Many franchise founders (and even multi-unit franchisees) hope to one day sell their businesses to private equity. PE’s significant interest in the franchise sector is undeniable. Sellers have benefitted from the activity of these well-capitalized buyers through added deal competition and increasing prices. Even in our current market where valuations have cooled from the heady prices of late 2021 and early 2022, multiples for great franchise businesses are still strong and often exceed middle-market averages for similar-sized companies.
No matter what your long-term objectives are, it is important to maintain a sale-ready stance as much as possible. This doesn’t just mean keeping your documentation up to date and refreshing an online data room with updated financials and franchise documentation — that’s a given. More important is having the right finance leader in place to be a strategic thought partner both to you as the founder and to your franchisees.
This makes your Chief Financial Officer one of the most important roles in your business. It’s also a role that, especially for emerging brands, can be one of the weakest in the organization. Bootstrapped companies may not be able to afford top financial management. When private equity later comes calling, immaturity in that role specifically decreases buyers’ willingness to pay because of all the downstream impacts a vacuum in that key position creates in how the business itself is managed.
Today’s franchise marketplace is extremely competitive for new brands. It is more expensive than ever to launch and create enough visibility to recruit top franchisee candidates. Emerging brands end up stuck in an expensive competition that often leads them to make heavy investments in franchise marketing and recruiting, including high-cost external sales channels. Little may be left over for support infrastructure, including the finance department.
It is difficult to recruit top finance talent as a small franchisor. Small franchisors may not even have the capacity to collect and meaningfully analyze franchisee P&Ls. Without this visibility, the franchisor can’t properly track or support system health. How will your operations team know what they should be focused on during franchisee coaching conversations? How can your team create and share reports with franchisees demonstrating key metrics and the impact on profitability?
Related: 4 Key Functions of a Chief Financial Officer
How a strong CFO can improve your franchise
Key areas where a strong CFO can improve your business value and exit options include:
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Strategic thought partner for the entire management team
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Maintain focus on corporate and unit-level profitability and growth
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Guide the creation of training materials to help franchisees improve their financial acumen and manage a more profitable business
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Financial modeling and scenario planning that ensures resources are invested in the highest pay-back initiatives
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Ensure data reliability and create a cadence for collecting and analyzing business financials
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Drive supply chain improvements and better vendor pricing
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Evaluate debt options to fund growth and delay taking on a private equity partner
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Establish lending programs to support franchisee expansion
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Team leadership; build financial acumen across the business
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Support for operations team; track operational KPIs back to financial impact at both the franchisor- and franchisee-level
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Work with the operations team to establish a common chart of accounts for franchisees and support mechanism for ongoing profitability coaching
Sometimes emerging franchisors try to “save money” by under-hiring for this key position. Don’t make this mistake! I recognize that for smaller brands, this is an expensive hire. Find the very best talent you can afford, and consider the ultimate payback. One strategy is to hire a fractional CFO and complement that talent with in-house administrative support until the business is large enough to comfortably afford a full-time hire.
If you are positioning your business for an eventual sale to private equity, the CFO role is ironically most at risk. PE firms typically either have financial resources in-house or outside executives they know and are comfortable with. In the case of a platform, financial planning and reporting functions may already be consolidated. Either way, while the CFO is a key enabling role to help create a sale-ready stance and drive higher enterprise value, ironically, it may be the first position to be replaced or eliminated post-acquisition. You may need to get creative with compensation, such as creating a bonus structure in the event of a successful transaction, in order to recruit the best talent.
Related: 3 Signs It’s Time to Hire a CFO
Key attributes in emerging franchise CFO hire
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Previous senior finance leadership experience — minimum 5 years
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Strong references, especially as a strategic thought partner for the founder, senior team and franchisees
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Experience working with private equity, preferably as CFO or VP of Finance for a brand that was sold to private equity or owned by private equity
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Experience working in a startup environment
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Franchise or multi-unit experience is a plus
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Accounting background preferred over finance background
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Good financial modeling skills
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Experience at one of the large accounting firms is a plus
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Ability to build a strong, profit-focused team
If your franchise system is primarily first-time business owners, make financial acumen at the operating level a priority for your finance lead in partnership with your operations lead. A strong CFO can assist operations to develop tools and coaching that help franchisees understand the major financial levers in their business and key activities that improve profitability.
Don’t wait until you’re selling the business for prospective buyers to point out all the low-hanging fruit that you could have captured and monetized yourself by helping franchisees improve their businesses. Strong attention to unit-level profitability also signals to franchisees that their profitability is a priority for your management team. This should attract better franchisees in the first place and validate well.
Related: The CFO Of The Future (No, They Are Not Just The “Finance Guy”)
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