Stop Calling It a Franchise Resale

By Sean Goldsmith

Search funds need businesses to buy. Multi unit franchising may be producing exactly what they are looking for.

Search funds are raising money to buy established companies. Some multi unit franchisees have spent decades building exactly that. I think franchising may be underselling what these businesses have become.

I have always thought the term “franchise resale” does some businesses a disservice.

It makes sense when we are talking about one location changing hands. It makes considerably less sense when the owner has 15 restaurants, 200 employees, several layers of management and a head office handling finance, recruitment and operations.

At that point, we are talking about a company.

The fact that somebody else's logo sits above the door does not change that. The owner has built revenue, cash flow, an employee base and a management structure. They may have property commitments across several markets and enough scale to acquire further locations when they become available.

I started thinking about this while looking at the growth of search funds and entrepreneurship through acquisition. These investors are raising capital specifically to find established companies with many of those characteristics, buy them and then run them.

IESE Business School tracked 320 international search funds across 40 countries in its latest study, with 59 new funds formed and 31 acquisitions completed in 2023. The median international acquisition had a purchase price of $11.7 million, revenue of $7.8 million and 50 employees.

Read those numbers again and forget about franchising for a moment. There will be multi unit operators in mature franchise systems that would sit quite comfortably in that conversation.

The strange thing is that I am not sure the two sides have properly found each other yet.

Some Franchisees Stopped Being Franchisees Years Ago

There is still a tendency to picture a franchisee as someone working inside the business they bought. For plenty of operators that remains accurate, but it does not describe what happens when good franchisees spend 15 or 20 years adding locations.

Eventually they hire managers. Then they hire managers to manage the managers. Finance becomes a proper function, recruitment becomes permanent rather than occasional and decisions about where to invest capital start taking up more of the owner's time than anything happening inside an individual location.

The owner has moved from operating a franchise to running a company that happens to operate franchises.

That becomes important at exit because an acquisition entrepreneur will look at the business very differently from a conventional franchise buyer. They are unlikely to be particularly interested in the promise of becoming their own boss. They will want several years of financial statements, unit level performance, management salaries, lease obligations, debt capacity and a clear understanding of how dependent the company remains on its current owner.

Most importantly, they will want to know what happens when that owner leaves.

A well built multi unit franchise business should have a good answer. If the general managers know their jobs, the back office works, the financial reporting is reliable and the owner can disappear for several weeks without sales falling apart, there is already something resembling the kind of company an acquisition entrepreneur has been trained to look for.

The Royalty May Be Buying More Than a Searcher Realises

There is another side to this that I think search fund buyers could easily overlook.

When you acquire an independent company, you inherit its people, systems and history. What you do next is largely your problem.

A franchise acquisition comes with another organisation that has spent years studying versions of the same business. A good franchisor knows what strong locations look like because it can compare them across the network. It should have suppliers, technology, training and operating standards already in place, and it may be able to identify expansion opportunities that an independent buyer would struggle to find alone.

An acquisition investor will quite reasonably look at royalties and see money leaving EBITDA every month. I would too. The question is what comes back in return.

If the franchisor provides better purchasing, useful performance data, customer acquisition, technology and a pipeline of additional units, the royalty can buy infrastructure that an independent company would otherwise have to fund itself. If the franchisor provides very little beyond the name, a financially sophisticated buyer is going to spot that fairly quickly.

I suspect that is one reason the arrival of more acquisition capital could be good for franchising. These buyers are unlikely to be impressed by support that exists mainly in a recruitment presentation. They will want to know what it does to the numbers.

Franchising Has Created a Succession Problem

This is the part I think the industry should be paying much more attention to.

Franchisors have spent decades encouraging successful operators to buy another territory, then another one after that. The best franchisees have often followed the advice and built substantial regional businesses.

Eventually those owners want to retire.

The franchisor then discovers that the 25 unit operator it was delighted to help create needs somebody capable of buying 25 units.

That buyer may look nothing like the candidates sitting in the franchise recruitment database. They may need millions in equity, acquisition debt and outside investors. They may expect to become chief executive of the acquired company rather than spend six months working shifts inside one of its locations.

Search funds and the wider ETA market suddenly become relevant because they are already producing people who want exactly that type of opportunity.

Franchisors have become very good at helping operators build larger businesses. I am less convinced that enough thought has gone into who will eventually buy those businesses from them.

Not Every Search Fund Will Make a Good Franchisee

There is an obvious complication, and franchisors should not assume that more sophisticated capital automatically means better franchisees.

Search fund investors are backing an entrepreneur because they expect that person to improve the company and eventually produce a return. Franchising places boundaries around how they can do that.

A buyer cannot necessarily change suppliers, redesign the product, alter the brand or close an underperforming location simply because the spreadsheet says they should. The franchise agreement may also restrict ownership structures, debt levels, transfers and a future sale.

Some acquisition entrepreneurs will find that frustrating. Some probably should not buy franchises at all.

The relationship can be uncomfortable in the other direction too. A sophisticated buyer is unlikely to accept poor economics because a franchisor tells them that is how the system works. They will question fees, benchmark unit performance and want to understand whether every required cost is producing a return.

I don't think that is necessarily a bad thing. A strong franchisor should be able to have that conversation.

We May Be Looking at the Wrong End of the Search Fund Story

Most discussion around search funds focuses on the person doing the buying. A young entrepreneur decides against building a startup, raises capital and goes looking for an established company to run.

For franchising, I think the more interesting opportunity sits with the seller.

There are franchisees around the world who have spent decades building businesses that will eventually need another owner. Some of those companies are now too large for the next ambitious franchisee simply to put down a deposit and arrange conventional franchise finance.

At the same time, the market for entrepreneurship through acquisition is becoming more established internationally. Business schools including INSEAD and IESE are supporting and studying the model, while investors are actively looking for profitable businesses with experienced employees and room to grow.

Those buyers and sellers look increasingly well matched.

The franchise industry should not wait until a major multi unit operator announces retirement before thinking about who might acquire the business. Franchisors know the age of their operators, their development plans and, in many cases, which groups are likely to require succession over the next decade. That gives them an opportunity to start building relationships with a completely different kind of buyer.

What We Can Learn From This

Franchisors should identify which operators in their systems have grown beyond conventional franchise resale and start treating succession as a capital problem rather than simply a recruitment problem. That means understanding whether those businesses have management depth, reliable financial reporting and enough scale to interest professional acquisition buyers. It also means getting to know the ETA community, search fund investors and business schools producing the next generation of acquisition entrepreneurs. We have spent years celebrating franchisees for building bigger businesses. We should probably get better at recognising when they have built companies worth buying.

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