Private Equity

Video

04.02.2019

In a low interest rate environment, where the riskless premium has essentially been zero for several years, investment funds have been increasingly shifting to owning private companies as a way to increase their return on investment and diversify risk. Now days, there are private equity companies deeply entrenched in almost all franchise brands.

Hey, this is Rick Ormsby at Unbridled Capital. Today I'd like to talk a little bit about private equity, which is a big term that we're hearing in the restaurant and franchise industry over the last four to five to six years. Private equity capital has been coming into the business substantially in the form of private equity, in the form of family offices, and private investment. They have been interested in a franchise business as the riskless premium of other assets in other investments has really decreased the return on their investment, and they see private franchise businesses as being an area that could produce a mid-15 to 22, 23% return on their investment, and it's been a place where they've been placing their capital.

When I first got into this industry with Yum! Brands in the early 2000s, there were almost no private equity companies in any restaurant brands. There might've been one or two in Pizza Hut and Taco Bell. And now fast forward 15 years, and if you look at the top 100 franchise companies in the United States, I'm just guessing here, but you're probably in the 60 to 70% of them are owned or backed somehow by capital that's not the franchisee and operator's actual capital, but supplemented or augmented by a private, a company that's helped them grow or bought them out over time.

I expect this trend to continue as we continue to see private equity companies move down the food chain in the franchise industry. They came in six or seven years ago looking for big deals with EBITDA of over $10 million, and then I talk to probably a couple hundred of these guys now a month, and they're sliding down and trying to find restaurant and franchise investments that are less competitive, where they can buy them at a little less and lower of a price. And so you see private equity firms specializing in three to $5 million EBITDA deals and now all the way down to one to $3 million deals.

And in this range, it incorporates most 10-unit franchisees in America, and they've been the ones that have been the real beneficiaries of higher prices, more attractive terms in the sale of their assets, and also just more momentum in the marketplace from a buying and selling and raising capital perspective. If we have relationships all across the industry and brand specific in the private equity and private family office space, if you want to know more about any of this and how it affects the value of your business, please feel free to give us a call at any time.