Private equity acquisitions took the franchise world by storm in 2018. And the interest in franchise acquisitions is not fading away any time soon. According to a report published by Deloitte earlier this year, more than three-quarters of M&A executives at large private companies, and close to 87% of M&A leaders at domestic private equity companies, are expecting to close a large number of deals in 2019.
Having said that, the franchise industry is at an interesting crossroads when it comes to private equity interests. While large private equity companies are focusing their attention on mature concepts like Bojangles or Buffalo Wild Wings; a lot of private equity investors are moving away to focus smaller non-franchise chains with an aim to franchise these concepts nationwide and globally. FRANdata believes that such a trend is likely to dominate the private equity circles in 2019.
Take the case of Fitness Connection. Earlier this year, Roark Capital Group acquired a majority stake in Fitness Connection, which is not franchised, but has 41 locations across Texas, North Carolina, and Nevada. The idea behind the acquisition would be to grow this chain, which has a niche focus within the “High Value, Low Price” (HVLP) fitness segment. The same is true for brands like Fuzz Wax Bar, a Canadian concept with little presence, then in 2018, Clear Summit Group (which owns brands like Tutor Doctor and WSI) acquired a partial interest in the company with an aim to franchise this brand in U.S. and beyond.
Similar trends can be observed in the restaurant industry as well. Going forward, we predict that larger private-equity firms are expected to be on the lookout for smaller, growth-chain investments. According to private-equity firm Hargett Hunter, “Larger investors are going to target ‘unicorns’ that have strong unit volumes and unique propositions.” A start to this type of focused attention was seen last year, when a few such unicorns got acquired. For instance, Native Foods Café had only 13 locations when it was acquired by Millstone Capital Advisors in 2018. The company now has plans to open 200 more over the next five years. At the same time, another private equity company, Capital Spring, was preparing a local Detriot-based pizza chain called Buddy’s Pizza for national growth. It acquired the then-12-unit Buddy’s Pizza, with hopes to franchise in the future. The franchise strategy was expected to help the chain take advantage of the “white hot” market for Detroit pizza.
However, in crowded franchise space, which adds close to 350 new brands each year, it can get difficult for private equity investors and their partners to spot “unicorns” with the best market potential. In light of such rapid growth, private equity investors are partnering with M&A advisors and franchise experts to develop algorithms and performance dashboards to help bring the cream of the crop to the top.