Big Money In Franchising: A Deep Dive Into Private Equity In Franchising

by | Mar 12, 2024 | Podcast

Franchise Masters | Alicia Miller |Private Equity In Franchising


Alicia Miller, an author, joins the podcast to walk us through insights about private equity in franchising (at both the franchisor and franchisee level). Alicia has analyzed private equity’s extensive involvement in franchising and offers a candid under-the-hood perspective that hasn’t been very public before. Alicia has deep ties within the private equity and franchising world. She’s also just released a book that covers this very topic called “Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity.” This episode is packed with nuggets and takeaways anyone involved in (or considering getting involved in) franchising can benefit from.

Listen to the podcast here


Big Money In Franchising: A Deep Dive Into Private Equity In Franchising

Welcome to the show. I have a special guest. I know her from reading her book Big Money in Franchising. Alicia Miller’s joining us. Alicia has a depth of experience from perspective in franchising. It’s broad, but she has picked an interesting topic to write a very good book on about all of the private equity activity at the franchisor level, franchisee level, and all the franchising.


Alicia, welcome to the show.

Thanks for having me. It’s nice to be here.

I poured through your book over a weekend when you sent me the copy. It’s called Big Money in Franchising. It is available on all the platforms and everything.

Amazon and all the usual retail platforms.

Where the heck did the idea come from to document and write this wonderful bible about private equity money and franchising?

Private Equity Money And Franchising

I don’t know if I should thank you or apologize that you spent your whole weekend reading my books. It sucked you in, so that’s good, I suppose. I got the idea through my interactions with various franchisors and franchisees where I could see this private equity activity happening. I didn’t feel that people really understood its breadth or depth. It hadn’t been written on before in any real way.

A couple of articles here and there have touched on it. There were a few articles that have been presented at legal symposiums and such, but most of that was around how to get a good transaction or how to attract private equity attention. It didn’t address the fundamental competition changes that are the result of all of this PE activity. I thought, “I’m in a position to write this. I know this business and the private equity side as well,” so thought I would tackle it.

My book, I call a pamphlet. It’s 45 pages long. It barely qualifies as a book. This book that you wrote is detailed. It addresses so many different of the big fundamental levels of how PE looks at franchising. It also gives you a pretty good peek under the hood in terms of how they view, their valuations, their long-term strategies, and the economics within a side of a private equity company, their fees, and all that stuff. It was eye-opening. You’ve been in the franchise world for a long time. You were a franchisee with Sylvan. Is that how you started in this world?

Yeah. That’s right. Like most people, I’m a corporate refugee. I had a successful career in high tech for a long time. When I had my daughter, our third child, I wanted to get off airplanes and stop doing that on-the-road corporate job that I had. I wanted to start my own business.

I came into the Sylvan Learning System and became a multi-unit franchisee in that system. I did that for about five years and eventually sold that. I picked up a bunch of units that needed to be turned around. It was a turn-around-and-build story. When I sold that business, I decided I was going to stay in franchising. I loved what I found. I loved the community and the sharing of best practices. I went and got my CFE certification with the IFA to learn and study franchising.

First, I did franchise development and then later branched out into a more traditional management consulting role. That very quickly got me to start to work with private equity and family offices that were investing in franchising. I was helping them to do due diligence, find acquisition opportunities, and evaluate what they were looking for.

That full circle brought me back to what I’m doing, which is not only working with them but also working with franchisors who are thinking about private equity transactions at some point in the future and want to position themselves as best as they can prior to going to market, which is very smart. Once you can do a direct deal, you can hire a banker to help you sell the business. Either way, once you go to market, you are what you are at the time to close any gaps or strengthen the story as long before that point. I help people think through that and hopefully hit their objectives, whatever those might be.

Once you go to market, you are what you are. Click To Tweet

Is that what Emergent Growth Advisors doing? Is it consulting for franchisors, mainly who are thinking about a transaction?


I love it. You got the franchisee perspective from an acquisition perspective. Buying and turning around your Sylvan locations and exiting that and then dovetailing that into the world of franchise development, which is the tip of the spear belly of the beast, and then getting into the consulting side. That’s awesome. How long have you had Emergent Growth Advisors?

I started that late in 2023. I had a prior consulting firm with a couple of partners and then decided that I wanted to go out on my own. It’s an interesting full circle. I am on my own, running this consulting firm. At the IFA convention that we had in Phoenix in February 2023, I taught along with two attorneys the Fran Guard CFE class, which is the core required CFE class that talks about franchise development and sales compliance. Talk about full circle. That was the first class I took back in probably 2013 when I first came into franchising and teaching the class. That’s franchising.

I  thought it was interesting in your book. You gave a little bit of a history of the PE activity and franchising. If I remember this correctly, because it was a few months ago when I read this and sometimes, I read stuff and connect my own dots at what happened, PEs have always been a big part of franchising, but it hasn’t been maybe as visible as it is. What have been the changes over the years in terms of what you’ve seen through research?

Franchising came of age before private equity was even an industry. It was not even a thought bubble. Franchising has been around for many years. Private equity didn’t get going until the mid-’40s. A few firms were founded and then it grew from there. It started to take off more in the ‘60s and ‘70s. The massive buyout era in the ‘80s is what earned private equity its first reputation for what they do, these big leveraged buyouts, but they still were not really active in franchising. Franchising was off over here growing fine. Companies were going public and raising money in the market and didn’t need PE to be successful. PE discovered franchising.

I posted an article that I did for Franchise Times on LinkedIn that’s an excerpt from the book that talks about the moment when PE discovered franchising. It was in the ‘90s. A few things conspired to get franchising on PE’s radar. One is a few firms that had their fingers in retail and malls saw this franchising thing and were like, “This is interesting. Let’s put a couple of bets down.” There were a few bets made in the ‘90s by those firms.

Bain swept in with $5 billion combined three deals that really got people’s attention, Dunkin, Domino’s, and Burger King. They did so well financially with those deals that it was pretty hard for the rest of the private equity universe not to notice. Plus, a few other things conspired to make it interesting to PE. They’re always looking for new ideas.

It feels like an overnight success per se, but it wasn’t. It took more than a decade for PE to get into it. There was a little bit of a pause with the financial crisis, and then it started to take off after that point. We’ve got close to 400 firms that have invested in franchising at either the franchisor level or the franchisee level or both, which is about 700 brands that have been touched according to my research. It’s a lot.

400 PE funds, groups, companies, or whatever you call them are active at all levels of franchising and 700 brands. Do you see it slowing down at all or do you think it’s going to get bigger?

There’s tons of money sloshing around looking for a home. There will always be people looking. Private equity has been doing this for 30-plus years. They’ve cherry-picked pretty successfully the top brands. There’s always this group of new brands launching. FRANdata does a great job of tracking this stuff.  400 new brands a year up from 250. It’s a number of new brands growing, but it takes a while for them to get enough scale to be interesting for private equity.

Franchise Masters | Alicia Miller |Private Equity In Franchising

Private Equity In Franchising: The number of new brands is growing. It takes time to get enough scale to be interesting for private equity.


Most PE firms can’t write small checks. They’ve got to write bigger checks. They’re waiting on the sidelines waiting for these things to get big enough to do something with. There’s this long-tail picture of all the brands in franchising. If there are 4,000 brands and 700 have already gotten investment, coincidentally, those are the same brands that land on the Franchise Times’ Top 500 list by system revenue. No surprise there.

There is an ongoing appetite for more PE investment in the sector, but it’s getting harder to find companies that are of enough scale and high quality that haven’t already been touched. There are a few holdouts, Subway being the famous one. That has been owned by the Angel investor and the founding family for a long time. It’s finally going to trade to Roark, but it’s gone decades before it was ready to do anything with PE. There are a few of those out there. There are not that many. More likely what we’ll see is more re-trading between PE firms.

The PE Ladder

The ladder that you described in your book, the PE ladder, was interesting. It is interesting because I’ve been at the tip of the spear of the franchise development world. I started my career with AdvantaClean, which Home Franchise Concepts of JM Family owns it. It’s probably a whole separate conversation about how that’s gone. With 400 brands entering the market every year and there are 3,000 or 4,000 brands already out there, the stat is 16% of all brands including the big ones, the Chick-fil-A’s, all the big food chains, all the big hotel chains, and the real estate chains, too. Only 16% of those brands get to 100 units open. It’s wild. Isn’t that a wild stat?

Yeah, it is. That’s partly due to all this competition spawned or supported in part by private equity. Let’s say you’ve got a new home services brand launching. No matter how great that operating model is, you are launching into a very crowded market. There are already a lot of home services brands. There have to be twenty home services multi-brand platforms, the Neighborly, the JM Family one that you mentioned, HFC, and Authority Brands. You’re launching your cleaning business, mosquito business, or whatever it is into these headwinds.

These are established brands. They’ve got a war chest of capital behind them. They’ve got the synergies of these platforms where they can cross-sell or cross-market. They can share a back office. If you’re busy trying to sell franchise licenses and also build your infrastructure to support all these franchisees, you’re at a disadvantage no matter how good your concept is. It’s harder for these brands to break out. It’s a shame because there’s some really good innovation happening all throughout these emerging brands but it’s getting more difficult for them to get to any scale.

Do you think franchising is a fast-growth strategy for expansion in terms of a concept that has a good fundamental business model they’ve proven out and can get to a scale within 2 years 3 years that would be of interest to PE and doing it the right way in terms of not just selling a bunch of units but helping their franchisees get open the right way and get successful?

Yeah. That’s an interesting and important point. Somewhere along the way, emerging brands got the message that 100 units open is the magic number because so few brands get over that hurdle that should be noticed. You’ve got to get to that level. They solved that problem in this very competitive sales environment by working through outsourced sales channels to try to sell as many units as possible to get to that level.

The challenge is the more of those units you sell through outsourced commission sales channels, the less money you collect in franchise fees. The only way to break out in that circumstance is if you’re really well-capitalized. If you took the time to build a bunch of corporate units first you need the cashflow. You’re going to need it if you’re going to sell through these channels, which is fine to sell through those channels, but you’re not going to collect a lot of leftover in fees and it’s going to take a while for the royalties to ramp up.  If you don’t have the infrastructure to get these guys open, you’re going to face a stall-out and some franchisees who aren’t too happy with you.

PE is onto this game. They will not pay for a sold-not-open funnel that’s not real. The first thing they’re going to do is tear through your franchise agreements. First, they’ll check sales compliance or they’ll hire somebody like me to look and see if there are any gotchas there. They then will look at the development agreements and franchise agreements, speak to franchisees, and see how real this funnel is. If you’ve built a funnel of 150 units yet to open but PE only believes 40 of them will open, they’re not paying for 150. They’ll pay for 40. It’s a game you don’t need to play. Lower and steadier is a better strategy.

Certainly, as anyone in franchising in any amount of time knows, your first group of franchisees, your first 10 or 20, are the most critical decisions you’re going to make as a franchisor. Those are the partners that you’re scaling with. They are proving this model. You’ve got it running in the corporate units. You’ve got to show that it works at the franchisee level too. They’re the beginnings of your culture. They’re everything. Don’t rush to find those amazing people that you’re going to partner with.

It is the essence of franchising. I’m a broker and I see it firsthand. I go to these conferences. They’re like, “We sold 250 units last year.” That’s cool. How many are open? How are the franchisees doing? That’s become a more powerful thing to say than all these units sold-type of thing. Everybody’s catching onto it and getting sick of it.

The fundamental essence of franchising when it’s done well is everybody wins. The franchisor wins. The franchisees win. They’re making money. They’re happy. It’s not the easiest thing in the world. It’s not easy to build a franchise from a franchisee perspective, but a good franchise is going to make it easier than going it on your own. This idea that you can shortcut that piece of it where you’re expecting a big payday because you have a big sold-but-not-open pipeline is disturbing, to be honest with you. Maybe that was a little blip in the evolution of PE and franchising. Maybe that door has been quietly closed, hopefully, in the market world.

We’re going to see if some of these folks who have got a pretty stuffed funnel end up trading at a value that you would expect them to trade at if it was real. We’ll have to see. If PE does its job and does a solid job of due diligence, then either those won’t trade where they’ll wait, see how real it is, and make sure they get open or it will trade for less than they otherwise would’ve gotten if they have been slightly more conservative on their strategy.

Good franchise companies during the first good emerging brands, what do you see them trading at? How does PE evaluate the valuation of a good business, whether it’s brick and mortar or non-brick and mortar, like a good fundamental business? They have a handful of foundational franchisees who are successful and have a pipeline of new locations to open around the country. All the indicators say, “This is a real business. The path forward should continue based on the early success that they’ve had.” What do you see those things trading at, or how are they valued?

It’s valued on a multiple of EBITDA, Earnings Before Interest, Taxes, Depreciation, and Amortization, which is a rough proxy for cashflow of the business and what it’s kicking off. They do that because it determines how much debt potentially the business could take. With that said, emerging brands usually are bought for cash. PE has a reputation for loading companies with a lot of debt. In the emerging brand space, that’s not true at all. Even in larger brands, private equity has gravitated to about a 50% equity injection, so they’re not putting in as much debt as they did back in the go-go days of the ‘80s. They’ll trade at a multiple of EBITDA.

Here’s that thing where we talked about before. If you are field stripping your own EBITDA by all the franchise fees you collect, if 80% of that’s going back out the door in commissions, your EBITDA is going to stay small. You’re going to have this huge sold-not-open funnel. They might trade it at a nice multiple, but your EBITDA is so small at that point that it’s a multiple of a very small number. If you can wait a little bit, get those units open, and get the EBITDA up, you will have a much better result.

Also, remember that not all EBITDA is valued equally by the buyer. In franchise, you’ll take all of your EBITDA. If you strip it down into, “This is coming in through rebates. This is coming in through franchise fees. This is coming in through royalties,” royalties are the highest prize because that’s recurring revenue. If most of your EBITDA is franchise fees, they’re not going to pay a high multiple for that. That’s a one-time thing. That’s why most investors will wait until it’s bigger and more proven and the recurring revenue stream has kicked in.

Magic Number In The PE World

It makes a ton of sense from the PE perspective and from the investor’s perspective. I’ve always heard that $2 million in EBITDA is a magic number in the PE world. Is there any truth to that?

Yeah, it is true. It’s a good place to start. Some of them though can’t go below $ million or $10 million. It depends on the size of the fund. If you’ve got a billion-dollar fund, how many checks do you want to write out of that fund? You can’t buy 40 little companies and manage them. It’s unwieldy. The check size tends to get bigger as firms get bigger. Their first raise is $250 million. The next raise is $500 million, and then it goes up from there.

That’s why in the book, I talk about where PE firms naturally land on this ladder that they’ve created for themselves. It takes a real commitment to investing in emerging brands to stay there and not fall up the ladder because you keep raising more money over time. Riverside is a good example of this that I talk about in the book. They’ve got a dedicated micro-cap fund. That whole purpose is to invest in emerging brands. That’s how they’re able to do that. For Roark, it doesn’t make any sense at all. In fact, they’ve divested some of the smaller concepts that they’ve had because they’re not set up for that. They’re set up to help brands at scale.

Certain PE companies have different appetites at different levels of the growth of an emerging franchise, which makes a ton of sense. Some of them have a buy-hold strategy for a long time. Some of them have a buy-hold strategy for 3 to 5 years. I forget what the timeframe was.

The average is six years.

You mentioned earlier you’re seeing, at least with emerging brands, the PE companies not using a lot of debt to fund the acquisition. Why is that?

One, they don’t need to. They’ve got plenty of money stashed away. If you’re buying a business for $30 million, that’s not a very big check. That’s one. Two is because they’re investing in the infrastructure of the business. You can’t load up a small emerging brand with debt. You’re still building that thing. You’re still hiring staff, investing in marketing, and so on. They don’t want to put debt on businesses that small.

There’s that much money on the sidelines. I’ve always heard this not just in franchising but in general.

$2 trillion in dry powder is a silly amount of money.

They’re like, “We’re still waiting for that recession to come.” They’ve been waiting three years.

It’s only growing. All these pension funds are increasing their commitment to private equity. They’ve got to allocate. They call it alternative investments, but it’s really not an alternative anymore. It’s mainstream. They’re allocating. On average, 13% or 14% of most large public pensions are allocated to private equity. The capital’s got to get deployed.

It is wild to think about. You talk about that in the book. Some of the very large pension funds, like teachers, unions, and stuff like that are shareholders of franchise systems, right?

They are, both in publicly traded firms. Pension funds will own shares of McDonald’s and RBI, which owns Burger King, Popeye’s, and so on. They’ll also invest at the fund level with these private equity firms. What’s interesting is more of them are wanting to do direct deals. For example, the Ontario Teachers Pension Fund was a backer of Flynn Group, which is the largest franchisee in the world. Flynn Group is going through a recap. It’s their sixth. They’re bringing in some new investors, and some of those other ones will exit. They’re called limited partners. Those limited partners like to do those direct deals because it saves them on fees. Yet, they can still ride along partnering with a majority PE fund to shepherd the business and help it grow.

It’s all part of the ladder. I love it. I’ve started to get calls from PE companies that are trying to skirt some of the brokers. There’s one broker in particular, Boxwood, that’s done a good job of capturing some of that market share in the transaction world at the emerging level. I’ve started to get some calls from PE companies saying, “Which brands do you know about?” It’s interesting. They say the same thing. They’re like, “We have money that we need to deploy, and we want to make a good investment.” It’s wild.

They’re all looking all the time. A quite large fund bragged to me one time that they look at 1,000 companies a year. Clearly, they’re not looking very closely at 1,000. That’s a lot. They’re probably thinking about 1,000 and looking at some smaller subset. They look at everything because they learn along the way. They’re professional investors. That’s one thing that founders need to avoid. You should think carefully when you start talking to outside capital why. Process your why. Why are you trying to talk to outside capital? Get your ducks in a row before you start taking those phone calls because it can be a big time suck.

If you’re not ready and you’re curious about what your market valuation is, call me or call some other person who does that for a living. They can give you that ballpark number you’re looking for. That’s all you need. It’ll suck up a lot of your time. Sometimes, a founder will answer the phone, and three months later, they’ve been acquired because it’s a small brand and it doesn’t take very long. All of a sudden, they’re acquired. They hadn’t even processed why they were talking to private capital in the first place. You have to plan ahead.

Who you sell to and who you partner with. Especially if I’m a founder of a franchise system, I’m going to roll a chunk of my equity back into the deal. I would like to think that making sure that the company is going to take care of the franchisees the right way should be a big factor in the decision process. I’m sure it’s not with all founders, but all these PE companies have different strategies for growth in terms of how they plan to take the system to the next level. Getting aligned with a company that’s going to carry forward the legacy and the vision that the founder started and built, I hope, is a big part of how a lot of founders evaluate their decision on who to transact with.

I hope so too. Usually, it is, especially if they have the pride of the culture that they’ve built. That often is a very important consideration for that first partner. The second time it trades and every trade after that, by then, the founder has often exited. They might roll once or twice, but by the 3rd or 4th time it trades, you’ve probably got a professional management team in at that stage.

The culture can change, and sometimes, the culture needs to change. The market is very dynamic. For franchisees, that can be tough. People coming into franchising should recognize that, at some point, if they’re in a high-quality brand, it could trade to a private equity firm. That’s okay, but that will mean some things will change. They should be ready for that.

Your license agreement is for ten years. A lot can happen in ten years, so be prepared for it. Know that for the most part, your interests in that of the PE firm should, in theory, be aligned because they want to grow the business, and they can’t grow it without franchisees being on board. When things go off the rails, usually it’s because the sponsor, whoever the sponsor is, has lost sight of that fundamental equation in franchising and has to get back on track.

Franchising is so much easier if people pay attention to the franchisees making money, first and foremost, right?


I don’t know if it’s any more complicated than that at the core of it all. The money follows all that. The growth follows all that. Once the word gets out that an emerging brand has ten operators that are successful and happy, that’s when the hockey stick grows in the natural evolution of franchising, not some of the forced growth that’s happening through these outsourced channels and stuff like that. Once that word gets out, the market reacts in a big way.

Franchisees come back and want to do more.

They’re expanding.

It’s one of the best signs of all

100%. If you’re in Charlotte, North Carolina, you don’t have a lot of options for established brands that want to move into Charlotte because they’re already here. You have to almost look at some of these emerging brands. I’m always like, “If they don’t have a big enough sample size of franchisees that have been operating this business model for a long enough time that you can get comfortable with, it’s going to be tough. You’re making a bigger gamble than you probably should in the perfect world.

That’s where some parts of the country have gotten to. You try to evaluate it and understand if you can make this business go maybe without the traditional support you would have of a more mature established system.” I don’t know how else to advise people on some of this stuff that are curious about franchising in these tough markets.

That’s true. There are some franchisees for whom that model does make a ton of sense. They’re okay with the extra risk. They understand that there’s going to be less infrastructure and it’s less proven. As long as they go in understanding that and agreeing to that, that’s fine. Sometimes, emerging brands oversell how proven their model is and how deep their support is. If combined with recruiting the wrong franchisees in the first place that aren’t a match, you’ve got a perfect storm where you’ve got people who aren’t really set up to be good operators in the first place combined with a lack of support. That’s where you can stall out.

A lot of franchisees also don’t look closely enough at resales combined with new territory development. You can go into an established brand and find people who are ready to move on and retire. You can combine that existing cash flow with new territory sales. At the same time, it builds you a nice pocket of businesses in whatever your metro area is. It’s not because it’s established that it means there aren’t opportunities there for growth. Sometimes, that consolidation wave starts to happen. You can buy out the individual operators and cobble together a pretty nice footprint for yourself, and then build new units from there on the basis of that cashflow.

That franchise system may have given that legacy franchisee a juicy deal way back when they were in the emerging world before they became what they were. They probably regret that, but that’s where they can’t develop the market above and beyond what the terms of the deal are with that franchisee. That’s a really good point. How has PE money started to trickle down to the franchisee level? What are you seeing there?

It’s becoming much more active at the franchisee level, which is great. That opens up some really interesting liquidity options for retiring franchisees that frankly didn’t exist years ago in some of these systems. For example, Orangetheory and Planet Fitness are two systems that are non-food. We always say franchising is bigger than food. Those are two non-food systems that are majority-owned by private equity firms at this point at the unit level. Over time, those franchisees have built up a footprint of 10, 20, or whatever units and then sold to a consolidator. That activity drives up prices, so that’s positive.

Exit Plan

Not every system wants PE at the unit level. As you’re thinking about your long-term exit plan, you should think a little bit about what that exit plan would be and who that buyer is likely to be based on where the system is. If there’s no PE activity in your system that you’re buying into, it might come in later, but you don’t have evidence of that yet. Your buyer is going to be another franchisee. If PE is already in the system and is buying units, you’ve got more competition at the time of exit which drives up the price.

It can be very positive for franchisees, but if you don’t see PE activity, you need to poke a little bit and find out why that is. It could be that the franchisor doesn’t let them in. They don’t want them in the system. It could be that it runs better under an owner-operator type of model. That’s very valid. It could be that it’s not financially attractive to private equity, which is something you might want to consider before taking the leap.

Franchise Masters | Alicia Miller |Private Equity In Franchising

Private Equity In Franchising: If you don’t see PE activity, you need to poke a bit and find out why that is.


I would imagine a lot of franchise systems are not financially attractive to the scale that PE would want, their appetite for getting involved in a business. I’ve always heard that the $1 million to $2 million EBITDA number seems to be a magic number for the family office PE level. A lot of franchise systems don’t have franchisees that have gotten to that point or will get to that point, to be honest with you.

Maybe it’s not set up to be run through managers. By definition, PE is not an owner-operator, so it’s got to be set up to be delegatable to someone else, to a manager.

This system has the characteristics that could get the business big enough to where there will be activity. Ideally, there’ll be other franchisees building with a similar strategy, so you’re not the trailblazer in that system. You’ve got to get this thing to where it’s built and it’s not dependent on you to operate on a daily basis. It’s got to be spitting off a significant amount of cashflow in order for that to be a potential. Do you help franchisees?

You did a whole episode  on that at one point. I’m trying to remember back, but you did one where you talked a lot about how once you get it going after a couple of years, you do need to try to get yourself out of the business and get out of the day-to-day if you plan to either add more units or retire at some point. You have to be able to sell it and have somebody step in and run it.

That goes whether you’re trying to sell to PE or anybody. Even if it’s a third-party buyer or somebody who might want to get into a business and is in a tough market for new franchises, they look at resales and could be a good buyer for you, but it’s got to be transferable and profitable. It’s interesting.

Traditional multi-unit franchising has always been brick and mortar in my mind, like having multiple locations of the same brand like an Orangetheory, Planet Fitness, or some of the big trampoline parks. Home services have been this little category that’s always been there in franchises. It’s always been a tried and true category. I’m starting to hear about the PE activity and the home service space. Precision Garage Door has had a couple of transactions as well as HVAC, plumbing, electrical, and the classical trades. Do you see that trend continuing or do you think it’s a moment in time post-COVID kind of thing?

For sure that’s going to continue. If you’ve got a good coverage strategy and a fairly demand-resilient business that’s got legs, if it can be delegated to a team, then, at some point, it is ripe for consolidation. That’s what PE does well. You can buy out those owner-operators. PE is also acquiring corporate models in-home services that aren’t franchises. Sometimes, they’re keeping them for the cashflow, and sometimes, they’re converting them to become a franchise. They can leapfrog over that entire emerging brand phase and acquire. Think of a plumbing business that’s got 50 units across 3 states as a corporate unit. They can convert that to a franchise in some ways much easier than they could start with a small franchise and turn it into something of that scale. There’s much less risk.

If you have a good coverage strategy, you have a fairly resilient demand resilient business. Click To Tweet

I agree with you on paper. I’ve seen some of that. Especially in this emerging world, you have companies buying a third-party company and wrapping infrastructure around it. They’ve owned it for two months and they’re like, “Let’s go. We’re going nationwide.” They haven’t operated the business. They don’t know how to operate this thing, but they’re selling franchises and claiming to be able to support people in operating this business. They haven’t operated. The founder of that business or the executive team has never dealt with franchisees before, which is a whole nother ball game. I’ve seen it go bad. It’s not easy, and it sucks for the franchisees.

It’s not a panacea, for sure. You need someone who understands franchising to pull it off successfully. That’s why it’s not super common, but it does happen. I don’t think we’re going to see a wholesale switch to conversion of corporate units to franchising. It’s very opportunistic. You could rebrand it as an existing franchise. Let’s say you had a roofing franchise. You could expand very quickly by buying out a bunch of corporate stores in a state where you want to expand, rebrand them, and then gradually sell them to franchisees who want to get all the support from the franchise but have a going business.

It’s that hybrid of a conversion model that’s out there. One Hour did it well. Benjamin Franklin did it well. I’ve seen that they’ve moved down the funnel where it’s more traditional franchising. They’ll take somebody with good business experience and capital and help them open a new location for an HVAC or plumbing business. Maybe I’m getting old in this franchise world, but I’m like, “Man.” That feels like a tough business to stand up from a new location perspective if you don’t have a background in that trade. That is some technical stuff. It isn’t easy.

There’s a bunch of PE money consolidating all these independent operators in that space. I always like semi-technical stuff or the simple. Simple is Urban Air. The business you’re part of, Urban Air, is a great business. Once you cover your fixed expenses, the profitability of those businesses skyrockets if you can get the volume cranking.

You have to have the right model. Once you’ve got it nailed, then you can expand. That’s the beauty of franchising.

You have to have the right model to expand. That's the beauty of franchising. Click To Tweet

What have been some of your favorite franchise businesses that you’ve seen over the years as you’ve been digging into this and been a part of the industry or maybe a couple of your favorite transactions that you did a deep dive on and got to know the intimate details of?

I am fascinated by this platforming, multiple arbitrage thing, that’s happening. As you hold a business over time, as long as you do all the right things, you’re going to benefit from a little bit of inflation over time. Prices go up. You’re going to grow the business, so the value of the business is going to go up. When you’re acquiring brands and bringing them in or you’re operating at the franchisee level, acquiring units, your opportunity for multiple arbitrage that is dramatically increasing the value of the company is pretty strong.

Franchise Masters | Alicia Miller |Private Equity In Franchising

Private Equity In Franchising: If you’re operating at the franchisee level, acquiring units, your opportunity for multiple arbitrage dramatically increases the company’s value is pretty strong.


We saw this across the Neighborly transactions. I did a case study on Neighborly where you can go back through the financial statements and pick apart what they paid for these businesses. You can do a rough napkin mass on their EBITDA, and then you could find out what the multiple is. In the next transaction when the whole platform trades again, the founders of those acquired businesses that have rolled anything forward do well on that first acquisition. They benefit from the lift of the entire platform in the next one. It’s an interesting dynamic that’s been set up that’s been tremendously rewarding for some of the founders and franchisees who have been part of it.

It makes sense. They can centralize a lot of the back office functions and have shared services amongst one team of people on maybe the accounting or financing side supporting a lot of their brands versus focusing on one. They can spread those costs across the whole platform versus the standalone costs when they’re a single brand.

Simplistically, let’s say you’re acquiring a company and you acquired a 10x or 11x valuation. Once it’s part of a larger platform, even if you don’t grow that EBITDA, it’s worth more as part of a platform. That’s the crazy thing. Likely, if you do everything right, you will grow EBITDA and grow the units because of all these benefits of being part of a platform. You will also probably save on some back office expenses as well. You’ll see a real lift in the business doing that if you execute the plan well.

I’ve been dying to ask you this question. What are some of the rut rows that you’ve seen PE companies make when they’ve been acquiring franchise systems?

PE is not perfect. Nobody is. The biggest challenge is that when you lose sight of that fundamental equation in franchising where franchisees have to be satisfied with their profitability and have to be believers in the future of the business, t hen the business goes sideways. It doesn’t matter if it’s PE-backed, owned by the founding family, or publicly traded. It doesn’t matter. That’s the core of all franchising.

When PE has messed up across this investing history, it usually starts there. They might let the brand go a little too long without keeping it fresh. They might be taking more money out and maybe not investing enough back in. There’s been some evidence of that. They might start adding fees, change suppliers, or do other things that franchisees are unhappy about. They don’t do a good job of change management and making the business case about, “Why are we doing this change?”

Some changes can be very positive for the business, but if you’re not explaining to franchisees why and not involving them in the decision, it doesn’t mean every decision’s going to go their way, but most of them need to go their way. Most of them need to be communicated in a smart way to franchisees and involve them in decision-making. If you don’t do that, then that’s when things can go sideways.

When I was looking at some of the history of private equity investing in franchising, it seemed to me that in the early days, a lot of the mistakes were overconfidence. In some cases, they took on businesses that really were starting to struggle. They were overconfident in their ability to turn them around, not realizing that turnarounds at franchising is one of the hardest assignments in business.

You’ve got these independent franchisees. They’ve got to be on board with your change approach. If they’re not on board and on top of that, you’ve loaded the company with a bunch of debt. That’s not headed to a good place. Some of the earliest mistakes can be attributed to that. As people have gotten more experienced in franchising, they’ve figured out that in order to keep the growth engine humming, we’ve got to have franchisees on board, which means your decision and all your change processes need to factor them in in a meaningful way.

100%. Focus on helping them make a lot of money and be happy and everybody’s going to be happy in the long run, right?

Yeah. When someone’s doing franchisee validation, those are the kinds of questions you need to ask. How often are franchisees consulted about change? What are some changes that have happened recently? Was it good or bad for the system? Did they ask you first before they started making these changes? Do some homework there. I’m working with somebody like you that can help vet some of that stuff and build up a good list of questions to help people validate what kind of culture they’re getting into.

Franchise Masters | Alicia Miller |Private Equity In Franchising

Private Equity In Franchising: Build up a good list of questions to help people validate to know the culture they’re getting into.


Do PE companies call the franchisees and validate in some way when they’re doing their due diligence?

Absolutely. The first thing they check is surveys. Franchise Business Review is a great one. Those are franchisee surveys and satisfaction surveys. If that doesn’t exist and they’ve got more than 50 units, that already makes them look a little suspicious. You should know what your franchisees think of you. That’s good information. If you don’t have that, then they’re going to start calling in the franchisees or they’ll hire somebody like me to do it. In all the years of mystery shopping that I’ve done, I never used a pseudonym. I always use my real name. Somehow, nobody seems to know I’m mystery-shopping them, which is fascinating. They will always call franchisees.

You spent a weekend reading my book. I spent a weekend tearing through every single page of every development agreement in a particular franchise because they were trying to ascertain the realness of the SNO funnel, Sold-Not-Open funnel. They do that due diligence work to see how on-board franchisees are, which is the same work that prospective franchisees should be doing. You have to validate. What are you hearing?

That’s where I was going with it. In a way, it’s the same steps in the process. As a prospective franchisee looking at opening a particular franchise, you go through a very similar process that the PE companies do when they’re looking at acquiring the overall system. The zeros might be a little bigger.

The zeros are bigger. In the book, I walk through, “Here are some of the things that PE firms look for.” You can take that same list and use it for your own purposes to say, “This is what PE is looking for. How do I feel about that same metric? Is this something I should be looking at?” Probably on most of those metrics that are mentioned. You can ask some good probing questions of franchisees. Remember. They’ve been in your shoes. They once were also prospective franchisees, so they understand that you’re going to be asking these questions. That’s okay. It’s part of franchising. Don’t be afraid to ask those questions.

When you’re doing validation on behalf of one of your clients who’s looking at an acquisition of a franchise system, how many franchisees do you call? Is there a percentage to get a big enough sample size? Do you call them all? How do you gauge that?

If it’s 50 units or under, I call everybody or the group of us collectively will call everybody. Sometimes, we will each talk to the same franchisees to see if we’re hearing the same thing. That’s important. For prospective franchisees, you want to talk to, hopefully, everybody in your market or similar markets. You want to talk to people who’ve been in the system a while and some newer people because there are going to be differences. You want to try to talk to people with different backgrounds so you can figure out how important someone’s background is to the success of being a franchisee.

Talk to people with different backgrounds to figure out how important is someone's background to the success of being a franchisee. Click To Tweet

You’ve also got to work with somebody like you to understand the why. Why are you doing this? What are you hoping to get out of it so that you’re not exploring a system that’s not a good fit for you? If you hate sales and you’re more of an operations person, you shouldn’t be looking at franchises where selling is a big component of success for that franchisee. You can weed through that stuff. When we’re doing due diligence, we look for the same thing. What kinds of franchisees were recruited into the system? Who is successful and why? How disciplined were they at recruiting that specific kind of franchisee into the system? That will suggest what the future growth could look like. Did they follow sales compliance? All of those things are part of the due diligence process.

I’m like you. I always nerd out on how to analyze and come up with good questions to ask either the franchise rep, the leadership team, but particularly the franchisees. Do you have any go-to 2 to 3 questions? Do you have a flow that you like to have those conversations? For anybody who’s looking at investing in a franchise, because there is an art to having those conversations with existing franchisees, I believe to butter them up a little bit and get them comfy, and then they start to open the kimono a little more.

There is, on my website. If you go to BigMoneyInFranchising.com, one of the tabs is Handbooks & Case Studies. There’s a handbook there with some suggested interview questions for prospective franchisees. You can pull off of that. I always start with, “I’m coming into this franchise potentially and I want to ask you some questions. This is a big investment for me and my family. I’m hoping you can help me.” That will help remind them that they were in your shoes at one point.

I always start with a pretty simple question because sometimes, you can get a talker who will socialize for 45 minutes and then you don’t get to the meat. I start with, “Would you do this again knowing what you know now? Why or why not? What were your expectations coming in? Have you fulfilled them?” or some flavor of that type of question because that gets you right to whatever their key pain point or joy is in this business. You can build out your questions from there.

If you get time, there’s a whole section down on that site about picking through the key performance metrics and profitability. It is, “How does cash flow through this business? What does it take to be successful? Would you put it in the same territory again?” All the learnings that they’ve had along the way. You talk about the culture, the relationship with management, and so on. If you start with what that franchisee was hoping to get out of it and whether they’re achieving their objectives, then you can start to peel away what’s really going on in that system.

Every conversation is different. It depends on the person that you’re talking to. You have to guide them. Make those calls. Those are the most important calls you make during the due diligence, both at the PE level and at the prospective franchisee level.

You’re investing in a business. You’re worth it. You are worth taking the time to get this. Understand what you’re doing and if it’s a fit.

You're investing in a business. Take the time to understand what you're doing and ensure it's a fit. Click To Tweet

That’s the unique part of franchising. You can talk to people who are operating the exact business that you are thinking about operating and most of them will be open with you if you have those conversations the right way. It’s fascinating. I know we’re up to the hour here. Do you have any final thoughts to share with anybody who might be reading as a prospective franchisee, current franchisee, or founder of a franchise company that’s thinking about talking to these PE companies?

Sure. PE investment and franchising are probably here to stay, so you need to educate yourself. This has got to be part of your due diligence process going forward. The aperture of what you need to look at has expanded. You can’t just look at the franchise, the competitive environment, or your local market. You’ve also got to understand all these other dynamics around the business with private equity having come into franchising. Figure out whether this business is going to be a good long-term fit for you and what the trajectory of this business probably will be given that PE is here to stay.

Franchise Masters | Alicia Miller |Private Equity In Franchising

Private Equity In Franchising: PE investment in franchising is probably here to stay. So, educate yourself.


Almost expect that it’ll transact at some point, right?

Yeah. Probably true.

For everybody reading, go buy Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity. It’s available on Amazon, the Barnes & Noble website, and all that kind of stuff. Thanks for joining us. That was great. I learned a ton.

You’re welcome.


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About Alicia Miller

Franchise Masters | Alicia Miller |Private Equity In FranchisingAlicia Miller is the Founder and Managing Director of Emergent Growth Advisors, a boutique strategic advisory firm working at the intersection of franchising and private equity. She supports founders and franchise management teams facing growth, disruption, or transformation challenges, and helps them accelerate their businesses. She also advises private capital firms pre- and post-transaction on strategy and value creation initiatives and co-invests alongside her partners. As a former multi-unit franchisee, she brings a franchisee’s perspective and operating experience into every engagement.


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