What are the advantages of private equity in franchising?

Welcome to another episode of Atlanta Franchise Today with host Leslie Kuban, expert franchise consultant and owner of FranNet Atlanta. Atlanta Franchise Today is dedicated to bringing entrepreneurs and business owners the best practices and tips for their franchise goals.

A notable trend in franchising, is the growing interest of private equity. On today’s episode, Leslie is joined by Scott Thompson, Managing Director of Level 5 Capital, an Atlanta-based private equity firm. The pair dive into the role of private equity in franchising and what that actually means.

Transcription: 

Leslie Kuban:
It’s great to see you, Scott, welcome to the show.

Scott Thompson:
You too, Leslie. So good to be here. Thanks for having me.

Leslie Kuban:
Well, you and I both have got a couple of days or decades banked in franchising, don’t we?

Scott Thompson:
Yes. Getting to work with you for so many years, it’s been fun.

Leslie Kuban:
Well, for our viewers who are just getting to know you, tell us a little bit about your background and your journey, how you got into franchising.

Scott Thompson:
Starts back in Boston, Massachusetts, where I’m originally from. We basically, was a kid out of college, not sure what career path I was going to go, and I found this concept called Fitness Together. It was a personal training franchise. I had no idea what franchising was at that time and really enjoyed it, wanted to own my own business, and did it, and then became successful at it, open a couple more locations. From there, scaled to master franchising in New York, and from there, moving down to Atlanta, working for some other big, large franchisor brands, and then beyond that, going into private equity. So, being part of Clear Summit Group out of Toronto, and now at Level 5 Capital here in Atlanta. So it’s been a super fun ride. I think I’ve been on every side of the coin, if you will, of franchising. So yeah.

Leslie Kuban:
We’re similar that way. Not knowing what we don’t know, we get into franchising, straight out of college, so, we can do it, anybody can do it, Scott.

Scott Thompson:
100%. Yes, that’s what franchising is all about, the business engineering of a brand.

Leslie Kuban:
So I’m hearing more and more about private equity really putting some eyeballs on franchising. The trend is growing. Just tell us what that’s about, what that looks like?

Scott Thompson:
So private equity, it’s not like venture capital or like angel investing. They like predictable returns, right? The beauty of franchising, is that you can predict royalties, you can predict cash flows, you can predict profitability, and basically franchising is mastering the unit model, right? Making sure that franchisees understand the levers to pull in their business to be successful at it, and the tools, processes, and technology to help them do that. We, at private equity, years ago, it would be like private equity basically would buy the franchise, or didn’t have much knowledge on the operational side of what a franchise was. Today, fast forward, what you’re seeing is, private equity is now getting in as large multi-unit franchisees, understanding the operational and acceleration of what it takes to be a successful brand, and they’re re-engineering the unit model, so that it’s going to be more profitable for other franchisees who are getting in that system. So when you see a system that has private equity in there as a franchisee, it’s probably a good model, and you should go ahead and invest in that.

Leslie Kuban:
So that’s an interesting migration, because in the beginning, as you said, it was more acquiring the franchisor, whether or not there was no franchising experience.

Scott Thompson:
Correct.

Leslie Kuban:
But now, PE is coming in on the other side of that franchise agreements, more so.

Scott Thompson:
So what it does too, for the unit franchisees, so if I go out and buy three units and I’ve been in it for say, five to six to seven years, and I want an exit strategy, if private equity is coming into that business, and that is a good unit model, they’re going to give you a good multiple on your invested capital, so that you can exit the business out with a good return.

Leslie Kuban:
So tell us about Level 5, kind of brands in the portfolio, your role in those brands, plans for those brands.

Scott Thompson:
So, we currently own Big Blue Swim School. That’s a kids’ swimming franchise. We have Orangetheory Fitness. We’re one of the larger franchisees in that system. We’re with HeyDey Skincare, we’re on the franchisor side and the franchisee side there, which is facials. We also have Restore Hyper Wellness, which is our Cryotherapy, IV therapy kind of brand, and we’re also on the franchisor and franchisee side there as well, and that’s what we do differently. Level 5 Capital has a level five acceleration services, which basically, if you look at it, is everything from real estate and construction, to franchise development, to new store opening and presales, to actual franchise operations. And so we’re the wrap-around capital. So when we make an investment, we also become an anchor franchisee within that brand, which is pretty unique in the industry.

Leslie Kuban:
And are you handling franchise development, meaning recruitment, for the portfolio brands as well?

Scott Thompson:
Some of the brands. Yeah. So for Heyday, we are, for Big Blue, we are. We also own, did I mention all of them? I just want to make sure, CorePower Yoga, we’re also a large franchisee as well. I just want to make sure I got all the brands there, but health wellness, personal services, family services, and that’s fund one. That’s our first fund. It’s about a $100 million fund that’s investing in these concepts. We are raising our fund two right now, and we’re going to, probably, expand beyond the health wellness, personal services, family services. So, we’re looking for those great emerging brands that have a good unit model, have a good story, want to scale, and understand the value of having systems and teams of people to help them scale.

Leslie Kuban:
So kind of regardless of the brand or the industry, is there a checklist of criteria that you guys need to see, in order to consider bringing a brand into the portfolio?

Scott Thompson:
We have to have good founders, they understand their numbers within their business, right? So they understand what levers they’re pulling to be successful. They have to have some good out-of-state operations, so not just one state, maybe two locations. We like to see between five and 10 locations, and that’s still early for a private equity to invest. That’s still very early, right? A lot of private equity invest when there’s like 50 or a 100 units. We’re in that five to 10 sweet spot and we help put the processes, we help build the acceleration. To give an example, we invested in Heyday about in February of this year, and the goal was, by the end of this year, to have a 100 franchises, and we are already a 100 franchises.

Leslie Kuban:
Congratulations.

Scott Thompson:
So that’s pretty accelerated growth for most brands, and as long as the unit model’s there, as long as the co-founder’s open to re-engineering it slightly, and then the other thing we really enjoy, is brands that have a good tech wrapper, because every consumer wants to have ease of use, frictionless experience, from the marketing side, to when they get into the store, et cetera.

Leslie Kuban:
The payment, the app, the follow-up, all that.

Scott Thompson:
All that good fun stuff. Contactless is huge now, so.

Leslie Kuban:
So private equity, sometimes, is a dirty word to people. So let’s just put that on the table, so that if people have different opinions about private equity and what that means in franchising. So what are the benefits to it?

Scott Thompson:
So just to kind of help you with that, put some context around that and why private equity is considered to be a dirty word. When most people think of private equity, they come in, they squeeze the lemon, they cut costs. They’re just trying to drive that profitability to get the return. That’s not all private equity, right? Just like franchisors are not bad. We are in the value creation business. We want to help founders reach their goals. We want to help franchisees be successful. That’s why we tend to drink our own champagne by investing in the brands that we buy. So it really depends on the ultimate goal of the actual private equity, and to why the levers they type, to pull when they get into the business.

Leslie Kuban:
Are there some questions? So, a lot of our viewers are aspiring entrepreneurs. They might be looking at franchising as a avenue to get into business, and if they find their way to a brand and private equity is involved, are there some questions that they might ask to help them really understand the role?

Scott Thompson:
How long have they been a partner? What’s their exit strategy? What investments have they made to date, and what’s been the outcome for the brands? Those would be some questions that I would ask. The beauty of private equity is its capital, right? Most private equity is bringing the capital to the business, and then the management team executes the plan. We are a little different. We come in, we actually help the management team execute, which is again, a totally different kind of philosophy, but we believe we can add that value and drive the creation of it.

Leslie Kuban:
So, and kind of along those same lines, Scott, you’ve been a franchisee before. You’ve been on all sides of this franchise agreement and you know a lot of folks who look at this, is there private equity involved or not? What advice would you give to people thinking about business ownership, franchising, in this day and age, just words of advice from someone who’s done it.

Scott Thompson:
First of all, make sure it’s something that meets your goals, right? Working with someone like yourself to help somebody partner with the right brands. I mean, a lot of people don’t know what they don’t know, and a lot of people say, I want to make a lot of money, and I love dogs, and I want to be in the dog business. You really need to understand what it is about the business you’re investing in, and what outcome you want, and then make sure that if you’re looking at item 19, make sure that the returns are there consistently. Talk to other franchisees, make sure they’re happy. Would they make this investment again? Talk to the leadership team, meet the leadership team, make sure it’s people that you could go have a beer with, because the end of the day, these are your partners, usually over a 10-year period, and you want to feel good about that partnership.

Leslie Kuban:
Now you’re right. Just because you love the idea of a business, or you might love to be the customer of that business, doesn’t mean you should own it. You have to look at it through the lens of, well, what would my life be like every day, if I owned that business, and who would I be working with, the franchisor and the other franchisees are all a part of that-

Scott Thompson:
Correct.

Leslie Kuban:
… community.

Scott Thompson:
Correct, 100 %.

Leslie Kuban:
I mean, franchising is such a big community and we both have been around it a long time.

Scott Thompson:
It’s small a thing.

Leslie Kuban:
It’s big, right, and getting bigger, but we all know each other. I always love to ask, do you have any particular mentors or people that you really admire in franchising that comes to mind?

Scott Thompson:
At every level I’ve had a different kind of mentor, someone that I would talk to, and share my challenges, and what I’m working on and it’s usually someone that’s done it, right? So in franchising, when I was a franchisee, I did it with other franchisees. When I was a master, I did it with other master franchisees. When I worked at the corporate level, I found a corporate, someone that did my job prior to doing this, and now today, at private equity, it’s interesting. I have two mentors. I have Neil Hobbs and I have Charles Myers. These are people who are changing things around the world, thing that you use every day.

Scott Thompson:
So Neil sits on boards. He’s the chairman of multiple telecommunication boards. He’s laying fiber all over the globe. Charles is the CEO of Equinix, right? So he’s basically all the data centers around the world. So anytime you put something on the Cloud, his company’s usually behind it. So working with people like him, and those guys, what does it take to scale, right? Because at the end of the day, franchising, private equity, helping more funds, having more employees, it’s all about people. It’s all about scaling. It’s all about process, and what am I not seeing around? What corner am I not looking around? And that’s what they help me do.

Leslie Kuban:
There’s always someone ahead to look to.

Scott Thompson:
Always.

Leslie Kuban:
So we were talking a little bit, before the interview, about how you guys are growing like gangbusters, looking into next year, any other plans at Level 5 that you’d like to share about?

Scott Thompson:
So [one 00:12:00] of next year, we’re probably going to add, I would say three additional brands, which is crazy to think about today, but from an AS perspective, acceleration services team, we’re going to go from, I think we’re at about 30 to 40 employees today, we’ll probably go to a 100, and that’s across each of the major functions. We brought on Kristina Eastman, by the way. She was the head of retail for Apple, right? So someone who’s done it before, scaled to a 1,000 units. We’re opening 86 units next year and 162 units across our brands in 2023. So we have a lot on our plates. It’s a fun journey. Charles tells me to enjoy it. Some days I enjoy it. Some days I’m a little stressed, but you know, today I was a couple minutes late, but I’m here and I’m happy to be here.

Leslie Kuban:
It’s so good to see you. We’ve been friends a long time.

Scott Thompson:
I know.

Leslie Kuban:
And so I can’t wait to have you in again, and see what’s new and improved in a year from now.

Scott Thompson:
I know. A lot changes pretty fast.

Leslie Kuban:
Anything in closing? Comments for our viewers, Scott?

Scott Thompson:
No, if you are working with Leslie, or you’re working with a consultant, just take the time and follow the process and you’ll definitely figure out the right brand to do with well.

Leslie Kuban:
I much appreciate it. Well, Scott, thank you so much for being on the show today.

Scott Thompson:
Absolutely. Thanks for having me.

Leslie Kuban:
And folks, thanks for joining us on another episode of Atlanta Franchise Today, and I look forward to seeing you next week.

Speaker 1:
Thanks for watching Atlanta Franchise Today, with Leslie Kuban.

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