Old is Gold – 2019 is the Year of Legacy Acquisitions

The merger and acquisitions (M&A) activity in North America has continued its pace in 2019, with 4,754 deals worth $849.7 billion closing in the first half of 2019. Dozens of mega-deals have been announced, potentially setting up a healthy back half of the year as well. The popularity of PE as an asset class has also continued to grow among investors. As an example, in the past three years, more than $600 billion of capital has been invested into buyout funds. Even with the increased deal volume, private equity funds have a record amount of “dry powder” or committed capital available to fund investments. That figure stands at more than $2 trillion across all fund types. Meanwhile, the number of U.S.-based, sponsor-backed companies has grown by 5.3% CAGR over the past decade.[1]

Even within the franchise marketplace, the M&As through private equity firms are on a multi-year run of unprecedented activity and currently shows no signs of slowing. But what is interesting is the differences in the approaches that PE firms have taken over the past three years. While 2017 was the year of the “unicorns”, the year since has been the year of the “old war horse”. FRANdata analysis shows that nearly 64% of the franchise brands that were acquired by PE firms in 2017 were brands that had been franchising for more than 10 years. This proportion has increasingly gained traction in 2018, with 69% of the acquired brands having a 10 or more years franchise experience; PE activity continues to further fuel this trend, as this proportion is now 83% as of YTD Q3-2019. This year alone several legacy franchises like ABRA Auto Body & Glass (acquired by Roark Capital Group), Servpro (acquired by Blackstone Group), Jenny Craig (by HIG Capital), Intelligent Office (by Incline Equity Partners), and Perkins (by Elysium Management) become the target of acquisitions. And a lot of these are acquisitions made to establish portfolio platforms offering a continuum of products and services.

Source: FRANdata Research

So why are more and more mature legacy brands getting acquired by PE firms? Take Jimmy John’s for instance. Roark Capital Group’s Inspire Brands just yesterday folded the brand into its portfolio. Experienced franchises like Jimmy John’s bring years of institutional expertise with them. The biggest benefit here for Inspire Brands may be Jimmy John’s dominance in delivery. Jimmy John’s is second only to Domino’s in terms of delivery[2]. Jimmy John’s delivery knowledge is likely to spread across other portfolio concepts.

Another advantage to pursue such deals could be related to growth and brand equity. In many cases, legacy concepts often plateau their franchise system growth after a certain amount of time. At the same time, they have a considerable amount of customer-facing brand equity. The stagnated growth allows PE firms a cheaper valuation multiple, with an aim to cash in on the high brand equity post-acquisition. For example, when NRD Capital acquired Ruby Tuesday, the franchise was with unprofitability and declining same-restaurant sales amid broader changes in casual dining[3]. But NRD was confident that the concept was a well-established, differentiated brand to drive future value for its acquisition.

As the race for finding new diamonds in the rough gets increasingly tough for PE firms, their focus is going to be more on acquiring legacy franchises throughout the rest of the year. Stay tuned for more old war horses finding new stables!!

Read previous posts in the FRANalyst Fridays series here.

[1] Forbes Magazine

[2] Nation’s Restaurant News Podcast Interview

[3] Wall Street Journal