I talked to a private equity guy who manages $4 billion.
They want to partner with franchisees to help them grow. This is a MAJOR change from PE only wanting to invest in franchisors.
Two of the topics we discussed:
When do you come “too big” and the franchisor restricts your growth?
A franchisor has to approve every transaction. They can deny it but it’s politically risky for them.
They want to have a great working relationship with their top franchisees. It goes both ways. Being a cheerleader for their big initiatives goes a long way
A lot depends on the brand’s size and % of units you control.
I own 33 out of 1,000-unit brand (3%). The top 2 franchisees have 100 each (10%). If they wanted to merge plus buy the 3rd biggest to control 25% of the system that may be “too big”.
I would love to hear feedback from some Franchisors on when do you put the brakes on a Franchisee?
What multiple do small franchises trade at?
Franchise resales are valued at a multiple of profit.
A stable, more profitable business will be valued at a higher multiple than a risky, lower-profit business.
There’s a lot of nuance here. Over the next few weeks, I’ll explore how franchises are valued and how to maximize your exit.
Most small franchises trade at 2.5 to 3.0X. For example, a franchise location making $100k profit is valued at $250k to $300k.
If the buyer is another small operator, there wouldn’t be a change in multiple.
However, if the buyer is a much larger company, the value will instantly increase due to a higher multiple. For example, if the buyer already has 20 locations doing $25M in revenue, they could be valued at 5X profit.
The same $100k/year profit, bought for $250k, is immediately worth $500k.
If the “roll-up” buyer continues to grow, the company could eventually be worth 6X, 7X, 8X, etc.
My Take
This is a trend that will only get stronger.
It’s been happening in fitness & food for years. Now we’re seeing it in the trades.
Private equity is only interested in partnering with “platform franchisees” — proven owners with at least $2-3M of EBITDA (most need a minimum of $5M/year).
They aim to accelerate the franchisee’s growth to $10M/year through acquisitions and development.
So how do you get to $5M+ of EBITDA? What about $1M+?
How many franchisees do you know making that much?
The quickest way to learn is to surround yourself with other people who’ve already blazed the path.
This is why I created the 8-Figure Franchisee, an exclusive community for driven franchisees on a mission to build 8-figure businesses.
Joining a private group of like-minded people is a cheat code in business. We’ve got members generating $100M, $50M, $10M+ sales per year who share the strategies & secrets of what it takes to get there.
Reply here if you own a franchise and are serious about building an 8-figure franchise. Happy to tell you more.
Cheers!
