Navigating franchise investments: legal strategies for private equity in franchise transactions

Summary provided by officers
IBA Corporate and M&A Law Committee

A session at the IBA Annual Conference Toronto 2025, on 4 November 2025

International Franchising Committee (Lead)
Closely Held Companies Committee
Corporate and M&A Law Committee

Session Chair
Melissa Murray, Bird & Bird, Dubai

Panelists
Andraya Frith, Osler, Hoskin & Harcourt, Toronto
Nanette C Heide, Troutman Pepper Locke, New York
Marco A Rizzi, Bratschi AG, Zürich

Session summary

The joint committee panel ‘Navigating franchise investments: legal strategies for private equity in franchise transactions’ that took place on Tuesday afternoon involved a thoughtful discussion among the panelists covering the relevant legal considerations to keep in mind when dealing with private equity (PE) investments in franchise transactions, which was of interest to practitioners involved in private equity practice, as well as advertising and franchise specialists. Chaired by Melissa Murray, the panel discussed structuring the transaction, conducting due diligence of franchise and franchisee operations, regulatory franchise rules and post-acquisition matters. The discussion provided insight into the key considerations for PE investments in a franchise operation, including the differences between investing in a franchisor and a franchisee.

Key takeaways

• general comment: PE funds are drawn to franchise systems due to their predictable revenue and scalable model. But the legal and regulatory framework introduces complexities that require early attention in regard to structuring;
• the common structure for franchise acquisitions or investments is a holding company structure, whereby the private equity sponsor will form a Holdco and Acquisition Co. The Holdco will acquire the franchisor’s equity. There will probably be roll-over equity issued for the franchisor management. If the acquisition is of a franchisee operating several units of a franchise, then the structure will be similar;
• the PE fund needs to be careful to avoid having day-to-day control or management of the franchise system. This is essential to avoid joint employer liability and to ensure compliance with franchise independence requirements. The PE fund will have control through the governance rights set out in the operating agreement of the Holdco;
• due diligence on the franchisor includes confirming historical and current compliance with the disclosure and registration laws in all the relevant jurisdictions, reviewing the current franchise disclosure document (FDD) to ensure that there are no deficiencies in the disclosure (which can create a rescission risk), reviewing the franchise agreements to ensure consistency and compliance, as well as identifying any unusual side letters;
• the due diligence process should also include an assessment of the health of the franchise operations and relationships with the franchisees. Counsel should look for notices of default or termination, litigation history and recession claims, and review franchisee satisfaction surveys, as well as store closure rates and transfer activity. Counsel should review the advertising fund and the sufficiency of its assets and unit-level financial data;
• the regulatory franchise rules are intricate and include an incredibly broad statutory definition of what constitutes a ‘material fact’ and a ‘material change’, which usually requires the target to ‘go dark’ in regard to franchise sales (new/renewal/resales) in the last few weeks leading up to the deal being announced; and
• post-acquisition, the most common surprises relate to the preservation of the franchising portfolio while meeting the PE fund’s expectations in terms of investment goals. This includes maintaining the franchise network, restructuring the franchising portfolio, such as terminating non-performing franchisees, and expanding the franchise portfolio. It is important to motivate and retain franchise operators and improve franchise operator management.