Private Equity Due Diligence, Value Creation, and Exit Strategies

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In this Data Alchemy episode, we’re joined by Alex Murphy, a seasoned professional in franchise investment and private equity at Atticus Franchise Group. As Managing Director and COO, Alex delves into data in private equity and how it shapes the lifecycle of franchise investments—from due diligence and value creation to strategic exits.

Due Diligence: A Data-Driven Approach

For Atticus, data and analytics are the foundation of the investment due diligence phase. In assessing the attractiveness of an opportunity, Alex stresses the importance of finding brands with “meaningful barriers to entry” and strong unit economics. In addition to assessing development metrics, such as working capital requirements, Alex summarizes that the attractiveness of a concept can ultimately be assessed by focusing on three main data points: people statistics, sales and overall unit growth, and the make-up of the labor pool. Together, these three key areas offer private equity investors in the franchise space a holistic view of the franchise’s health and potential for growth. 

First, Atticus assesses the operational stability of a potential investment by looking at management tenure length and turnover rates. After all, as Alex notes, “it all starts and ends with people”. Sales performance data, on the other hand, reveals the franchise’s market position and growth trajectory. Lastly, understanding how the labor pool fits into the overall labor matrix or sales per labor hour model is crucial to understanding the overall economics of the opportunity.

While these are the 3 main building blocks of the investment assessment, Alex notes there are other data points that are important. For example, his firm even takes into consideration Google and Yelp ratings which help to further paint a picture of the long-term viability of the brand.

This data-driven approach to due diligence sets the foundation for Atticus’s strategy and helps to inform the overall investment thesis. By prioritizing data in the due diligence process, Atticus maximizes the potential for success, laying the groundwork for strategic value creation in the next phase of their investment process.

Value Creation Through Operational Excellence

Atticus assumes the dual roles of Private Equity sponsor and operational leader within their investment portfolios. Just as data and analytics play a role in informing their investment strategy, so does it come to define their core operational philosophy as well. 

Alex notes that while overall top line revenue targets are important to assessing the performance of the operations, simply taking this revenue target and cascading it down to the operational teams is not enough. It’s about identifying the underlying operational drivers of these core financial metrics. These “input” metrics are highly correlated with traditional financial metrics, such as revenue growth and profitability.

Finding the right operational drivers can be a complicated process and involves identifying the right actionable metrics for every level of the organization. This granular focus on operational metrics — from customer satisfaction to service efficiency — enables targeted interventions that directly boost performance and profitability. By breaking down revenue into its drivers, Atticus identifies precise areas for improvement, ensuring that strategies enable sustainable and scalable growth.

Particularly within Atticus’s membership-based business models, within brands like Massage Envy and Crunch Fitness, the emphasis on enhancing member experience is crucial. Data analytics offers a window into the member’s behaviors and preferences, allowing Atticus to tailor offerings and improve engagement. Atticus monitors key metrics like attrition rates and dues collectibility, with a special focus on the frequency of member visits and service utilization. Recognizing the direct correlation between product usage and member retention, Atticus leverages extensive data from point-of-sale systems and member management tools to engage proactively with members. 

Atticus believes in helping customers use what they’re paying for so they can derive maximum value from their memberships. They have proactive routines for re-engaging members, which not only aids in retaining members for longer periods but also significantly contributes to the lifetime value of a member. 

The integration of online booking platforms and mobile apps has also emerged as a potent tool for enhancing guest loyalty and driving revenue growth. According to Alex, guests who utilize online booking platforms tend to be more loyal, stay longer, and spend more. This trend is evident across various brands within their portfolio, such as Wingstop and Sonic, where online orders boast substantially higher check averages. Additionally, offering app-exclusive discounts, as seen in Sonic, increases order volume. At Massage Envy, they noticed that guests who book online tend to buy more add-on services, further validating the efficacy of digital channels in driving incremental revenue. 

While these effective strategies seem straightforward enough, Alex also acknowledges the challenges that arise in attaining and aggregating data across multiple platforms, brands, sites, and geographical areas. Alex’s suggestion? The implementation of comprehensive data warehouse solutions and business intelligence tools. While collecting and storing data in Excel can feel comfortable to many business operators, there are limitations and inefficiencies with this approach. 

Data at the Heart of Successful Exit Strategies

The final step of the investment lifecycle is the exit. Atticus, under Alex Murphy’s direction, has successfully exited 2 investment portfolios, selling to individual operators and larger sponsors. In executing their exit strategy, Atticus relies heavily on analytics to prepare a data-driven story ensuring franchise portfolios are attractive to potential buyers.

Exit preparation starts well before the sale, focusing on achieving stable sales growth via operational efficiency throughout the lifetime of the investment, all with the goal of signaling future growth potential. Effectively, there needs to be a viable opportunity for the new investor to find additional “white space” for further growth. This is showcased with data to demonstrate past successes and future acquisition/development opportunities. Financial and operational metrics, brand scorecards, and social sentiment data play significant roles in presenting a business to potential buyers, illustrating operational strengths and areas for growth.

The Future of Data Analytics in Franchise Investing

As expected, Alex predicts an increasing role for data in PE, especially in franchising. As PE-backed platforms in franchising grow, the demand for comprehensive data to support decision-making from outside the operational “four walls” increases. This trend is leading to investments in data aggregation tools and third-party services to provide insights and drive value creation in franchise investments.

Alex discusses the challenges in aggregating and analyzing data from diverse sources. Traditional reporting systems fall short of capturing the multifaceted metrics essential for driving performance and monitoring results across multiple brands and industries. To overcome these hurdles, investments are being channeled into data warehouses, third-party aggregators, and analytics tools aimed at consolidating disparate data streams into cohesive reporting platforms.

Alex talks about a promising trend in the franchise investing landscape — the emergence of all-in-one management tools designed to streamline operations and facilitate informed decision-making. These tools offer a comprehensive suite of functionalities, spanning target setting, performance monitoring, expense reporting, and facilities management. By centralizing key business metrics into a unified platform, these tools empower investors and operators to navigate the complexities of multi-unit hierarchies with ease and efficiency.

By investing in robust data infrastructure and embracing emerging technologies, franchise platforms can unlock new insights, drive value creation, and chart a path towards sustainable success in an increasingly competitive marketplace.

FDS provides robust analytics that have helped multi-location businesses achieve remarkable results: on average, 5 new openings per year, a 6% increase in profitability, and 15+ hours saved weekly.