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Four crucial things to consider when choosing a private equity partner

Four crucial things to consider when choosing a private equity partner

Investment firms may look similar on-paper, but due diligence will separate the best from the rest.

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Franchise and multi-unit businesses looking to expand often need capital to fuel growth, make acquisitions, strengthen balance sheets, and provide liquidity to shareholders. This often requires outside investment.

Did you know that the word ‘invest’ comes from the Latin word ‘investire’, which means “to clothe in, cover, to surround”? When founders and management teams recognize and surround themselves with the resources needed to take their company to the next level, wonderful things can happen.

As the first institutional investors in leading franchise brands such as Card My Yard, European Wax Center, Massage Envy, Sola Salon Studios, and Urban Air, we have helped founders and management teams become comfortable partnering with us in order to assemble the necessary ingredients to grow those companies into well-known international brands.

These successful brands didn’t go it alone, and neither should you. We believe that successful investment partnerships focus on collaboration, perspective, humility, and support. Here are four things to consider when evaluating which investor partner to bring to the table:

1. Personality fit

Bringing on a partner is going to have a major impact on your life moving forward. Ask yourself: is this someone I want to spend time with?

Is this someone that I would want to get stuck at an airport with? Are they going to micro-manage me? It is important that you bring someone into your life that you enjoy working and spending time with, as this person (or firm) is going to be heavily involved in your life and business for years to come. It’s not a decision that should be based solely on money or your company’s valuation. Personality fit should be of supreme importance when evaluating potential partners.

Investors tend to focus on numbers, but over the years we’ve learned that a company’s culture and the happiness of franchisees, while not measurable on a spreadsheet, can often be the secret to success and a major competitive advantage with franchise brands.

If you can attract interest from a sophisticated investor like a private equity firm, it already means you have a good business and are doing something right. Don’t compromise that. You want to put employees, franchisees, and customers first and choose a partner who values those things as well.

2. Industry experience

Franchising is a nuanced, idiosyncratic, and unique industry. It takes a highly experienced franchise investor to fully understand all of these factors. No other relationship in business is as complicated as the relationship between the franchisor and franchisee.

“No other relationship in business is as complicated as the relationship between the franchisor and franchisee”

This means that your potential partner shouldn’t just have experience with one or two deals; they need to have deep industry and sector experience relevant to your business across many franchise investments. You will find that such meaningful experience allows them to quickly triage the pain points of your company and to help you develop a plan to enhance value.

However, don’t forget that you know your business best, so make sure they are also good listeners and willing to be highly collaborative.

3. Track record of success

There are many investors and people with capital, but it’s important that any potential partner have a proven track record of success. You should ask them about their investment track record: how have the companies in which they have invested performed during and after their involvement? If they are private equity investors, how have their funds performed? Ask to see their actual performance.

This matters because if you sell, for example, 60 per cent of your company, you are implicitly investing the remaining 40 per cent of your business alongside your new investor.

Assuming their returns are strong, you should also explore their “playbook” or toolkit to add value and replicate success. At Princeton Equity Group, we often walk CEOs and founders through our Princeton Playbook and provide specific examples of how we helped our companies grow. This provides our potential partners a window into how we act, how we think, and how we work. We talk extensively with CEOs and founders of target businesses – before we close an investment – about how we approach enhancing areas like franchise development, recruiting c-level executives, re-tooling marketing initiatives, investing in technology to provide insight into unit-level economics, etc.

Private equity funds are increasingly drawn to the franchising industry and the attractive attributes of franchisors in particular. As a result, there are many less experienced players interested in these businesses. That said, a successful franchise investor requires many years of experience across multiple industries and concepts to truly make a good partner.

4. References matter

While private equity funds will always complete extensive due diligence on potential investment targets, many business owners or CEOs don’t take the time to do the same research on potential investors.

References matter. An investor’s proven ability to make money is important, but so is understanding how they act as partners. Call other executives and entrepreneurs they have worked with and ask what that experience was like.

At Princeton Equity Group, we encourage any potential partner with whom we are in discussions to speak with any CEO with whom we have worked. Any investor worth their salt will be open to providing you with references. Investment firms may all look and sound alike, but they are not the same.

THE AUTHOR

Jim Waskovich and Doug Kennealey are the founders and managing partners of Princeton Equity Group, a private equity firm exclusively focused on investing in franchises and multi-unit companies.

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