Access to private equity funding for franchisors
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.
Some of the legal issues of particular importance to an investor in a franchise network are:
- ownership of the intellectual property
- compliance with the Franchising Code of Conduct (both in terms of documentation and compliance with the sign-up procedures)
- relationship between the franchisor and its franchisees (and the potential for disputes)
- arrangements with key suppliers (particularly if the franchisor receives rebates from these suppliers)
- if the franchisees operate from fixed premises, the leasing arrangements in relation to these sites (including whether the leases are in the name of the franchisor or the franchisees).
A franchisor that is considering raising capital through private equity should consider taking some or all of the following preliminary steps before approaching potential investors:
- prepare a comprehensive business plan outlining future plans for the network
- conduct an intellectual property audit
- formalise relationships with key suppliers
- conducting an audit of franchisee files to ensure compliance with the Franchising Code of Conduct
- collate all material contracts into a central contract register
- prepare a comprehensive asset register of all plant and equipment.
Preparation is a key step in maximising the return that can be achieved from a capital raising. By being thoroughly prepared for the process a franchisor will be in the best position to maximise the value attributed to its business. If a potential fundraising is a long term rather than short term goal there are a number of simple steps that can be taken in advance (such as ensuring compliance with the Franchising Code of Conduct) that will save significant time and expense when the capital raising is conducted in the future. While private equity firms are attracted to opportunities in the franchising sector, tough market conditions are likely to result in potential investors having a range of opportunities. As a result, it will be even more important for franchisors looking to raise capital to be well prepared before they consider entering the market.
by Marshall Bromwich
Deacons is Australia's leading franchise law firm, with offices in Melbourne, Sydney, Perth, Brisbane, Canberra and in 11 locations in Asia. We have assisted over 200 franchise companies, from large international corporations to start up franchisors. We do not handle franchisee matters.
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