Franchise

How to get proper Franchise Investments?

In principle, the capital is transferred to the company indefinitely, but the aim of the participation is not to pay interest, but to create value by selling the participation. When the value of the company has risen, the investors use a previously agreed option for the exit. Since the valuation approaches and payment modalities have already been contractually determined at the beginning of the investment, only organizational details are involved.

The entrepreneurs as shareholders can now buy back the shares of the investor. It is also not unusual for another company in the industry to take over the now well-developed company in its entirety and for the founders to realise a high added value in this way – for example Joey’s Pizza. A variant that is comparatively rarely used is the IPO, in which the shares are offered on the public capital market – for example Vapiano.

The following sources are available to franchisors

Venture capital, business angels or private equity are often cited as sources of finance for young companies with convincing concepts. On closer inspection, however, these are not really different alternatives, but rather investment models in which the investors can transfer shares in the company to companies with convincing prospects and in return contribute capital.

In addition, mezzanine or hybrid financing is often mentioned. This is the collective term for a mixed form of equity and debt financing. Traditional lenders include mezzanine in their economic equity because it does not diminish the available collateral. After the contribution of mezzanine capital, the credit line increases, which in turn enables supplementary financing through conventional loans.

The numerous promotional offers of KfW-Mittelstandsbank with their attractive interest rates can also be used for these financing models.

Participations are always associated with a high risk, which can lead to a total loss of the capital invested. For this risk, investors aim for above-average returns of up to 20 % per year. This must be possible through the franchisor company.

However, there are nuances in the rules of the game that a franchisor should know when looking for equity capital. First of all, when looking for equity capital, the franchisor must make the fundamental decision as to whether a private investor or an institutional investor should be acquired, and which investment quota is acceptable to him.

Private equity companies are subject to prospectus liability and approval by the Federal Financial Supervisory Authority, which means that extensive checks of the capital taker are necessary before granting an investment. This leads to high transaction costs, which can only be calculated in the case of investments of EUR 1 million or more.

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