How Franchisors Benefit From Choosing Strategic Partners

Strategic partner for franchisor

Strategic Buyers can Help Franchisors Grow, Offer Exit Strategies

If you are a franchisor looking for an exit strategy or searching for a way to grow your business, seeking a strategic buyer may be the right choice.

After years of putting your nose to the grindstone and watching franchising help your business flourish, are you ready to hang up your hat? Did your brand hit a rough patch and need a solution? Is your franchise primed for growth but in search of guidance and capital to move forward? A strategic buyer may be the answer.

Stock market value and cash on hand is helping propel the mergers and acquisitions market, and the United States is leading the way. The value of M&A deals in the United States rose to $2.5 trillion in 2021 and increased globally by 64% to $5.8 trillion. Low growth following the outbreak of the pandemic is compelling companies to look for ways to fuel expansion and add to the bottom line, CNBC reported. In 2021, there were more than 62,000 deals worldwide.

Private Equity Acquisitions in Franchising

Neighborly, one of the world’s largest franchisors of home service brands, is an example of a strategic buyer who achieved its vision through private equity acquisitions. In 2018, Neighborly was acquired by Harvest Partners, a private equity firm. The deal allowed Neighborly to continue to add new brands to its umbrella of home services. During this time, Neighborly substantially increased its systemwide sales in less than three years. 

The company’s success made it an attractive prospect for another sale. KKR, a global investment firm, acquired Neighborly in 2021. Terms of the deal were not disclosed, but Neighborly’s management team remained in place and the company is continuing its efforts to add new brands. Neighborly recently reached an important milestone. The company now has 5,000 franchises across 29 brands in nine countries. 

The Benefits of a Strategic Buyer vs. M&A

Strategic buyers provide an advantage over a typical merger and acquisition (M&A) deal because they are usually competitors or have operations in a similar industry. If the current climate is prompting you to take the leap and list your business, here are some of the benefits of finding a strategic buyer.

  1. Opportunity for growth. Finding a strategic buyer can help increase your market share and grow revenue. Having access to capital will enable you to scale your business at a faster rate.
  2. Streamline operations. Finding a strategic buyer can help you reduce costs by sharing budgets and increasing purchasing power. Your strategic buyer may have relationships with existing vendors and a wider array of support to help improve the services you offer your franchisees.
  3. Explore new geographic markets, add services. A strategic buyer may give your business the opportunity to expand to new geographic areas and give more potential business owners the chance to explore your brand. If the buyer has additional services you don’t already offer, your franchisees may be able to add these services to their lineup to increase profits.

Considerations for Franchisors Before Finding a Strategic Buyer

Finding a strategic buyer requires some heavy lifting on the franchisor’s part. There are a lot of concerns to address as you search for the best partner to meet your needs. Finding a buyer that ticks all the boxes is key to a successful transaction. Columbia, Maryland-based Authority Brands is an example of a strategic buyer pursuing growth through acquisition. Over the past two years, the company added Monster Tree Service, STOP Restoration, Color World Housepainting, and DoodyCalls to its slate of brands. Here are a few things to consider when evaluating a potential buyer.

Culture. In today’s labor market, employee retention is essential to successful operations. It’s possible to limit employee departures during an acquisition. A company with retraining and upskilling capabilities will ensure your talent continues to grow and is attractive to employees who are focused on career growth. Make sure your buyer shares your company culture and values. Keeping your human resources department dialed into your negotiations will ensure your company culture remains in place when you sign on the dotted line. Keeping HR in the loop can also raise red flags and answer questions employees have about the impact of the deal.

Industry Experience. A strategic buyer has the industry experience to help your franchise grow. For example, Home Franchise Concepts is becoming a leader in the home services industry by acquiring smaller home services brands, including Two Maids & a Mop, Kitchen Tune-Up, AdvantaClean, and Aussie Pet Mobile. The company’s experience in the home services market makes them an ideal buyer for a brand offering residential services.

Control. While merging with an industry leader or obtaining a cash infusion from a private equity firm may look like a good idea on paper, it’s important to pay special attention to the impact the deal will have on your control of the company. Many entrepreneurs pursue business ownership because they want to chart their own course and control their destiny. Since you hung out a shingle, you’ve been in charge of your business. That will change when you make a deal. It may be a relief to hand over the reins of your franchise and relinquish some control, but it does come at a cost. Your company will be accountable to your investors, who will have their own insights and contributions.

Strategic Buyers Backed by Private Equity

Strategic buyers backed by a private equity group are a great choice because they offer the seller more options when they close, including retaining a level of control by becoming a brand president. For example, Authority Brands is backed by APAX Partners, a private equity firm, and Home Franchise Concepts is owned by JM Family Enterprises, a family office. Private equity firms focus on growing brands for resale, which can allow management teams to gain a second bite of the apple when the company is resold.

Making the decision to sell your business is never easy but finding the right partner for your future may be the best path for your company’s future.

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J. Patrick Galleher is the CEO & Managing Partner for Boxwood Partners; an investment bank headquartered in Jupiter, FL. He leads transactions for Boxwood’s M&A advisory services. He has led sell-side transactions on over sixty engagements over the past fifteen years. Boxwood Partners focuses on transactions in the lower middle market between $50-$500m in Enterprise Value. Boxwood has successfully completed over 16 Franchisor sell-side transactions since 2019.
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