Q2 2024 M&A UPDATE - IMPACT TO FRANCHISING
Global M&A dealmaking was up in Q2 2024, almost double $196 billion the activity in Q1 $100 billion, and a significant improvement from Q3 2022 when the M&A slow down hit. (Source: EY)
The biggest impediment to more dealmaking remains misalignment of buyer and seller expectations, although this gap has narrowed. With so much dry powder (more than $2.5 trillion) sitting on the sidelines and a backlog of companies that need to trade again, M&A should continue to pick up pace, barring any market shocks. According to Bain, 25% of PE-backed companies have been held > 6 years and half have been held > 4 years.
According to a recent EY survey, GPS EXPECT TO SEE THE BIGGEST POSITIVE TREND IN GROWTH EQUITY AND LATE-STAGE VC DEALS. FRANCHISE DEALS SIT SQUARELY WITHIN THAT OPPORTUNITY FRAME.
What else is holding GPs from re-trading their portfolio companies now? There are plenty of buyers looking to deploy capital. According to the EY survey, GPs are waiting for operational improvements to lift valuations, and also for the market conditions to improve.
FOR FRANCHISING THIS MEANS WE’LL SEE A FEW NICE DEALS IN 2H2024, BUT 2025-2026 IS SHAPING UP TO BE VERY BUSY.
Considerations for sellers: If you want to deal a deal done this year and are realistic on price, there are buyers looking now. If you plan to wait, be prepared for a busy market. You will compete for attention with other sellers who have used this time well to push operational improvements and get their houses in order.
YOU NEED TO START PREPARING NOW IF YOU WANT TO GET A GREAT DEAL DONE IN 2025 THROUGH 1H2026.
Remember the resource constraints we faced in 2021 (attorneys, QOE firms, bankers, audits, etc.)?…all those teams will be very busy again. They will be more selective which mandates they take on.
WHAT OPERATIONAL AND GROWTH LEVERS CAN YOU PULL NOW TO LIFT CURRENT RESULTS AND IMPROVE THE CREDIBILITY OF YOUR PROFORMA FORECASTS? THAT’S WHERE YOU NEED TO FOCUS.
FINALLY, LEAN INTO YOUR FRANCHISOR-FRANCHISEE RELATIONSHIPS – IF NOT ALREADY A TRUE PARTNERSHIP, FOCUS ON MAKING MEANINGFUL IMPROVEMENTS.
Operational levers that drive expansion should be aligned to franchisee interests. But change is hard. Sometimes when PE pushes management to grow the business or make changes franchisees feel caught in the wheels. It doesn’t matter what your intentions are. Only franchisee perceptions matter regarding how changes are perceived. The next buyer doesn’t want a turnaround. Now is the time to really tighten your working partnership with your franchisees if you want to have a smooth transaction at an attractive multiple.