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Aug, 05 2014

Importance of PE funding in franchising business

Are you looking forward to grow your franchise business by way of third party investments? You are on a right track as PE funding is known as the preferred choice for franchisors to strengthen brand's foothold across the nook and cranny of the country.

Multi-unit franchise (as opposed to a single unit franchise) is the future of franchising. However multi-unit franchising requires depth of operations and substantial capital for expansion. Infusion of capital into the franchise business through third party investments by private equity funds or venture capital funds is quiet common. One of the most common questions that I regularly face from entrepreneurs is whether PE funding is preferable over the conventional external debt funding? My experience in the corporate and PE funding space indicates that seeking PE investment at growth stage is definitely the preferred option for multiple reasons:

Capital for Growth: PE funding brings in much needed capital for expansion and growth of multi-unit franchise business, enables engagement of talented human resource (the backbone of any franchise business), enhances resource building capabilities including investment in technology and IT and empowers the franchisee to undertake advertising and media campaign for a lasting impact on discerning customers. While a debt funding also enables fueling of growth, it brings liability of repayment with interest, and sometimes, penalties. PE capital infusion on the other hand is a risk capital and comes with lesser liabilities of repayments (other than the usual equity based exit options).

Expanded Network, Processes and System: A PE fund not only brings capital but also its vast experience and network of contacts and resources. Unlike a creditor, a PE fund usually brings depth of knowledge, system bandwidth and quality oriented processes that assist in compliance and corporate governance and widens the network base of the franchise business.

Accountability: Since every spend of a PE funded company is rigorously mapped through adherence to agreed business plans and affirmative voting rights and participation in board meetings by a PE fund, it brings accountability and increases the efficiency of resource management skills.

Focus on goals: As most PE funded companies are milestones and purpose driven, and regularly assessed and evaluated by investors, it brings dedicated attention and focus to achieving targets agreed under the investment agreements and, if required, reassessment and careful realignment of the agreed goals, always a win-win situation for the growth of the company.

In a nutshell, PE funding is good for growth. It is however advisable to consider external capital at growth stage (rather than at an early stage) to leverage results and minimise substantial stake sale of the company. It is also advisable to carefully negotiate the investment terms related to proportionate board seat, quorum, affirmative voting rights, promoter lock-ins, mandatory exit options, breach provisions but once the franchise business has executed a clear, unambiguous and balanced investment agreement it is time to focus on growth and expansion.

PE capital infusion on the other hand is a risk capital and comes with lesser liabilities of repayments (other than the usual equity based exit options).

Seema Jhingan, a Senior Partner at LexCounsel, Law Offices

She has more than twenty years of experience. She has been designated as a leading lawyer in the area of IT, Telecommunications & Media, by Asia Law and Practice and is a regular speaker at global and domestic forums.

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