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How Do Franchise Systems Become Attractive to Investors?

Why do franchise chains have such high value? What do investors or buyers look at when purchasing a franchise brand?
Below, we will explain how and why franchises become attractive to investors, as well as the characteristics a franchisor must have.
After more than 10 years of experience in franchising, I have watched my own brand grow from a small 27m² store into an international franchise chain. I have also studied and followed many other small brands that, thanks to franchising, have become large and prominent chains. Many business owners work day by day with the goal of eventually achieving the best possible “exit,” that is, selling their company.

Regardless of the product or service they offer, they often do not pay attention to the system they are building to scale the concept and thereby increase its value. Why is scaling so important? Primarily because all VC or PE funds look for concepts that are scalable in order to maximize the return on their investment.

Any concept that is not scalable will not interest investors or potential buyers. This is precisely why it is important to think about franchising, as a franchise is the ultimate way to scale concepts from any industry. It is this mindset of building a system, not just a product or service, that is the link chronically missing in the Croatian economy.
To illustrate what I mean, ask yourself whether McDonald’s built over 36,000 restaurants because of such a good burger or because of the excellent system it built and then implemented an outstanding franchise program?

Three core values of franchises

According to experts, there are three core values or characteristics that a franchisor must have:

Royalty Break-Even

A franchisor becomes “interesting” or valuable the moment their revenue from the royalty fee starts covering all operating costs, that is, when they reach the Royalty Fee Break-even point.
This achievement is important because it demonstrates that the franchisor has a system that works and shows financial sustainability. Without the Royalty Fee Break-even, of course, either the franchise system established by the franchisor or the concept itself is not good or developed enough to prove growth potential that would be attractive to investors or buyers.

Time

It is simply impossible to duplicate or speed up the time someone needed to correct all mistakes and recognize all the opportunities necessary for a franchise to be successful.
It literally takes years of operation with minimal profit or even no profit to reach the point where new profitable franchise units can be opened consistently. Many start-ups that have received enormous funding and have extensive support from various experts cannot achieve this overnight.
Just like the fine work of an expert creating a “masterpiece,” time is required, and for this reason, it has very high value.

Productivity

Scalability, as I mentioned, is an integral part of success and a potential investment or acquisition. Scalability is the main reason someone would want to invest in or buy a concept or company.
Every subsequent franchise that the franchisor opens becomes more advantageous for them, and the processes are more refined than the previous ones. Consequently, the franchisor’s company productivity becomes increasingly efficient, and the franchisee’s investment becomes increasingly secure.
In other words, if an investor sees that it is possible to exponentially increase franchise growth while costs change only nominally, they will be very interested in paying a high multiplier for your franchise brand.

Conclusion

What is the conclusion? As a franchisor, you should primarily be focused on internal processes until you bring them to perfection.
It will probably take you time, but that is normal. If you succeed, you will certainly develop a system that can grow profitably in an exponential way while costs increase only nominally. At that point, you will become very attractive to investors or potential buyers.

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