Private Equity in Franchising
Scalable Investment – franchise growth allows for substantial, fast, and efficient growth when compared to traditional organic growth. Franchising can be opened quickly and the franchisor has significantly less operating overhead to manage the system.
Franchisees typically outperform company-owned locations. With “skin in the game”, an owner-operator mentality and an onsite owner, franchised businesses have a much higher likelihood of success, profitability, and customer experience.
Good franchise owners bring solid local market knowledge which is difficult to obtain through company-owned growth.
Franchisees will have a longer tenure with a brand than an employee in most cases allowing for better unit economics resulting from time in the business and a better understanding of the culture of the brand.
Franchise system growth is on the rise in the U.S. and globally. Consumers prefer established brands, and familiarity with a business model and more investors are putting capital towards franchise investments since the market recovery in 2012.
All of these factors create an obvious investment opportunity in growing franchise brands and have pushed valuations for quality franchise systems higher. In 2014, several franchise system acquisitions were valued as high as 19 X EBITDA.
In the last year, private equity played an important role in franchising. Private equity offers a franchisor with a growing franchise system a promising pathway to rapid growth. An investment group can assist a franchise company strategically, tactically, and with economies of scale.
Private equity sees value in the ongoing royalty stream of a franchise system. Franchised restaurants, hotels, and retailers also typically have higher valuations than non-franchised businesses. This point was brought home to me at the Capital Roundtable “Private Equity & Franchising” event in New York City in October 2014.
Using numbers from Capital IQ, Matt Kelly, of North Point Advisors in San Francisco, demonstrated that publicly traded restaurant, hotel, and retail companies headquartered in the U.S. with a high percentage of franchised outlets tended to trade at higher valuations than those with just a few franchises.
In the group of companies he identified, the multiple of enterprise value to EBITDA averaged 9.7 in the companies less than 30% franchised. That 30% to 60% franchised had an average multiple of 12.2x. Those more than 60% franchised had an average multiple of 15.0x.
Here is a quick rundown of private equity acquisitions of franchise systems in 2014:
- Roark Capital acquired Anytime Fitness in March 2014. Roark also owns Arby’s, Batteries Plus Bulbs, Carl’s Jr., Corner Bakery, Massage Envy, Primrose Schools, Wingstop, and Focus Brands, which in turn owns Auntie Anne’s, Carvel, Cinnabon, McAlister’s, Moe’s and Schlotzsky’s.
- The Riverside Company acquired The Dwyer Group (Mr. Rooter, Rainbow International, Aire Serv, Glass Doctor, Mr. Appliance, and others) from TZP Group in August 2014 after owning Dwyer from 2003 to 2010. TZP Group acquired Snap Fitness in January 2014.
- Sentinel Capital (Cottman Transmission Systems, Huddle House Restaurants; Interim Healthcare; Massage Envy) acquired TGI Friday’s in July 2014 and Checkers and Newk’s Eatery in March 2014.
- Levine Leichtman Capital Partners (Beef ‘O’ Brady’s, FastSigns International, Lawn Doctor, Senior Helpers, Wetzel’s Pretzels) acquired FASTSIGNS International in July 2014. Levine Leichtman also owns Global Franchise Group (Great American Cookies, Pretzelmaker, Marble Slab Creamery, MaggieMoo’s) which acquired Hot Dog on a Stick in August 2014. Levine Leichtman formerly owned Quizno’s.
- Apollo Global Management acquired CEC Entertainment (Chuck E. Cheese) in early 2014.
2013 saw the following notable private equity franchisor purchases:
- Centre Partners (Uno Restaurant Holdings) acquired Captain D’s in December 2013.
- Sun Capital Partners (Boston Market, Friendly’s, Bar Louie Restaurants) acquired Johnny Rockets in June 2013.
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