Equity capital for acquisition of an existing franchise

searcher profile

August 24, 2023

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA

Have any self-funded searchers had success raising equity capital for the acquisition of an existing franchise? Most of the self-funded searcher investors I've spoken with don't seem interested in franchises. For context, I'm looking at acquiring a package of multiple existing, long-standing territories of a franchisor, and the purchase price would exceed $5M.

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Reply by a searcher
from University of Illinois at Urbana in Vancouver, BC, Canada
Super interested in learning more about this. I think the terms with the franchise will really matter here. Assuming you have a franchise on a search fund model and you structure it in a typical search fund way, you are paying the royalties to the franchise parent, paying a percentage on redeemable equity to the search fund investor, if you have that structure, paying back the senior loans, paying the seller earn-out. That's a lot of different stakeholders to stack in your cap table. You should really be sure that the earnings hold, and also possibly have an exclusive contract with the franchise parent to not increase your competition by shelling out more licenses near to your locations.
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Reply by an intermediary
from Naval Postgraduate School in Bellevue, WA, USA
We have sold franchises with multiple units. SBA is very comfortable providing that it meets all qualifications and the bank loan doesn't exceed $5M. Without knowing the details and assuming one owner, it might be possible to sell you enought units that with your downpayment and his/;her promissory note that the SBA loan does not exceed $5M with a DSCR of###-###-#### You could enter into an agreement to operate the other units (along with a right of first refusal to buy the other units) until can acquire the other units.
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