Venture capital and franchising: A new trend
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Partner
Spain
I am a partner and head in Bird & Bird's Corporate and M&A department in the Madrid office.
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In recent years we have become used to seeing how the businesses that have franchised their concept successfully have raised the interest and investment appetite of financial investors, particularly of the private equity funds. Franchisors are an attractive investment given they are light on assets, offer a recurrence and certainty in financial return, and have great capacity to grow and become global. Investors have paid great multiples for such investments and made great exits afterwards.
We cite as an example the investment made by Inspire Brands (holding company that owns Sonic Drive-In and Jimmy John’s, Buffalo Wild Wings and others), a restaurant franchisor launched by Roark Capital, in Arby’s in 2011 and later in 2020 in Dunkin’ Brands, the parent of Dunkin’ and Baskin-Robbins.
On the other hand, the franchisees, mainly multi-brand, are also a good investment target, mainly to the extent that they have a diversified portfolio of brands and an international spread, as their experience and resources attract investment. As an example, we can cite the investment made by Grupo Alsea that acquired the Spanish Grupo Zena (partially owned also by Alia Capital Partners) in 2014 and Grupo Vips in 2018 (where ProA Capital held a 30% stake before the purchase and currently holds a minority stake). Currently the Latin-American Alsea Group operates in Europe within 6 markets a total of 10 brands: Starbucks, Domino’s Pizza, Foster’s Hollywood, Foster’s Hollywood Street, VIPS Smart, Fridays, Burger King, OleMole and Ginos. Also, we can cite the investment made by Cinven in the Spanish group Restaurant Brand Iberia, a Burger King, Popeyes and Tims franchisee.
In addition, we are now starting to see, as a new trend, investments in early-stage businesses, which are suitable to be franchised because of their brand and/or a specific and solidly developed knowhow, as well as their actual operational track record. In this sense, we are seeing specialised accelerators and incubators helping early-stage start-ups to "package" their IP, as well as some investors interested in exploring the possibility of investing in such kind of company with the particular commitment to grow through franchising. These investments will not be merely financial, but will need to be "smart investments", thus possibly will raise the interest of specialised venture capital entities or professional investors that have sufficient experience to help the development of the franchise network from scratch and leverage their full value. We believe this is a trend that is here to stay and will soon become strong, bringing a lot of changes and innovation in the market and of course a lot of opportunities for us in respect of the type of services that we may help our clients with.
