Private Equity in the Franchise Business

By Rick Ormsby
Managing Director
502-252-6422
[email protected]

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.

When I started working for Yum Brands in the early 2000’s, private equity investment in the Yum franchise space, as an example, was almost non-existent – PE firms owned only 1-2 large Pizza Hut and Taco Bell franchisees.

Fast-forward 15 years, and there is private equity companies deeply entrenched in almost all franchise brands. Once franchisors got comfortable with the private equity model of buy/hold/sell, they fell in love with the idea of larger operators with institutional capital to do new store development and accomplish remodeling projects. And I am sure they would rather have larger partners than having to keep up with hundreds of smaller franchisees.

As I look back to 2009, during the height of the recession, to now, many of the largest 100 restaurant operators have grown their units counts by over 40% or more. It surely hasn’t come from same store sales growth or new unit development – instead, it has come mainly through acquisition.

These franchise holding companies are now largely private-equity backed, and they have been acquiring corporate divestitures, new brands and existing franchisees’ businesses at a blinding rate.

We expect this trend to continue for the near-term, and Unbridled Capital is positioned perfectly to help small and large franchisees alike in the sale of their companies as well as help larger franchisees to acquire more units or secure capital to grow.

I will say in closing that outside capital is never as passionately attached to a franchise brand as an individual operator. This is sometimes good and sometimes bad. While the current flood of outside investors has resulted in much higher prices for sellers, I think a day might come when things turn sour and franchisors will have lost sizeable control.

I still feel like the 15-20-unit operator is and will always be the heart of what makes a brand great – one relationship at a time in their individual communities.

Nonetheless, at Unbridled Capital, we have relationships with hundreds of private equity companies and private investors who are interested in acquiring franchise businesses. And while the old model used to be $10MM in EBITDA and higher, today’s private equity investors are looking for smaller franchisees to buy. We are always happy to talk with you confidentially about this burgeoning trend. Give us a call.

Rick Ormsby
Managing Director
502-252-6422
[email protected]