Market has been on its eighth year of expansion. Several factors have led to continued strength in the franchise system. Foremost, the U.S. economy has experienced 10 straight years of GDP growth, with only a few slight quarterly hiccups along the way, signaling a generally strong economy that has expanded business opportunities and investment returns for many individuals, institutions and businesses. Second, low interest rates have also played a significant factor, bolstering EBITDA multiples and supporting attractive CAP rates that are still hovering near multi-year records. Lower rates have stimulated a long period of cheap borrowing, which has fueled investment returns, resulting in many people with more money in their pockets than ever before. As typical in the late stage of many rallies investors start looking for alternative methods of chasing higher yields, and it becomes increasingly difficult to find an easy risk adjusted return on investment.
This phenomenon has led to many private equity firms, family offices, and large operators to invest in the franchise system and the pace has quickened rapidly since 2015. Why? Franchising generally boasts a strong success rate relative to other businesses. While franchise businesses are certainly difficult to manage operationally, and require tons of consistency, they have relatively stable cashflow and provide a good diversification to a portfolio that might otherwise invest. For example, in real estate, oil and gas, or technology. Also, as it pertains to restaurant franchising, it is difficult to see Amazon disrupting the retail model like it has done so quickly and shockingly in many other areas.
And finally, there is a natural consolidation that is happening due to the aging of the franchise base and cost pressures in the business. Many of the largest franchisees, for example, have national footprints and have been around for 40 years or more. Many first and second generation franchisees in these brands are nearing their natural retirement age and no one works forever. It is therefore no surprise that the pace of M&A has been brisk.
Aging franchisees are lucky. Many are seeing the value of their businesses reach 10 to 15 year record highs, just at the time when they would naturally want to consider retiring. And with risks on the horizon, including geopolitical uncertainty, elections, trade wars, and especially minimum wage pressures, it certainly appears that we are at, or even slightly past, the crest of the wave in capturing this unprecedented appreciation in business valuations in a sale.
If you'd like to talk about the value of your franchise business, please feel free to reach out to Unbridled Capital anytime. We're very proud of our industry disrupting two year success rate of closing almost 93% of our engagements. Also, feel free to check out Unbridled Capital's website at www.unbridledcapital.com for more videos, podcasts, white papers, and a list of our transactions.