Beyond the Arches #1: Why PE loves franchising
Featured Story
Why private equity firms love franchising
Lately, private equity can’t seem to get enough of franchising. PE acquisitions of franchise businesses were up by 50 percent in 2021, even as the valuations of those businesses were also on the rise. And it’s not just existing franchisors – PE firms are getting involved with franchise sales and broker networks, as well as multi-unit franchisees.
So why the big rush to get in the door? PE interest comes from the size of the franchise industry, its growth potential, and steady revenue streams. Not only are franchise businesses inherently scalable, but franchises as a whole are seeing a major rebound after the trials of the pandemic. According to the International Franchise Association (IFA), output for the sector reached nearly $788 billion in 2021, a 16 percent increase over the year before.
The impact of private equity investment
While PE investment means founders must give up some control, it does not necessarily mean they’re letting go of the reins completely. Many PE firms want founders to stay on as active partners in growing the business. And these PE investors are well-positioned to add to the industry’s growing momentum. Besides the obvious infusion of capital (which can range from a few million to several hundred million dollars), these investors represent a wealth of resources. Both franchisors and franchisees stand to benefit from the subject matter expertise and management experience that come with PE involvement, as well as the expanded network that can be leveraged for talent and vendor relationships.
Recent deals
A popular approach by PE firms in recent years has been the consolidation of franchises under “platform companies.” One example is Prospect Hill Growth Partners, which formed Legacy Franchise Concepts in the spring of 2022. This became the largest franchisee of Dogtopia and OrangeTheory Fitness, as well as the sole operator of the global rights to wellness concept, SweatHouz.
Maryland-based Authority Brands has taken a similar tack with home service franchises, building a portfolio that includes everything from pest control to plumbing. Princeton Equity Group has opted for a more traditional acquisition approach, but remains a major player in the space. Two of its Q1 investments for 2022 included Ellie Mental Health and International Franchise Professionals Group. Around the same time, Connecticut-based PE firm Southfield Capital invested in Franchise Fastlane, a franchise development accelerator. In Q2 of 2022, Olympus Partners acquired Excel Fitness LLC, a large Texas-based Planet Fitness franchisee, for $675 million, bringing more than 90 Planet Fitness sites and 750,000 members into their portfolio.
Deal & Industry Outlook
Private equity firms have been extremely bullish on franchises for a number of years, and that trend shows no signs of slowing down. HPS Investment Partners’ Franchise Equity Partners has already pledged $1 billion in investments for up to 20 franchise businesses over the next three years.
Franchise News
- Cedar Tree Restaurant Group has acquired 47 Jack-in-the-Box restaurants and signed a deal to develop 37 new locations across Louisiana, Tennessee, North Carolina, and South Carolina.
- Quick service/fast casual restaurant Hawaiian Bros is launching a franchising program. The brand currently offers fresh, island-inspired fare at 36 restaurants in six states and is seeking experienced multi-unit franchisees aligned with its “ohana” culture.
- Fast-growing franchise Marco’s Pizza has inked an agreement to open eight new locations in Northern Virginia by the end of 2025. The new units will be an addition to the portfolio of existing franchisee, Michael Ghanem.
- Eggs Up Grill has announced a 30-unit development deal in the Dallas-Fort Worth area. This is the largest agreement of its kind in the brand’s history and a major stepping stone in its plan to have 100 units open by mid-2024.
Deal Flow
- Conscious Capital Growth Acquires Majority Stake in Patrice & Associates
- TSG Consumer Partners Acquires Radiance Holdings
- Flynn Properties’ $1.1 Billion Hotel Play Signals Ambition in Franchising
- BurgerFi in first-ever co-branded franchising deal with Anthony’s
- Unbridled Capital Provides Sell-Side Advisory to 16 Burger Kings & 8 Popeyes in Kentucky & Indiana
Macro Trends
- The US CPI came in cool at 7.1 percent in November, a welcome early indicator that inflation may be slowing.
- The battle between the US and China for semiconductor supremacy is heating up, causing widespread concern about how the conflict will impact global supply chains.
The FranShares Way
If you’re an investor looking to incorporate franchises into your diversified assets, investing fractionally with a FranShares franchise portfolio offers high earning potential and diversification in a completely passive investment model.
To learn more about the FranShares opportunity, speak to our Investor Relations team.
