After a frothy 2025, global private equity investment in franchising has continued unabated, with record deal volume in 2026.
Much of this is driven by roughly $2.5 trillion in available private equity capital alongside what is still a relatively favorable lending environment, but franchising has attracted private investment for many fundamentally sound reasons, including:
Thousands of franchise models with strong brands ready to take the next step in growth
The proven economics of franchising, with its recurring revenue, asset-light and readily scalable model
A wave of successions as franchise owners seek liquidity at retirement age
Growth drivers for select franchise areas, such as the increase in post-pandemic spending for personal services
Increasing appeal of running a business making recruitment of franchisees easier
Fundamentals of Franchise Sales Shifting
What may look like a rush of funding toward franchising deals, however, is much more nuanced. Fast-growing franchisors are no longer sure bets for high valuations. The growth must go hand-in hand with strong customer satisfaction, consistent year-over-year growth with existing franchisees and clear potential for future expansion.
The Danger of Over-Franchising
The best franchisors know the value of franchise network discipline.
Franchisors who focus solely on growing their networks by creating more franchises often incur declines in performance due to poor franchisee selection or market saturation. This can harm the overall brand, affect your Item 19 (financial performance representation) and in the worst cases lead to costly litigation.
Abnormally high earnings sound great unless they are proven to be unsustainable. Oversold markets raise the risk that earnings will normalize downward as franchise density increases. New buyers will anticipate a decline under new ownership, leading to reduced bids. Red flags include:
Too many sold and unopened units
Cohorts of newer franchisees underperforming as the system scales
Unhappy franchisees who will not provide validation to new/incoming franchisees
Negative franchise sentiment assessments or lawsuits
Item 4 (bankruptcy history) and Item 19 of the Franchise Disclosure Agreement make these flaws clear to any savvy buyer.
Overselling Outcomes
Franchisors with a broken franchise development program who sell new units at any cost are eating their seed corn. It often provides a temporary boost from new franchise sales but buyers will not be fooled because they know that overselling leads to cannibalization, reduced per-unit sales, brand reputation damage or worse.
The most damaging cases sees the franchisor reliant on initial franchise fees and not long-term royalties, causing an almost inevitable degradation of services as struggling franchisees drag the system down. Valuations of such franchisors will reflect fee harvesting and not long-term potential.
Building Sustainable Franchises
Franchising is ultimately about creating systems that allow franchisees to thrive. A healthy franchisor helps its franchisees succeed and everyone wins. Ideally, the strong concept allows franchisees to naturally generate strong unit economics while benefitting from the franchisor’s brand and customer loyalty. In turn, franchise opportunities are more appealing to better candidates as the concept spreads organically. This builds long-term value based on sustainable royalties, renewals and predictable steady growth.
What Buyers Want
Franchise investors look for healthy growth and reward it with larger checks. Franchisors focused on sustainable growth and helping their franchisees thrive represent a lower acquisition risk because established, profitable franchisees are happy to stay in the system, allowing the buyer to rely on stable cash flows across economic cycles.
When evaluating a franchise business for acquisition, investors typically normalize and adjust EBITDA to reflect realistic future performance given competitive density, discounting multiples if they sense overselling, as it can severely limit growth potential.
Best Practices
Where once unit growth was king, the quality of a whole operation is what sets apart great franchisors. Slower and steadier wins the race to higher valuations. Here are a few ways to get there:
Maintain Territory and Density DisciplineDon’t sell franchises to anyone with capital. Choose carefully and keep strict standards.
Determine optimal unit density in each market and cap franchises accordingly
Consider multi-unit commitments over time rather than one-off sales to motivate franchisors to think strategically
Provide exclusive territories to protect franchisees and build long-term loyalty and system stability
Ensure Franchisee Quality
Vet potential franchisees beyond the ability to pay by considering management skills and commitment
Consider tying franchise renewal or relocation rights to hitting profitability/service benchmarks
Be wary of underperforming units and close them before they damage brand reputation
Find sophisticated multi-unit operators who can sustain operations through economic cycles
Align Interests
Consider a royalty-focused fee model with lower initial franchise fees and higher ongoing royalties (making franchisee success critical to franchisor cash flow)
Use shared marketing rather than extracting fees and leaving franchisees to fend for themselves
Reward franchisees who scale efficiently to encourage reinvestment in growth
Consider profit-sharing that ties franchisor success directly to franchisee profitability
Invest in Growth
Focus on training, operations, supply chain and IT infrastructure before adding more franchises
Choose the best locations possible to hit growth targets
Provide tools that help franchisees operate better (POS, CRM, analytics)
Use scale to improve margins for franchisees
This is all more methodical and time-consuming than the stereotype of private equity might have you believe, but the path to maximum long-term value is careful strategic growth. Steady gains with happy and profitable franchisees is exactly what PE and strategic buyers are seeking. Whether you’re looking to sell or just trying to run the best franchise operation possible, this steady approach will provide long-term gains.
Grant Marcks is a Partner at The Riverside Company, a global investment firm focused on the smaller end of the middle market, where he serves as franchising industry sector head and focuses on sourcing new platform and add-on investments. With more than a decade of experience in private equity and business development, Grant has completed dozens of transactions across a range of industries and capital structures. He leverages his extensive network and investment expertise to identify growth opportunities, create value and support the strategic development of portfolio companies.