Franchising ’ s future grows bright
ExitStrategies BY DEAN ZUCCARELLO
A Model of Success
Franchising ’ s future grows bright
Franchising has proven to be a successful and popular business model since its mainstream inception many decades ago . Three constants have fueled its growth : the desire to expand , the need for capital to fuel that expansion , and the goal of operating seamlessly across large geographical distances .
Credit for developing the restaurant franchising model we know today belongs to Ray Kroc , who discovered McDonald ’ s when it was still a small California hamburger stand . This enticing operating platform has grown massively in scale since the 1950s , becoming one of the most prominent and favored business models for those with a desire for self-employment . But has it reached its tipping point ? Let ’ s look at the current state of franchising and what we can expect for its future .
Current state of franchising Today the method remains robust , with more franchise concepts alive and thriving than ever before . Why are we continuing to see such positive momentum ?
One key factor is consumers ’ strong reliance on the power of branding . Franchising leverages the power of branding by providing mass scale in terms of advertising , market penetration , and customer recognition . There is also the power of legitimacy ( whether perceived or accurate ) that accrues as a benefit to the most recognizable brands . Many people are less inclined to dine at an independent concept they are unfamiliar with , preferring the comfort of sticking with a known , established brand . A widely known brand name carries a lot of clout , putting potential diners at ease about the value / experience equation . People like to know ahead of time what kind of food and service to expect , giving the widely known brand names an advantage over the unknown option .
Entrepreneurship also plays an important role in franchising . A large and growing number of people aspire to run their own business , but there is great uncertainty about creating an entirely new concept . Franchising provides an opportunity to be self-employed while mitigating the risks of an independent concept .
Another important facet of franchising ’ s success stems from today ’ s accessibility to debt financing . Lenders are very comfortable with the franchise model , having lent in the space for many years now , perceiving it as a safer option than most , and thus providing funds that are more readily available . Lenders aren ’ t just lending to an entrepreneur , they are lending to an individual business that is backstopped by a meaningful number of other operators , and even the franchisor , should their borrower not perform .
Just like debt financing , individual equity has greatly contributed to the ongoing success of the franchise model . In today ’ s economic landscape , individuals are less enamored with investing in securities ( stocks , bonds , annuities ) and are instead looking for investments where they have more individual return opportunity . This comes in the form of control-adjusted risk . If an owner-operator risks their treasure , but has the means to oversee that capital and an ability to voice their opinion about the business and its operations , this can become an appealing lifestyle and investment alternative . Another appealing aspect is the notion of often steady cash-flow generation from this investment .
Private equity supports franchising much like individual equity , but on a larger scale . The abundance of capital available in many of today ’ s private equity groups is staggering , and franchised concepts have become one of the most attractive investment opportunities available . Many private equity firms have embraced the franchise model because of its lower risk / return scenarios . We expect to see this trend continue for quite some time .
The scarcity of new locations and markets also contributes to the success of franchising . Many brands are dependent on real estate or location . Thus , given the
lack of acceptable new locations available in today ’ s marketplace , the valuations of mature , developed brands will continue to increase .
Last , the operational transfer of risk is an increasingly popular trend and proven advantage for franchisors . Those who are developing and expanding successful brands have the capacity to shift the risk of operation and capital to others , while generating strong return on assets for themselves . This is why we continue to see refranchising initiatives , with franchisors selling off their company operations to franchisees . We believe this trend will remain compelling and active in the coming years .
The future of franchising Considering all these dynamics , the future of franchising is bright . We will continue to see strength and growth in the franchise segment , as operators further invest in mature brands through organic growth and consolidating M & A activity . Franchisees reaching retirement age will create additional buying opportunities for the foreseeable future .
Additionally , we will continue to see the evolution of new industries adopting and growing the franchise model that haven ’ t done so before . Many of these will likely be within service industries , where we have already begun to see some franchising occur . These businesses include beauty services ( hair and waxing salons ), massage , pet care , healthcare , and housecleaning . We expect to see a widespread embrace of the franchise business model in these industries , with companies seeking the same success as the first adopters . It has become increasingly clear that because of the immense success franchising has achieved , this business model is here to stay .
Dean Zuccarello is CEO and founder of The Cypress Group , a privately owned investment bank and advisory services firm focused exclusively on the multi-unit and franchise business for 25 years . He has more than 35 years of financial and transactional experience in mergers , acquisitions , divestitures , strategic planning , and financing in the restaurant industry . Contact him at 303-680-4141 or dzuccarello @ cypressgroup . biz .
78 MULTI-UNIT FRANCHISEE ISSUE III , 2016