With thousands of existing franchise concepts and over one hundred new concepts launching per year, finding the right franchise opportunity can be a daunting task for anyone looking to go into business for themselves. Jim Waskovich and Doug Kennealey are the Co-Founders and Managing Partners of Princeton Equity Group, a leading private equity firm exclusively focused on franchisor and multi-unit companies. They have built their careers identifying the right franchise businesses in which to invest and have backed over 35 concepts representing nearly 6,000 locations across the U.S since 2009.
Waskovich and Kennealey utilize “four lenses” through which they evaluate any new franchise opportunity. With over $1 billion of assets under management, they operate on a different scale than most individuals looking to open their first location. However, they believe their approach is just as relevant, whether buying a single franchise license, or in their case, the franchisor.
It’s All About the Unit Economics
“The great thing about buying into a franchise system is that you should be able to develop a sense for how well your business will do before you open it” says Waskovich. Princeton does extensive work on how the existing locations of a concept perform over time and looks for concepts with superior four-wall performance. “We look for high bottom line margins and a high rate of return on the capital required to open and get a location to cash flow positive,” notes Kennealey.
So how does a prospective franchisee do research on unit economics? Waskovich suggests starting with the Franchise Disclosure Document or FDD. “The best franchisors will tell you in Item 19 of the FDD how existing locations perform. Look for concepts that disclose both revenue and other performance measures.” If the franchisor chooses not to disclose how existing locations perform, Waskovich and Kennealey suggest moving on to another concept to evaluate.
Another way to understand unit economics is by talking to existing franchisees. Princeton does this before investing in any concept. “Franchisees are usually willing to talk about their business with prospective franchisees,” says Waskovich. “Ask them how much it cost for them to open their location, how long it took them to start making money, and to walk through their P&L. It is amazing what people will tell you if you just ask.”
Look for Recession Resistant Concepts
Waskovich and Kennealy target concepts that they believe will do well in all economic environments. “If you sign a 10-year franchise agreement, chances are you are going to face a recession at some point during that time,” says Waskovich. “We look for concepts in services industries addressing end markets that have done well in past downturns.” For example, Princeton has invested in concepts operating in the auto services, healthcare, wellness, and personal care industries that have all performed well in prior downturns.
Avoid Fads
Some of today’s highest profile, fastest-growing concepts may not stand the test of time. “We invest for the long term” says Waskovich, “if a franchisee signs a 5, 10, or 15-year lease, we need to make sure they have a successful business that far into the future.” Princeton looks to avoid concepts that are subject to changing consumer preferences. “This is one reason we avoid food concepts where consumer preferences change quite regularly” says Kennealey. Princeton’s portfolio includes brands like D1 Training, Ellie Mental Health, Mosquito Shield, and Pirtek, all of which offer services, the demand for which is likely to remain high for many years to come.
People Matter
When buying a franchise license, get to know the leadership team at the franchisor. “Look for a senior team that communicates honestly and has exceptional command of the business,” suggests Kennealey. “If they treat you poorly throughout the franchise sales process, what will they be like during the 10 or more years you are obligated to them as a franchisee?”
This is an area where talking to existing franchisees can be invaluable. “Ask existing owners of a concept how the franchisor treats them. Are they good people? How did they behave during a difficult time in the relationship?” offers Waskovich.
Waskovich says that buying a franchise is like getting married. “Getting in is always easier than getting out of the relationship!” He suggests making sure you take the time upfront to get to know the people involved before saying “I do.”
Waskovich and Kennealey say that the time they have taken to find the right concepts to buy has been worth it. “Franchising is an amazing industry that dramatically increases the chances of success when opening a small business.” Their “Four Lenses” have helped them avoid costly mistakes, while giving them the confidence to pursue the significant opportunities that exist in the franchising industry.