How Making This Critical Hire Will Improve Your Franchise

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Many franchise founders (and even multi-unit franchisees) hope to one day sell their businesses to private equity. PE’s keen interest in franchises is undeniable. Sellers have benefited from the activity of these well-capitalized buyers through increased deal competition and rising prices. Even in our current market, where valuations have cooled due to high prices in late 2021 and early 2022, valuation metrics for large franchises are still high and often above the mid-market average for similarly sized businesses.

Regardless of your long-term goals, it’s important to maintain a sell-ready attitude whenever possible. That doesn’t just mean keeping your documentation up to date and updating an online data room with updated financial and franchise documentation – it goes without saying. Even more important is having the right finance leader who is a strategic thinker for both you the founder and your franchisees.

This makes your CFO one of the most important roles in your company. It’s also a role that can be one of the weakest in the business, especially for emerging brands. Bootstrapping companies may not be able to afford top financial management. In particular, if private equity is asked later, immaturity in this role reduces buyers’ willingness to pay, as a vacuum in this key role has all the downstream implications for the way the company itself is run.

Today’s franchise market is extremely competitive for new brands. It’s more expensive than ever to start a business and gain enough exposure to recruit top franchisee candidates. Emerging brands face expensive competition that often leads them to make heavy investments in franchise marketing and recruitment, including costly outside distribution channels. Little may be left for the supporting infrastructure, including the finance department.

As a small franchisor, it’s difficult to recruit top finance talent. Small franchisors may not even be able to capture and meaningfully analyze franchisee profits and losses. Without this transparency, the franchisor cannot properly track or support the health of the system. How does your operations team know what to focus on during coaching conversations with franchisees? How can your team create and share reports with franchisees that show key metrics and the impact on profitability?

Related topics: 4 key roles of a CFO

How a strong CFO can improve your business

Key areas where a strong CFO can improve your business value and exit options include:

  • Strategic thinking partner for the entire management team

  • Remain focused on profitability and growth at the enterprise and unit level

  • Guide the creation of training materials to help franchisees improve their financial acumen and run a more profitable business

  • Financial modeling and scenario planning that ensures resources are invested in initiatives with the highest payback

  • Ensure data reliability and create a rhythm for collecting and analyzing business financial data

  • Drive supply chain improvements and better pricing from suppliers

  • Explore debt options to fund growth and delay a private equity partner acquisition

  • Set up loan programs to support franchisee expansion

  • team leadership; Build financial acumen across the organization

  • Operations team support; Track operational KPIs through to financial impact at both franchisor and franchisee levels

  • Work with the operations team to create a common chart of accounts for franchisees and a support mechanism for ongoing profitability coaching

Sometimes aspiring franchisors try to “save money” by understaffing this key position. Don’t make this mistake! I realize this is an expensive hire for smaller brands. Find the best talent you can afford and think about the ultimate payback. One strategy is to hire a fraction of the CFO and supplement that talent with in-house administrative support until the company is large enough to afford full-time employment.

Ironically, when positioning your company for an eventual sale to private equity, the role of the CFO is most at risk. PE firms typically have either internal financial resources or external executives they know and are familiar with. In the case of a platform, financial planning and reporting functions may already be consolidated. Either way, while the CFO is a key role in helping create a sell-ready attitude and driving shareholder value, ironically, it may be the first position to be replaced or eliminated post-acquisition. You may need to get creative with compensation, e.g. B. by creating a bonus structure in case of a successful transaction to recruit the best talent.

Related: 3 Signs It’s Time to Hire a CFO

Key characteristics when hiring CFOs for emerging franchises

  • Previous finance managerial experience – minimum 5 years

  • Strong references, especially as a strategic thinking partner for founders, senior team and franchisees

  • Experience working with private equity, preferably as CFO or VP of Finance for a brand that has been sold to or is owned by private equity

  • Experience working in a startup environment

  • Franchise or multi-unit experience is an advantage

  • Accounting background preferred over finance background

  • Good knowledge of financial modelling

  • Experience with one of the major accounting firms is an advantage

  • Ability to build a strong, profit-oriented team

If your franchise system is primarily for first-time entrepreneurs, you should make financial expertise at the operational level a priority for your finance manager, in cooperation with your operations manager. A strong CFO can assist operations in developing tools and coaching to help franchisees understand their company’s key financial levers and key activities to improve profitability.

Don’t wait until you’re selling the business to potential buyers to point out all the small rewards you could have reaped 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 is primarily intended to attract and validate better franchisees.

Related: The CFO of the future (No, he’s not just the “financier”)



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