“The Franchisor's Role in Equity Raising”		«BACK
	by Dennis L. Monroe
	from Franchise Times, October 2002 Issue

While a franchisor is sometimes an appropriate partner, there are many franchisors who are not equipped to provide equity funds. Many franchisors believe being a partner should not be their role, and because of various legal issues and constraints, they shy away from this approach. Their thought is that as franchisors they are franchising to leverage capital and protect the concept, not to participate in outside investments.

Even when a franchisor elects not to invest with its franchisees, the franchisor should still play a vital role in attracting equity investors. The franchisor can develop a list of equity investors who are looking for operating franchisee partners. This list should include qualified or approved equity players, very much like the shrinking list of senior lenders. For their own good as well as the good of their franchisees, it is essential that franchisors continually search for interested equity players.

We have recommended to many franchisors that they send out RFP's (request for proposals) to equity investors. In effect, the franchisor needs to establish a farm system and be a matchmaker.

How does the franchisor go about sourcing equity players? There are available databases of equity investors interested in the retail industry. These databases can be broken down into those investors who may be interested in franchisee investments. We have even seen franchisees send out questionnaires to equity investors to ascertain their investment interest.

Because equity investors want a flow of deals, they are normally willing to provide a description of their investment criteria. Following is a list of questions that can be expanded upon by the franchisor for use when contacting equity investors about theoretical deals:

1. What type of opportunity is the equity investor looking for?

2. How much is the equity investor willing to invest in a deal or a series of deals?

3. How would the equity investor structure a proposed deal?

4. What type of ownership interest is the equity investor willing to provide to the franchisee operator?

5. What type of incentives will the equity investor provide to the franchisee?

6. Is the equity investor willing to sign on the franchise?

7. Is the equity investor willing to be involved in management?

8. Will the equity investor have a strictly passive involvement?

9. Does the equity investor want a preferred type of return or straight common interest?

10. Does the equity investor want certain control rights?

11. What type of leverage does the equity investor seek?

12. What type of exit strategy is the equity investor looking for?

Once it is determined that a list of potential equity investors is key, what does the equity investor want?

1. A strong cash flow investment;

2. A return of 25% to 40% in the overall investment, not necessarily current pay.

3. A discernable exit strategy;

4. Corporate governance control; and

5. Managerial control only in troubled situations.

In conclusion, a franchisor teaming with its franchisees to attract equity is vital and creates a win-win situation. A franchisor should network with and develop a list of potential franchise equity investors to assist their franchisees. Once this list is developed, the franchisor should actively solicit and qualify the equity investors. The franchisor needs to provide reasonable guidelines for the franchisee to strike an acceptable deal with the equity investor. Franchisors must make their franchise documents user friendly to attract equity investors. If the franchisor fails to provide for the equity investor, the franchisor is probably excluding 60% to 70% of today's available funds, thus inhibiting growth.