What Private Equity Looks for in a Franchise Portfolio

Private equity has discovered franchising. Over the past decade, PE firms have poured billions into acquiring multi-unit franchise portfolios — and they are paying premiums that would have seemed absurd a generation ago.

A single franchise unit might sell for 2-2.5x EBITDA to an individual buyer. That same unit, as part of a 15-location portfolio with professional management and growth runway, can trade at 5-6x EBITDA to a PE firm. The math is staggering: a portfolio generating $1.5 million in EBITDA could be worth $4 million to one buyer and $9 million to another.

The difference is not magic. It is understanding what institutional buyers actually value — and building your portfolio to match their criteria from Day 1.

Why PE Loves Franchises

Private equity firms are not buying your sandwich shops because they love sandwiches. They are buying characteristics that de-risk their investment and enable predictable returns:

Proven unit economics. Unlike venture-backed startups, franchises have established P&L models. PE can underwrite the investment with confidence because thousands of other units have already proven what works.

Recurring revenue characteristics. Franchises with membership models, subscription services, or habitual purchase patterns generate predictable cash flows. PE loves predictability.

Fragmented ownership. Most franchise systems have hundreds of independent owners operating 1-3 units each. This fragmentation creates a consolidation opportunity — PE can buy multiple small operators and combine them into a platform worth more than the sum of its parts.

Operational playbook. The franchisor has already figured out the systems. PE does not need to reinvent operations — they just need to execute the existing playbook at scale.

Multiple expansion opportunity. Buy at 4x, implement operational improvements, add locations, sell at 6x. The multiple expansion alone can generate 50% returns before any operational gains.

The Eight Criteria PE Evaluates

When a PE firm looks at your portfolio, they are scoring you against a mental checklist. Here is what matters most:

1. Scale

PE firms have minimum check sizes. A $500 million fund cannot waste time on a $2 million acquisition — the due diligence cost alone makes it uneconomical. Most PE buyers want portfolios with at least $1-2 million in EBITDA, which typically means 8-15+ units depending on the concept.

Smaller portfolios (3-7 units) can still attract buyers, but they are more likely to sell to other franchisees, small family offices, or search fund operators. The multiples are lower.

2. Geographic Concentration

PE prefers portfolios clustered in a defined geography. Ten units in the Dallas-Fort Worth metroplex is more valuable than ten units scattered across five states. Why?

• Operational efficiency — one Area Manager can oversee a concentrated territory
• Marketing leverage — local advertising reaches multiple locations
• Brand dominance — you own the market, making competition difficult
• Easier integration — the buyer's existing operations may already be nearby

A scattered portfolio signals that the operator grabbed whatever territory was available rather than building strategically. It also creates integration headaches for the buyer.

3. Management Infrastructure

PE is not buying your labor. They are buying a business that runs without the owner. A portfolio where the owner still works the register on Saturdays is worth less than one with a District Manager, unit-level GMs, and documented systems.

The question they ask: "If the seller disappears on Day 1, does the business keep functioning?" If the answer is no, either the multiple drops or they require an earnout that keeps you involved post-sale.

What they want to see:

• A GM at each location with P&L accountability
• An Area Manager or Director of Operations overseeing multiple units
• Back-office functions systematized (payroll, accounting, HR)
• Written SOPs for every critical process
• KPI dashboards that provide visibility without owner involvement

4. Clean Financials

PE due diligence is rigorous. They will go through your books line by line. Sloppy accounting, commingled personal expenses, or inconsistent reporting creates friction and kills deals.

What "clean" looks like:

• Accrual-based accounting (not cash-basis)
• Reviewed or audited financials for the trailing three years
• Clear separation between business and personal expenses
• Consistent chart of accounts across all locations
• Reconciled royalty payments matching franchisor records
• No "add-backs" that require creative explanation

The cleaner your books, the faster due diligence moves and the fewer reasons the buyer has to renegotiate price. Messy financials are a signal that other parts of the business might be messy too.

5. Franchise Agreement Terms

PE acquires your business subject to your franchise agreements. They care deeply about what those agreements allow and restrict:

Term remaining: A franchise with 3 years left on a 10-year term is worth less than one with 8 years remaining. Short terms mean imminent renewal negotiations, potential remodel requirements, and uncertainty.

Transfer provisions: Can the franchise be transferred to a PE buyer? Most agreements allow it, but some require franchisor approval, impose transfer fees, or give the franchisor a right of first refusal. Restrictions reduce value.

Development rights: Does your agreement include rights to develop additional units? PE pays a premium for growth runways they can execute post-acquisition.

Territory protection: Exclusive territories are more valuable than non-exclusive. If the franchisor can open competing units nearby, the buyer's investment is at risk.

6. Unit-Level Economics

Aggregate EBITDA matters, but PE also looks at unit-level performance. They want to see:

Consistency: Ten units each doing $150k EBITDA is more attractive than a mix of stars and dogs. High variance suggests some locations have structural problems.

Margins: Are your units hitting or exceeding system benchmarks? Below-average margins suggest either operational issues or unfavorable lease/labor dynamics.

Trend: Are same-store sales growing, flat, or declining? PE underwrites based on future performance. A declining portfolio requires a turnaround thesis — and a lower price.

Four-wall economics: They will model each unit independently. Locations that only work when allocated a tiny share of overhead are not really profitable — they are being subsidized by stronger units.

7. Growth Runway

PE pays for what the business can become, not just what it is today. They want to see clear paths to value creation:

Whitespace: Are there undeveloped territories where you have development rights? Can you open five more units in your existing market?

Tuck-in opportunities: Are there distressed franchisees in adjacent territories who might sell? Can the buyer grow by acquisition as well as development?

Margin improvement: Are there obvious operational fixes — labor optimization, renegotiated leases, reduced waste — that a more sophisticated operator could implement?

Revenue initiatives: Has the franchisor announced new products, dayparts, or channels that could drive same-store sales growth?

A portfolio with no growth runway is a "cash cow" — it might generate stable returns, but it will not deliver the 20%+ IRR that PE targets. The multiple reflects that limitation.

8. Brand Trajectory

Your portfolio exists within a franchise system, and PE evaluates the system as well as your units:

Franchisor stability: Is the franchisor financially healthy? Have they been through recent leadership changes, lawsuits, or restructuring?

System growth: Is the franchise adding units or shrinking? A declining system suggests brand erosion.

Franchisee satisfaction: What does the FDD show about franchisee turnover? Are operators suing the franchisor? Happy systems are healthier investments.

Competitive position: Is the brand gaining or losing share in its category? Is the concept still relevant to consumer preferences?

You cannot control the franchisor's decisions, but you can choose which brand to invest in. PE will pay more for portfolios in ascendant brands than declining ones.

Building for the Exit From Day 1

The franchisees who achieve premium exits do not start thinking about PE in Year 9. They build with the end in mind from the beginning:

Choose the right brand. Some franchises are "PE darlings" — proven concepts with strong unit economics and active buyer interest. Others are too small, too fragmented, or too risky to attract institutional capital. Research which brands PE has acquired in the past five years.

Concentrate geographically. Resist the temptation to grab scattered territories. Build density in one market before expanding to the next. Own your region.

Invest in management early. Every dollar you spend on GMs, systems, and infrastructure increases your exit multiple. The owner-operator model is a trap — escape it as fast as you can.

Keep impeccable books. Hire a real accountant. Use real accounting software. Separate personal and business expenses completely. Produce monthly financials you would be proud to show a buyer.

Negotiate strong agreements. Push for longer initial terms, favorable renewal provisions, and development rights. These terms are hard to renegotiate later and directly impact your exit value.

Document everything. Build the SOP library, training programs, and management dashboards that make your business transferable. If knowledge lives only in your head, the buyer is not acquiring a business — they are acquiring a dependency.

The Timeline to Exit

A typical PE-ready portfolio takes 7-10 years to build:

This timeline is not fixed. Some operators move faster with aggressive capital deployment. Some take longer because they prioritize cash flow over growth. But the arc is consistent: build, scale, professionalize, exit.

"PE does not buy businesses. They buy future cash flows, growth optionality, and management teams that can execute without the founder. Build what they want to buy, and they will pay what it is worth."