Private equity investment in franchise-related businesses, including franchisors and multi-unit operators, is on the rise. In the last year alone, the following deals have been announced:
The list goes on. Even though the most valuable asset being acquired is the franchise system, the approach of some prospective investors and their counsel often relegates franchise due diligence to the back burner. We believe this is more a result of the routine many investors have adopted for deals generally, rather than a lack of sensitivity to the importance of franchise diligence. It is worthwhile to consider the increasing importance of appropriately targeted due diligence in light of the current regulatory environment, the importance of sustainable revenue streams, and the increasingly competitive market among private equity firms and other investors for potential acquisition targets. Targeted and accurate valuation and risk assessment has never been more in demand. The following five areas of inquiry, when present in a deal, should be significant drivers of the franchise due diligence investigation.