Buying a Franchise
March 09, 2021
by an investor from Babson College in Boston, MA, USA
An old proverb reminds us that if you are searching for a jewel, it too often may be hiding in plain sight! Most searchers discount the opportunity to become the CEO/owner of a franchise for a variety of reasons, including size, limited growth, low margins, restricted flexibility, and “status.” According to Statista, in 2019, there were approximately 780,000 franchise “establishments” in the US with an economic output of about $787.5 billion and with 8.43 million people working for them—certainly not an insignificant niche.
In a survey of 147 Entrepreneurship through Acquisition (EtA) businesses purchased by Harvard Business School graduates in the past decade, 10 (or 7%) purchased franchise operations—2 immediately upon graduation and 8 mid-career (See Blog Post: Searching Mid-Career). All were self-funded, paying an average earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple of 4.2x with a range of 2.7x to 5.5x. The median seller note was 20% of the purchase price with 15.5% outside equity and the remainder financed by bank debt. Of these franchises, five were single-unit operations, and five ranged between 13 and 23 units. Employee count ranged from 8 to 300. Searchers took a median of 12 months from search launch to close with a range of 6 to 35 months. One additional searcher/CEO decided to “build” rather than “buy” a territory for seven car wash facilities.
You can read more in my blog post here: https://jimsteinsharpe.com/searching/buying-a-franchise/
Please let the community know your thoughts and comments below!
Search On!!!
Jim Sharpe
from Carnegie Mellon University in Philadelphia, PA, USA
I assume a lot of searchers are looking for autonomy in their new roles--especially self-funded searchers. Being a franchisee is not necessarily the best way to go if you're seeking autonomy. Franchisors have a lot of power over franchisees due to the franchise agreement.
These franchise agreements are what kept me from signing the dotted line. One such agreement, with a fitness franchise, had a clause that would have allowed the franchisor to take over my territories if my establishment had been closed for 3 days. There was no force majeure clause protecting the franchisee, though we requested (and were denied) one. Me being in New Jersey, I was thinking of another Hurricane Sandy forcing me to close my doors for 3 days or more.
Less than a year later, COVID-19 hit and this fitness franchise would have closed for months, not just 3 days. The franchisor might not have taken my business from me--but they were within their contractual rights to, and they would not have owed me a dime.
I still view franchises as a good investment. Just make sure the franchisor is a really good fit for you, has a good reputation, and that you aren't taking any legal risks of which you're unaware.
from University of Southern California in Los Angeles, CA, USA
Nonetheless, there are funds out there that make money through trading franchisees. Other than joining a growing (or stable) brand, it would be important to achieve operating efficiency. Key to that is usually people management. Another high-level strategy would be to scale up. Private equity funds in franchise deals typically buy or ask for master franchisee rights and grow through sub-franchising as well as roll-ups. Can improve negotiating power vs the brand owner and enjoy some multiple expansion.