PE Profit Ladder Articles
There Are No Franchise Lifeguards, and Don't Expect Private Equity to Save the Day
No lifeguards. Longer hold times. If it looks and smells like a "project" don't expect buyers to line up. This also applies to re-trades. This month in Franchise Times.
Big Money in Franchising Wins Silver in Axiom Business Books Awards
Founded in 2007, the Axiom Business Book Awards recognize outstanding new titles that drive professional growth and inspire positive change. In a landscape where leadership and innovation are crucial, these awards highlight books that serve as valuable resources for enhancing business acumen, fostering collaboration, and inspiring transformation. Whether through promoting effective strategies, encouraging entrepreneurial spirit, or advancing ethical practices, the Axiom Business Book Awards celebrate the creativity and ingenuity behind influential works in the business sector.
M&A Update & Franchise Perspective
M&A Update & Franchise Perspective: - 95% of M&A activity in 2024 were middle market deals (S&P Global) - PE sponsor to PE sponsor deals reached ten-year high (45%) in 2024. (McKinsey) We have seen this play out in franchising....once on the PE Profit Ladder, brands are likely keep re-trading. - $2.5 trillion of dry powder still available (S&P Global) - Multiples @ exit increased, partly because sponsors were only successfully exiting high-quality assets with strong demand, driving up valuation averages (McKinsey). The rest were relegated to broken auction status and must try again later. - Median global buyout entry multiple 11.9x (McKinsey). We have seen franchisor trades in franchising exceed averages for similiarly-sized non-franchise deals. But too many sellers still come to market with inflated expectations - or we would see more deals getting done. You have to read the room. - Average leverage 4.1x debt to EBITDA (below 4.7x seen in 2021) demonstrating both valuation pressure and underwriting discipline (McKinsey) ....said another way, frothy pricing specifically driven by cheap debt that we saw in 2021 hasn't returned and likely won't anytime soon. Only high quality assets are seeing spirited bidding but this is based on their own merits. - Public to private deals will get more attention this year - if the markets undervalue good companies taking them private may be a better option than acquiring something from a downstream PE fund. - IPO exits remain challenging. PE-backed IPOs fell 7% in value and 20% in count in 2024. (McKinsey) In franchising, this means a small number of very large funds look like IPO-waiting rooms where assets can be carefully groomed, optimized, and combined to create IPO-ready packages, while tapping the securitization market to pay themselves for the trouble while they are waiting. - Exit backlog remains an issue. Average buyout hold time is 6.7 years. (McKinsey). We've seen more re-trading among limited partners and continuation funds recently to cope with this, but it's not a long term solution. This forces more PE sponsors to focus on the operating mechanics of value creation, not financial engineering. In franchising, this means a focus on everything that keeps franchisees focused on unit growth and increasing same store sales. The flip side is the opportunity for well-coordinated franchisee voices to be HEARD because management and sponsors need engagement and momentum from the franchisee base.
Crumbl Is Reportedly For Sale
It was only a matter of time. Crumbl is reportedly for sale. If they get their hoped for 10x valuation (approx $150M EBITDA) this will be a nice deal. The incoming PE sponsor will bring new eyes, is likely to invest in further growth, and has a predictable playbook. Franchisees in growing systems should always be prepared for the system to trade to a PE sponsor.
PE May Soon Tap Retail Retirement Investors - But Where is Capital Actually Needed?
Private equity may soon be able to tap retirement funds at some level, something PE has long lobbied for. While this may open significant new capital sources to PE investing, there is already an estimated $2 trillion of PE committed funds that need to be deployed. Pouring billions of new dollars into mega deals backed with debt will surely open new opportunities (and new risks) for retail investors. But what we really need are more private capital investors active in the micro and lower-middle market who are adept at this type of investing and who take an operational approach (versus financial engineering). According to the U.S. Census Bureau 2022 Annual Business Survey, 52.3% of business owners are 55 or older. Small business remains a critical economic engine in this country, but we don’t have enough hands-on investment practitioners able to accomplish the lift to help smaller businesses reach the next level. More focus here would unlock significant economic growth and create needed liquidity events for retiring Main Street founders and franchisees. We see this dynamic in the franchise sector, which has been successfully picked over by private equity. Fewer than 20 percent of active franchises have PE investment. Mega franchise deals by the likes of #KKR, #Bain, and #Blackstone are exciting to see, and I also expect to see a surge of #franchise re-trading in 2025-2026 as long-held assets come due to trade again. Consolidation in scale systems will also continue as structural forces nearly guarantee this activity. But what we need are more skilled investors, incubators, and capital pointed at smaller franchise deals. We need to move the needle for thousands sub-scale or sub-optimized franchise systems that are actively marketing their franchise opportunity to prospective franchisees but are currently unlikely to attract PE growth capital and strategic support even if they want it. Smaller systems are where the hard work needs to be done to protect franchisee outcomes, build critical support and infrastructure, and create growth opportunities. If PE succeeds in opening the retirement fund spigot, those funds will be mostly pointed at mega PE firms. We need a mechanism for smaller firms to tap that opportunity so they can deploy more growth capital into smaller businesses. I’d like to see more mega PE sponsor or create fund of funds pointed at active micro and LMM investors.
Franchisees Have Influence Ahead of a Sale Process
If there are issues that need to be addressed, franchisees should be crisp and smart about your "ask." Get organized. Establish the precedent that franchisees can make themselves heard at the boardroom level. Do this well ahead of a sale process for maximum impact.
Crunch Fitness Reportedly For Sale, TPG Looking For $1.5B
Crunch is up for sale, TPG is reportedly looking for at least $1.5B (15x). Fitness continues to be an area of steady private equity interest at both the franchisor and franchisee level.
PE Squeeze: Investor Pressure to Exit & Return Funds
European point of view from recent private equity conference at covered by Financial Times, but themes mirror much of the squeeze we're seeing here in the US: 1) Drop in small PE funds; 2) Flight to large funds (mega-funds heading toward record fundraising year); 3) Increasing investor pressure to create exits & return funds; 4) Longer holds have been necessary recently to drive ROI; 5) Tougher for small generalist PE firms, specialists doing fine; 6) PE firms globally are sitting on record 28,000 unsold businesses (source: Bain) ***** Franchise spin: 1) Coming into 2025 it's setting up to be an active trading year; 2) Good exit may outweigh optimal exit for some PE-to-PE trades; 3) Extreme pressure to hit growth business case; 4) Great operators & franchisees have negotiating power in recruiting discussions; 5) High quality franchise businesses still sought after acquisition targets; 6) When does the "music stop" on PE-to-PE retrades? At some point, there may be no logical PE buyer and some assets may need to find a long hold family office to get an exit if IPO or reverse SPAC aren't options...
PE Profit Ladder Market Watch Newsletter: Roark-Backed ServiceMaster Teams with Ace Hardware
Mark Twain is reported to have said, "During a gold rush, its a good time to be in the pick and shovel business." Home services is probably the biggest gold rush in US franchising at the moment. This week Roark-backed ServiceMaster announced that it struck a multi-year agreement with Ace Hardware. ServiceMaster franchisees can now buy equipment and supplies through Ace. This one is interesting because Ace outlets are locally owned and the company itself is a cooperative. Ace has made acquisitions including the Handyman Matters franchise in 2019 and a portfolio of HVAC companies in 2023. There is also private equity activity at the unit level. For example, JPB Partners owns a number of stores and consolidated additional units last year. Could this be a "try before you buy" opportunity for the Ace co-op to see what it's like to work with Roark? Will this prompt other home services franchise platforms to get more aggressive around supply chain initiatives? #bigmoneyinfranchising #franchising #privateequity
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