The Rapidly-Growing Franchise Industry Offers Strong Investments for Private Equity
Private equity firms have taken note of the opportunities in franchising and for several years have been aggressively buying in. Private equity (PE) firms typically pump in capital to expedite growth and then sell their share of the company at a profit down the road – earning money for investors in the meantime.
Private equity’s optimism for franchising is fueled by recent statistics that are bullish on the industry. For instance, the 2022 Franchising Economic Outlook, a report released by the International Franchise Association (IFA), showed that franchises reached nearly $788 billion in output for 2021, a 16% increase over 2020. Franchise growth is expected to stabilize this year and rebound nicely from the Covid-19 pandemic, expanding by 2.2% to reach a total of 792,014 franchise establishments, 17,000 more than in 2021.
How Private Equity Capital Helps Franchisors
Private equity presents “an exciting way to grow for many brands, so long as they’re willing to open themselves up to outside influence,” SMB Franchise Advisors President and CEO Steven Beagelman writes in Forbes. “Young but growing brands are attractive to boutique PE firms, where 50 units or more seem to be the sweet spot. Larger PE firms will look for brands to have over 100 operating units.”
Beagelman points out that “bigger brands may attract bigger investment, but it is really about finding the right fit.” Franchisors and other franchise-related entities willing to bring in investors should ensure that the private equity firm knows its industry well and has reasonable performance expectations.
What Franchisees Should Know About Private Equity
Potential franchisees need to do their homework, too, because an infusion of capital from a PE firm can sometimes be troublesome. Problems can arise when the investment firm is looking for quick money and sometimes in a quest to improve the bottom line, will cut staff, programs, and/or franchisee support. For instance, a PE firm might drastically cut the corporate training team to shed their salaries.
So to protect themselves, potential franchisees must find out who owns the brand along with that organization’s financial condition and whether it will commit to supporting the brand over the long haul. In verifying organizational integrity, check for lawsuits against the organization, read up on its executive team, find out how long it has been operating, and chat with franchisees to determine whether they’re happy.
Private Equity Investments on the Rise
For sure, PE investments are here to stay. Joe Mathews, CEO and founder of Franchise Performance Group (FPG), which helps franchisors boost their development, has seen private equity firms increasingly invest in franchising for a decade. “A few years ago I hosted an IFA roundtable on franchise development strategy, and out of the dozen or so participants, eight were partners in PE looking to acquire franchisors while learning about franchising,” Mathews wrote in April 2021. “At any given time, half or more of FPG clients are PE-backed franchisors or PE firms themselves.”
Mathews says private equity leaders are data-driven investors looking to “reap strong returns for ownership and shareholders” and they’re finding it with franchises. After investing, they can help franchises and related entities with expansion into new markets, leadership and management expertise, high-value relationships with suppliers and vendors, brand-building, and streamlining of various processes and functions. PE firms have invested across extremely diverse types of businesses, from restaurants and home services to education enrichment and senior citizen health care.
“Over the next decade, PE will professionalize franchising,” Mathews says. “There is too much at stake not to. PE firms will start buying thought-leading suppliers with strong intellectual property with the same gusto they are now buying franchisors.”
A Win-Win-Win Scenario With Private Equity
Mathews also predicts “there will be a robust economy of PE firms participating in and adding value in every stage of the franchisor life cycle, buying and selling brands among themselves, professionalizing franchising, adding more value to the customer and better returns for the franchisors and franchisees, creating a win-win-win scenario.”
For a great example of this scenario, look to Neighborly, a large franchisor of home-services brands. In 2018 the Harvest Partners PE firm acquired Neighborly. That deal allowed Neighborly to add new brands, and the umbrella franchisor significantly increased its sales in the next two-plus years. Then in 2021, Harvest Partners sold Neighborly to global investment firm KKR. The company’s 29 brands now have 5,000 franchises in nine countries.
Recent, Diverse Private Equity Deals
Although private equity firms are making headlines by investing in franchisors, they also invest in multi-unit franchisees, franchise broker networks, and franchise sales organizations. Following are some recent investments that PE firms have made in franchise-industry businesses:
• Olympus Partners acquired Excel Fitness LLC, a large Texas-based Planet Fitness franchisee, for $675 million. The franchisee had more than 90 Planet Fitness sites and 750,000 members. When the acquisition was revealed, Matt Boyd, a principal with Olympus Partners, said his firm plans to add Planet Fitness franchisees in current and new markets.
• International Franchise Professionals Group (IFPG) received capital from Princeton Equity Group, a private equity firm focused on partnering with growth franchisors and multi-unit businesses. This partnership will accelerate 10-year-old IFPG’s growth and ensure increased benefits and support to the franchise broker network’s 1,300-plus franchise consultant, franchisor and vendor members. When the deal was announced, Don Daszkowski, IFPG founder and CEO, said “Princeton was the obvious choice for us. They share our vision and mission to change lives for the better through franchise ownership.”
• Princeton Equity Group also recently invested in 7-year-old Ellie Mental Health, which operates and franchises outpatient mental health clinics. Ellie Mental Health provides various types of counseling, psychiatric medication management and community-based mental health services. By teaming with Princeton Equity Group, Ellie Mental Health will have added support as it looks to grow throughout the United States.
• Franchise Fastlane, a franchise sales organization, recently secured private equity from Southfield Capital to boost its growth. Franchise Fastlane, founded five-plus years ago, has a mission of accelerating franchise development so that emerging franchises turn into thriving franchises and established brands can accelerate growth. Funding from Southfield Capital will go toward expanding its services to eager-to-grow franchises.