or dealing with a challenging situation, you'll find yourself talking to someone reading from a script rather than the experienced employee who always understood your unique situation and quickly resolved whatever issue your franchise business was experiencing.

Note: the things I named above are worse-case scenarios. They may not ever happen.

Potential Financial Games May Be Played

Private equity firms love financial engineering – restructuring deals to optimize their returns regardless of operational impact. That means they could saddle franchise systems with debt to fund their acquisition, then demand higher franchise fees to service that debt.

Additionally, they may sell off valuable real estate assets and lease them back at higher rates.

Finally, they may try to restructure supply chains to benefit some of their other portfolio companies. Doing that could increase your costs. Bottom line?

Your success becomes secondary to their financial optimization strategies. To their bottom line.

What Does This All Mean For You, As a Prospective Franchisee?

If you're considering franchise ownership, you need to understand who actually owns and controls the system you're evaluating. Or could. Because private equity ownership fundamentally changes your risk profile and your potential returns.

So, look beyond the brand presentation materials. Research the ownership structure. Understand the debt load. Investigate recent fee changes and territory modifications. Next, talk to franchisees who've operated under both traditional and PE ownership. Ask them what changed when the new owners came in.

Most importantly, you need to recognize that private equity owned franchise systems operate with different incentives than traditional franchise companies. Your long-term profitability and wealth building aren't their primary concerns.

The Danger of Private Equity to The Beloved Franchise Model

Franchising has built hundreds of thousands of small businesses. Some of those franchise businesses have created wealth for franchisees.

But private equity's approach threatens to turn franchise "ownership" into expensive management contracts where you potentially bear more risk while they extract the returns.

In the final analysis, the franchise business model can still work – but only when the franchisor's success depends on franchisee profitability.

So, before you buy a franchise, make sure you understand whose interests really get prioritized in the system you're considering. And look at all the scenarios in which a private equity firm could buy the franchisor you signed with. Ask yourself how it might play out.

 After all, your franchise business ownership dreams deserve better than becoming someone else's financial engineering project.

Finally, have you been affected by a private equity buyout in your franchise business?

Did I miss something?