At SCG, we understand the salon suites industry and the major players, and attempt to keep up to speed on latest developments. We have become aware one of the highest profile salon suites franchisors is being shopped around to private equity groups.
While we have no specificity regarding future plans or motivations for the current or new ownership groups, in most transactions of this nature, this means that the founders are trying to cash out. Typically, a professional investment group will step in to run the operation as the founders depart. It is common that when a family-owned operation changes to an investor-run entity, the focus can change considerably. Often, franchisees who bought into the company because they felt that the founders were "good folks" that could work with them, and with whom they had a personal connection, find themselves dealing with corporate suits that have an entirely different approach and objectives.
As it has been explained to us, among the selling points that this particular franchise has indicated to potential private equity buyers is that they are leaning away from additional franchises and towards more corporate-owned facilities. Our analysis indicates that is likely due to potential franchisor interest waning as folks exploring the concept become more educated as to the waste of money that suites franchise royalties represent. (We remain extremely skeptical of their claim that they will double the number of franchises in the next calendar year.)
Who cares? Well...franchisees should...and they should care a lot! Again, we don't know the motivations of this particular ownership group, nor the details of this specific franchise agreement. We're only addressing business ownership changes as they pertain to franchises of all types.
The development of corporate-owned facilities is potentially very bad news for current or interested franchisees that hold an exclusive territory license. Often, franchisors exempt themselves from territorial restrictions in the fine print of the franchise agreement (which most franchisees don't bother to read). Under this scenario, existing franchisees are looking at the possibility of competing with a well-funded corporate facility in their neighborhood since fewer open territories are available. With a private-equity owner, the emphasis is typically on corporate growth, without regard to potential damage to the small franchisee.
When this particular franchisor started selling franchises, they were one of the earliest players, but now, there are at least six legitimate salon suites franchises operating (Phenix, Sola, My Salon Suite, A Suite Salon, Salons By JC, Salon Lofts, etc.). Our guess is that historic franchise growth rates are unsustainable given the current competitive market and a more educated potential operator. The low-hanging fruit of gullible franchisees has already been harvested, so they have little choice but to change direction and self-develop.
Selling out is the logical direction of any salon suites franchisor, so it would be wise for the potential franchise owner to tread carefully for ANY salon suite franchise since the same exposure potentially exists in all of them. Even if your franchise is not being actively marketed, we believe it soon will be. The opportunity to cash out to the tune of millions of dollars is the main reason for building ANY company, and we certainly do not blame anyone for that! The downside is the potential exposure to the franchisees, who are paying those huge monthly royalties for...what was it again? The list of reasons for avoiding salon suites franchises keeps getting longer and longer.