Are you looking to make big money in franchising? And maybe hoping to grow your franchise company to exit to a private equity or venture capital group eventually? Our guest today is Alicia Miller, who is an expert in helping franchisors successfully exit.
TODAY’S WIN-WIN:
If you are going to franchise, you need to be prepared to embrace what it means to be a franchisor and to be focused on unit-level economics.
LINKS FROM THE EPISODE:
- You can visit our guest’s website at:
- Get a copy of our guests’ book: CLICK HERE.
- Attend our Franchise Sales Training Workshop:
- https://bigskyfranchiseteam.com/franchisesalestraining/
- If you are ready to franchise your business or take it to the next level: CLICK HERE.
- Connect with our guest on social:
- https://www.linkedin.com/in/milleralicia/
- https://www.instagram.com/bigmoneyinfranchising/
- https://x.com/BigMoneyInFran
ABOUT OUR GUEST:
Alicia Miller is Co-Founder and Managing Director of Emergent Growth Advisors. She is an active franchise investor and advises franchise brands and multi-unit operating groups on growth and transformation initiatives, as well as private capital firms and family offices active in the franchise sector. Alicia is a recognized thought-leader in franchising and has published more than 100 articles in Franchise Times, Forbes, and Entrepreneur. Her book, Big Money in Franchising – How Private Equity Is Transforming Franchising, provides a unique look at PE’s impact on the franchise sector and franchise stakeholders.
ABOUT BIG SKY FRANCHISE TEAM:
This episode is powered by Big Sky Franchise Team. If you are ready to talk about franchising your business you can schedule your free, no-obligation, franchise consultation online at: https://bigskyfranchiseteam.com/.hise consultation online at: https://bigskyfranchiseteam.com/.
TRANSCRIPT
Dr. Tom DuFore (00:01):
Welcome to the Multiply Your Success podcast, where each week we help growth-minded entrepreneurs and franchise leaders take the next step in their expansion journey. I’m your host, Tom DuFore, CEO of Big Sky Franchise team. And as we open today, I’m wondering if you or someone who’s thought about making big money in franchising and maybe you’re hoping to grow your franchise company to a big exit, to a private equity group or a venture capital group eventually. Well, our guest today is Alicia Miller, who’s an expert on helping franchisors successfully exit. Now, Alicia is the co-founder and managing director of Emergent Growth Advisors. She’s an active franchise investor and advises franchise brands and multi-unit operating groups on growth and transformation initiatives, as well as private capital firms and family offices active in the franchise sector. Alicia is a recognized thought leader in franchising and has published more than a hundred articles in the Franchise Times, Forbes and Entrepreneur. Her book, Big Money in Franchising, How Private Equity Is Transforming Franchising provides a unique look at PE’s impact on the franchise sector and franchise stakeholders.
(01:13):
You’re going to love this interview if you’re franchising, thinking about franchising your business and thinking about how do you exit. This episode is for you and you’re going to want to share this with all your franchise friends and other entrepreneurs that are interested in franchising and exiting at some point in time. It is packed full of great information. So let’s go ahead and jump right into my interview with Alicia Miller. Alicia, thank you so much for being here. We have been connected now for a little while and have just been following you on LinkedIn as a primary channel to watch what you’re doing as the title of your book talks about big money in franchising. Let’s talk a little bit about what your book is generally about so someone can get a high level understanding and then what led you to write this book?
Alicia Miller (02:02):
Big Money and Franchising is the book I wish I had had access to when I came into franchising as a multi-unit franchisee. I see the marketplace completely differently now than I did when I first came in in 2013. I’ve learned a lot over the years and people don’t really appreciate how much private equity has impacted all sorts of things in franchising, big and small. So even though they’re very picky and they’ve cherry-picked only a few companies to invest in compared to the totality of what’s available, they are market makers and the market has moved because of their involvement in lots of really interesting ways, and as any stakeholder in franchising needs to really understand it and think it through before they make decisions about how to achieve their outcomes that they’re looking for.
Dr. Tom DuFore (03:01):
Just even thinking back 10 years ago in franchising, it’s just changed so much just in that time window. One thing that I’ve definitely noticed a change in from 20 years ago when I first started my career in franchising, occasionally I might get a call from some private equity group or a venture capital fund that said, “Hey, we’re looking for a brand that has a few hundred franchises and these high numbers of EBITDA.” And for most of the clients I was working with, it just was far too large of an ask. However, one thing that I’ve noticed, especially in recent years is this trend, the lowering of what these groups are looking for and now seeing it enter into the emerging brand space. So I’d love to get your insight on how you see this private equity and these investment groups coming into the emerging brand.
Alicia Miller (03:54):
Sure. It’s almost like a clown car emptied in the middle of franchising and all these people suddenly appeared. If you had started in the ’90s, you would’ve had your pick of great brands where there was no competition for these deals. But Bain did such a good job with its three investments, Domino’s, Dunkin, and Burger King, and it got so much attention in the late ’90s and early 2000s that the entire industry, all the heads on a big swivel said, “Oh, franchising, what a great model. I love this.” And they just piled in.
(04:31):
More than 400 firms have made investments in franchising to date since the ’90s, so it’s still pretty recent. They like the model, it’s a cash flow machine once you get it to a certain scale, but they’ve effectively now, because they’ve been in it now for a few decades, they’ve cherry-picked and some of the best opportunities are gone and they’re forced to dip lower and lower into emerging brands in order to get deal flow, which has had some really interesting consequences I guess for all of franchising as a result of that.
Dr. Tom DuFore (05:06):
Absolutely. Well, and what are some of the criteria or some of the things that you see private equity or investors looking for and whether it may be emerging brands or just franchise brands in general?
Alicia Miller (05:19):
So I think we need to clear up often held misinformation. Traditional private equity investors aren’t here to clean up a mess. They’re not transformation experts. They are accelerators. They are looking to invest in a good business with good bones and a good management team because they’re not operators themselves and they’ll put money into the tech stack, into marketing, into franchise development. They’ll add staff, hopefully better support franchisees. It’s a very clear playbook, what they do in order to accelerate brands and they want to return three times their invested capital at least in about five or six years. The model’s really, really clear. So they cannot take on a project, they don’t have time. They cannot unwind your mistakes, they don’t have time. So the best thing you can do is to stay focused on, it sounds so silly, franchise best practices. Again, it’s not complicated, but it’s really easy to lose your way and chase the shiny object or get too enamored with growing too fast and not put the scaffolding in place to build real value for your franchisees.
(06:35):
No one’s going to come and bail you out from that because they do not want to take on drama. They don’t want to take on a mess. There’s a few investors who are willing to do turnaround investing, but most of the PE firms, family offices and independent sponsors are looking for pretty good companies with good growth prospects where they can meaningfully add value to the team, new perspective, add capital, invest in the business to grow it. So my advice is think about your business from the perspective of a buyer. You got to get outside yourself a little bit. I know there’s a lot of pride and creation and all that, but you’ve got to see it through the lens of a buyer and look at where the buyer is going to see potential weaknesses in your model, in your unit level economics, in your team and in your relationship with your franchisees.
Dr. Tom DuFore (07:34):
Thinking from their perspective, how can a founder, most of the folks who will listen into this and the clients we work with, they’re still founder led organizations. They’re either new thinking about franchising or an emerging brand in most cases. So how can a founder assess whether or not a private equity partner or an investor might be a right fit or just in general a good business decision for them?
Alicia Miller (08:00):
Ideally, as you’re thinking about your growth plan, you don’t want to put yourself ever in a situation where you run out of cash. Cash is king. So you don’t want to grow too fast or over promise and under deliver anywhere, take out too much debt and not be able to pay it off because you’re not going to be rescued by a private equity buyer. So my advice is build a few extra corporate units to start with, either before you launch franchising or in conjunction with launching franchising because it gives you extra cashflow to be able to invest in the business to grow it. When you start adding franchisees, it’s going to be a while before those royalties help pay the bills, but meanwhile, you now have franchisees you have to support. So try to be really balanced. Work with an advisor who can help you model that out and make sure you’re not getting ahead of your skis.
(08:58):
There’s no reason to create that sort of stress for yourself or your franchisees. It doesn’t have to be that way. So make sure the model is a really solid model to own. You need to… For an owner operator, for example, if you’re a franchisee, if you’re not making 20% profit, 15 at a minimum, you might as well stay in the public market. There’s a much less risk for your money. You don’t have the opportunity cost of having to give up a corporate job to run a franchise. So make sure your unit level economics, an average franchisee can do well and can make money and be profitable in your business. Start with that.
Dr. Tom DuFore (09:37):
Great advice and great suggestions there. I’d love for you to talk about, you mentioned early on that you were multi-unit franchisee. As multi-unit franchisees continue to grow in their percentage of just franchise ownership in general, how have you seen this private equity and these investments that are coming into franchising? How do you see that impacting multi-unit franchisees and how might it have impacted your position as a multi-unit franchisee previously?
Alicia Miller (10:07):
There are some private equity investors who are willing to invest at the franchisee level that is consolidate within large systems typically. So for example, Garnett Station Partners consolidated a lot of Burger King units. They’ve recently sold it off, but they got it up to several thousand, I think. They tend to prefer larger systems because they want to build scale so that you’re not going to see PE at the unit level in anything below the several hundred units really because there’s just not enough they’re there, there’s not enough to consolidate. It’s a really important thing to think through as a franchisee, what’s your exit strategy? If you’re joining an emerging brand, it’s going to be a while before it gets enough scale to attract a PE buyer at the unit level, which means your only exit is going to be to another franchisee if you can sell it. So that puts a lid on prices.
(11:04):
It’s only when private equity really starts to consolidate systems that you see prices start to move, and over time those prices get more expensive and pretty soon some of the initial PE investors drop out because the bargains are no longer available. But it’s something to just think about, is PE active in this system or not? I personally think one of the most beneficial things about PE’s entrance to franchising is this activity at the unit level, because think about if it’s a publicly traded franchisor or if it’s got a private equity firm that owns the franchisor and now you’ve got private equity backed franchisees. Think about that dynamic that sets up, they may have entirely different investing mandates and entirely different fiduciary responsibilities to their limited partners, but I think it sets up a really healthy tension to keep everybody focused on where they should be in the first place, which is unit level economics and having those really savvy investors at the unit level prompts different conversations with corporate as the system consolidates.
(12:17):
So if you’re a franchisee and you have a disagreement with your franchisor, it can isolate you. There’s lots of ways where they can manage it through the contract, but if a coordinated block of your system is private equity backed and they’re all saying the same thing, it’s hard for the management team to say, “Oh, this isn’t an issue.” So some systems, in some restaurant systems, big fitness systems, more than half of those units are PE-owned. So it changes the conversation, I think in a very healthy way to remind us all what makes franchising work in the first place, which is good franchisee outcomes and good unit level economics.
Dr. Tom DuFore (13:03):
Alicia, you work with a lot of franchise brands, founders, you’ve been involved in a lot of these types of deals and helped others prepare for this infusion of capital or maybe an exit. As you’ve gone through this, what have you heard some of your clients or others you know of in franchising, what have they said to you that they wish they had known before starting this journey or things that maybe they wish they would have done before starting?
Alicia Miller (13:32):
Start earlier. Start thinking about it earlier. Think of me as an advisor business coach. So at some point you’re going to exit. None of us lives forever, so at some point the business you are now running is going to transition to somebody else. So what does that look like? What does success look like for you? What kind of objectives are you trying to get out of this? So if you’re a franchisor, if you’re a founder of an emerging brand, it always helps to think about possible exits in mind. You may be founding it now, not thinking all that much about exit, but it’s actually a really good lens to look at your business because it helps you build more value along the way.
(14:11):
And then if you decide to live forever or pass it down to your kid or whatever, then you will have built a more valuable business for them to run. But I think the most common theme I hear is that they didn’t start early enough preparing and they didn’t educate themselves early enough in all of these ways to think about their business and how it looks to an outsider. They didn’t understand the private equity landscape. They didn’t understand the financing landscape at all or not enough to be able to influence their thinking while they still had time to make changes.
Dr. Tom DuFore (14:48):
That leads me to reflect back on something you said earlier about there being over 400 different investment groups that have invested into franchising in some way, shape, or form over the last roughly 30 years or so. Are they all looking for the same types of things with these 400 different private equity groups? I mean, sometimes I think you hear private equity and people just think, “Well, they’re all the same.”
Alicia Miller (15:13):
No, they’re not all the same. So I find it useful to split them into buckets by their mandate and also by the size of business they want to take on. So there are many PE firms that cannot buy small businesses. Their fund is simply not set up that way, so they cannot write small checks.
Dr. Tom DuFore (15:34):
What does a small check in this category mean? We’re not talking like a thousand dollars here.
Alicia Miller (15:40):
A small check for somebody like Roark might be $500 million. They’re one of the more prolific investors in franchising. They really cannot buy small businesses. Blackstone bought Tropical Smoothie recently for $2 billion. They cannot buy a $10 million startup. It’s too small. But there are other specialists who can and want those and are perfectly willing to incubate those and grow them up and mature those systems and then sell them upstream to somebody who is looking for a business of that size. So they organized themselves along essentially a ladder by check size, but in addition to that, they have different mandates. So for me, the easiest way to think about it is growth, value, turnaround. So we already talked about turnaround is actually a very small portion of all of PE. I think it’s less than 10% of all PE deals are turnaround situations. The other two are growth and value.
(16:44):
Most PE investors, family offices and sponsors in franchising are growth. That’s what they do. They want to pick up a brand, grow it meaningfully, get three times their money, sell it for a nice multiple to the next guy up the ladder. That’s what they do. As brands mature though, you start to run out of that fast growth and it becomes more about optimization at scale. So that’s more of a value player where the thing is already quite large, it’s kicking off a lot of cash flow. Now it’s time to optimize the supply chain, if it hasn’t already been done, enter new markets, maybe internationally, there’s probably some remodels that need to happen so that the business changes as it gets bigger and scale happens.
(17:27):
But different investors are interested at different inflection points along the way and what you need help with, changes, which is why it’s actually a useful mechanism to have this re-trading that happens between PE firms. They’ve got to make money on the way out. But it also is a good changing of the guard because a PE firm that likes working with and is good at working with, say emerging restaurants, is not the same firm that knows how to take them internationally when they’ve already got thousands in the US and now they need to break into new markets. Those are different skill sets.
Dr. Tom DuFore (18:04):
Very much so. And just thinking of, you were mentioning some of those check sizes, which were very big differences. Is there a general starting number where you see a low side begin and then it sounds like it goes on up into the billions beyond that?
Alicia Miller (18:20):
For most PE firms, they’ll say they prefer to have at least 2 million of EBITDA, most of which needs to be recurring revenue and not franchise fees that you’re collecting upfront, because that’s just one time. Some can’t invest though unless you’re five, 10 million or more. But we’re seeing more and more invest down in the 500,000 EBITDA. So in other words, barely break even range.
Dr. Tom DuFore (18:45):
This has been a really great discussion, and Alicia, for someone that listens into this, how can they get a copy of your book or get in contact with you if they’re interested in learning more?
Alicia Miller (18:55):
The book’s on Amazon, Big Money in Franchising. To reach me, bigmoneyinfranchising.com. You can find me. There’s a form you can fill out or you can get in touch with me or on LinkedIn. That’s an easy way to reach me as well.
Dr. Tom DuFore (19:07):
Thank you so much. Well, Alicia, this is a great time in the show. We make a transition and we ask every guest the same four questions before they go, and the first question we ask is, have you had a miss or two on your journey and something you learned from it?
Alicia Miller (19:20):
I think the initial miss I had is the one that sticks with me the most, and that is when I was a multi-unit franchisee, I think I got enamored too soon with the brand I eventually chose. A great brand, great system, but I didn’t realize how rich franchising is in terms of variety. There are a lot of great concepts and a lot of interesting categories in franchising to consider before you really determine whether this is the right business that you’re going to run. Had I to do over again, I might be in a completely different category. I marched down that road really fast and found something that I thought was a fit and the rest is history. But I think doing it over again, I would’ve taken more time to educate myself on other categories, could have been really interesting.
Dr. Tom DuFore (20:09):
Well, let’s talk about a make or to a highlight that you’d like to share.
Alicia Miller (20:13):
Publishing this book is a pretty big highlight I would say. Honestly, it’s very personal. Nobody publishes a niche topic book like this because they’re expecting to sell millions of copies of the thing. It’s my attempt to really help people and give them the tools and the playbooks that they need to make decisions. Like I said, this is the book I wish I’d had when I was starting out, but it was watching my own kid open that box when we first got that first case shipped to the house and my pictures on the jacket. That was to have her experience that she wants to, a lot of kids want to grow up and be a writer. I don’t know if she ever will, but I thought that was a nice lesson. Not much different I think from founders and business owners when their kid sees you in the business and sees you kind of winning at life and winning in your business, that resonates with your family. So I would say that’s the biggest win.
Dr. Tom DuFore (21:10):
Being just a great example and role model to say, “I had a dream and I wanted to do something and I did it. I accomplished it.” I think it’s wonderful. Well, let’s talk about a multiplier that you’ve used to maybe grow yourself personally, professionally, or any of the businesses you’ve been a part of.
Alicia Miller (21:27):
The biggest force multiplier for me is I surround myself with people who are much smarter than I am. It’s impossible for you to know everything. So I have a very broad list. I call them like my board of advisors. It’s not a formal board. I have really strong connections with people and try to always be a giver and try to make the right introductions and provide assistance as much as I can. But I trust these advisors and they can see things I can’t, or they’ve got experience I don’t have, or they know somebody I don’t know. And I’m telling you, the biggest force multiplier is don’t try to do this by yourself. Don’t be a hero. Whatever business path you’re picking include a lot of people in your journey. People want to help each other. They have at many points in my career along the way have been very helpful for me.
Dr. Tom DuFore (22:21):
The final question we ask every guest is, what does success mean to you?
Alicia Miller (22:26):
I think that it changes based on the season you’re in your life and what your objectives are. At this point in my life, I’m looking for balance between work and my family commitments and helping people get good outcomes in franchising. I love franchising. I hope that comes across. I really love so much about the franchise model and I just want to do my little part to improve outcomes everywhere I can because it’s one of the most important generators of small business and new opportunities for people to make a big change in their life and work for themselves that has ever been invented. So the more that I can do to help in my own way to make sure we have better outcomes, I think that to me is success.
Dr. Tom DuFore (23:11):
Before we go, is there anything you were hoping to share or get across that you haven’t had a chance to yet?
Alicia Miller (23:17):
I would say that for anyone who is considering whether their business is franchisable, do your homework. Talking with Big Sky is a good place to start. It really is not something to be taken lightly. If you consult advisors and they say, “You’re really not ready for franchising, here’s what you need to work on.” Please don’t shop for yes. You’ve got to hear that feedback. We are all sincerely trying to help make sure that emerging brands do the right thing and launch correctly and out of the block. Really think about whether your brand is ready to franchise and whether you really want to be a franchisor, it’s a different business before you pull that trigger. So get some good advice and really hear it from people who’ve been in franchising for a long time.
Dr. Tom DuFore (24:07):
Alicia, thank you so much for a fantastic interview and let’s go ahead and jump into today’s three key takeaways. So takeaway number one is when Alicia talked about the history of private equity coming into franchising and that it started in the ’90s when Bain invested in Domino’s, Dunkin, and Burger King and those deals really caught the attention of other investors. And she said, “Now, there are over 400 investment groups that have invested in franchising since the ’90s.” Takeaway number two is when she talked about private equity and VC firms are looking for a quality franchise system to grow, not to come in and clean up a mess. And this is a common theme that I see with budding franchise companies, these entrepreneurs that are thinking about franchising and they want to grow quickly and leave just a mess in their wake. And there are unfortunately consultants who encourage that kind of behavior.
(25:11):
I do not think that’s wise or a good measure for a lot of reasons. Number one is your franchisees, making sure that your franchisees are being led down a successful path. Certainly number two, you want sustainability and viability in the franchise system. And number three, if you do want an exit or a potential financial partner along the way, private equity and venture capital groups are looking to come in to a business that’s being run. I love the way that Alicia said this. They do not want the drama. I thought that was great. If there’s drama, they’re not interested. So very, very interesting. And she said, “Think about this from the perspective of the buyer when you’re thinking about growing your business.”
(25:53):
Takeaway number three is when she broke down the types of private equity and venture capital groups that are coming in, and she described them or broke them into three broad buckets, growth, value, and turnaround. And she said that this turnaround to look at takeaway number two about the drama or the messy franchise systems, she said that less than 10% of all private equity is focused on turnaround. And why is that? Well, certainly it makes sense. It’s hard. You’re buying a business that you never know really what direction it’s going to end up going. So you want to build it right from the beginning. This is a message Alicia likes to talk about. It’s something that we talk about at Big Sky. You want to build your franchise system with your best foot forward right from the beginning, helping your franchisees grow and succeed in the system. I think that’s really, really important.
(26:46):
And now it’s time for today’s win-win. So today’s win-win is if you are going to franchise, you need to be prepared and embrace what it means to be a franchisor, which means you’re focused on unit level economics of your franchisee. The unit level economics is so important. How does this work for a franchisee? Followed by making sure you’re providing support and training to your franchisees. This is not a sell them and forget them kind of a business. If you come in with that mindset, you’re better off not getting into franchising. So you want to come in and be thinking about how are you going to help your franchisees succeed and embrace this new business model of franchising?
(27:36):
Whatever business you’re in today or that you founded, you are now in Franchising and it’s a different business. So I thought that was just a great win-win and a great takeaway. Because if you do that, if you’re focused on it, is going to be a huge win for your franchisees and your franchisees customers, and it’s going to be a huge win for you as well as you grow your system. And so that’s the episode today folks, please make sure you subscribe to the podcast and give us a review. And remember, if you or anyone you know might be ready to franchise or business or take their franchise company to the next level, please connect with us at bigskyfranchiseteam.com. Thanks for tuning in and we look forward to having you back next week.
