The Pros and Cons of Franchising a Brand That Has Private Equity Ownership

It often starts with a whisper. A familiar, founder-led franchise, one built on a charismatic story and a personal touch, gets a new CEO. The operations manual, once a friendly guide, is suddenly thicker and more rigid. New fees appear on monthly statements, justified by complex corporate logic. This isn't just a brand refresh; it's a fundamental shift in the company’s DNA. Behind the scenes, a powerful and increasingly common force has taken the wheel: private equity.

Once a niche player in the world of high finance, private equity (PE) has stormed the franchising sector, transforming it from the ground up. The number of PE firms actively chasing deals surged from 2,000 in 2015 to over 3,500 by 2023, injecting massive amounts of capital and driving up brand valuations. For the Filipino entrepreneur, this trend presents a seismic shift in the landscape. The brand you’re considering buying into may no longer be a family-run business but a portfolio asset for a multi-billion dollar fund.

This new reality is a double-edged sword. Aligning with a PE-backed brand can supercharge your growth with unparalleled resources. It can also trap you in a system where your individual success becomes secondary to an investor's exit strategy. Understanding this high-stakes game is no longer just for financial analysts; it’s a crucial part of modern franchise due diligence.

The New Landlords: What is Private Equity and Why Do They Love Franchising?

At its simplest, a private equity firm is an investment company that uses capital from institutions and wealthy individuals to buy controlling stakes in private companies. Their business model is often summarized as "buy, fix, and sell." They acquire a company, implement strategies to increase its value over a three-to-seven-year period, and then sell it for a significant profit.

Franchising is uniquely attractive to PE firms for several key reasons. It’s a business model built on predictable, recurring revenue streams in the form of royalty fees. The growth model is scalable—instead of the PE firm funding every new location, motivated franchisees provide the capital for expansion. This allows the PE-owned franchisor to grow its footprint and system-wide sales with relatively low capital expenditure, making it a highly efficient investment vehicle. For a PE firm, a franchise network is a cash-generating machine with built-in, low-risk expansion capabilities, making it a prime target for acquisition.

The Pro Side: Capital, Sophistication, and Rocket-Fueled Growth

When a "growth equity" focused PE firm acquires a franchise, the impact can be dazzlingly positive for franchisees who are along for the ride. These firms aim to dramatically increase the brand's value by investing heavily in its success.

• A Tidal Wave of Capital: The most immediate benefit is a massive cash injection. A founder who was bootstrapping may have struggled to fund necessary upgrades. A PE firm can pour millions into system-wide initiatives like store renovations, technology overhauls, and aggressive marketing campaigns. This can revitalize a tired brand, boost same-store sales, and enhance the customer experience for every single franchisee.
• Professionalization of the System: PE firms bring a level of business sophistication that many founder-led companies lack. They often install seasoned executives with experience in scaling global brands. They implement best-in-class operational systems, from supply chain logistics to digital marketing. This professional management can create a more efficient, data-driven, and supportive ecosystem, providing franchisees with better tools and strategies to succeed.
• Accelerated Expansion and Brand Value: PE funds are not patient. Their goal is rapid growth. This means an aggressive push to open new locations, which increases brand recognition and market penetration. For an existing franchisee, this can mean the brand’s name becomes more prominent, potentially driving more customers to your door. It also creates new opportunities for investors who want to be part of a fast-growing story.

The Con Side: The Ticking Clock and the Extraction Playbook

The same logic that drives the pros of PE ownership can also create a nightmare scenario for franchisees. When a firm is focused purely on "internal improvements"—a euphemism for aggressive cost-cutting—the relationship can turn predatory.

• Profit Squeeze and Increased Costs: The primary goal of a PE firm is to maximize its return on investment. A common way to do this is to increase revenue from franchisees and cut support costs. This can manifest as new technology fees, mandatory (and expensive) store upgrades, increased advertising fund contributions with little transparency, or forcing franchisees to buy from more expensive, PE-affiliated suppliers. The focus shifts from franchisee profitability to franchisor profitability.
• The Tyranny of the Exit Strategy: A PE firm is not a long-term partner. They have a defined timeline to sell the business. This can lead to short-term decisions that boost the brand's sale price but may harm its long-term health. They might saturate a market to show rapid unit growth, even if it cannibalizes the sales of existing franchisees. Innovation might be shelved in favor of cost-saving measures that make the balance sheet look good for a potential buyer. You need to be aware that it's almost certain that the franchisor will be sold within a few years.
• Loss of the Founder's Soul: The original culture and vision that made a brand special can be an early casualty of a PE takeover. The relational, hands-on approach of a founder is often replaced by a rigid, one-size-fits-all corporate playbook. Communication can become less personal and more bureaucratic. For franchisees who bought into the original mission, this can feel like a betrayal. The ability to give feedback through a body like a Franchise Advisory Council becomes even more critical in these scenarios to maintain a voice.

The Philippine Context: A High-Stakes Environment

In the Philippines, the pros and cons of PE ownership are amplified by the legal landscape. The country has no single, overarching "Franchise Law." The relationship is governed primarily by the Civil Code, which means the franchise agreement is the ultimate authority.

A PE-backed franchisor has the resources to draft an iron-clad contract that heavily favors their interests. This makes it absolutely essential for a prospective franchisee to seek expert legal counsel and meticulously analyze all key sections of the franchise agreement. Clauses related to fees, mandatory upgrades, advertising funds, and the franchisor’s right to change the system without franchisee consent must be scrutinized.

Furthermore, with many PE firms being foreign entities, it’s also important to understand the local investment landscape. While most franchise sectors are open to 100% foreign ownership, the complexity of these structures requires a thorough check on the franchisor’s financial health and its compliance with Philippine corporate and investment laws.

Due Diligence: How to Investigate Your Potential PE Overlord

Before you invest, you must determine if a private equity firm is in the picture.

1. Ask Directly: In your meetings with the franchise development team, ask point-blank: "Is the brand currently owned by a private equity firm or investment group? If so, which one, and when did they acquire the company?" A transparent franchisor will answer directly. Evasiveness is a major red flag.
2. Investigate the Firm: If you get a name, research the PE firm itself. What is their track record? Do they have a reputation for being growth-oriented partners or aggressive cost-cutters? Look at what happened to the other franchise brands in their portfolio.
3. Talk to Franchisees: This is the most crucial step. Speak to at least 5-10 current franchisees who have been in the system both before and after the PE acquisition. Ask them specifically:
   • "How has communication with the franchisor changed?"
   • "Have your costs increased? In what ways?"
   • "Do you feel the new owners are invested in your personal success?"
   • "Has the level of support improved or declined?"

Partnering with a PE-owned franchise is neither inherently good nor bad; it is simply a different, higher-stakes game. The potential for explosive growth is real, but so is the risk of being treated as a number on a spreadsheet. For the savvy Filipino entrepreneur, the message is clear: proceed with your eyes wide open, your due diligence thoroughly conducted, and your lawyer on speed dial. In this new era of franchising, your most valuable asset is not just your capital, but your clarity.