Alicia Miller
We were supposed to see a big comeback in M&A dealmaking this year. Instead, it’s been much slower than anticipated. But opportunities exist if you know where to look.
First, buyers are considering smaller brands. Private equity firms have successfully picked over most unaffiliated, interesting franchisor-level investment options. Dedicated emerging brand investors now routinely face competition from other firms moving down-market in search of deal flow. When unaffiliated franchisors today get PE attention, this attention happens earlier compared to what these same PE firms would have previously considered a prime entry point. We must therefore recognize Jersey Mike’s recent $2 billion sale to Blackstone (the brand’s first PE equity stakeholder) as a modern-day franchise anomaly, since brands today are typically picked off by PE long before they reach 3,000 locations.
Consider the following comparison. When Tropical Smoothie Cafe took on its first institutional capital in 2012, it had 315 cafes. BIP Capital and 10 Point Capital invested and helped accelerate Tropical Smoothie. 10 Point and BIP were considered emerging brand specialists at the time who could take the smoothie and food concept to the next level—and they did.
The chain later traded two more times. Since fewer than 15 percent of active brands reach more than 100 units (per FranData), at 315 cafes Tropical Smoothie fit the definition of “proven” on the surface. But in the restaurant sector the “proven” bar for emerging brands is often higher. At Tropical Smoothie, unit level economics and marketing both needed improvement. Investment in these levers and other growth accelerators eventually paid off for investors and franchisees.
Now compare TSC’s first step onto the PE Profit Ladder to Bubbakoo’s Burritos’ recent first step onto the ladder. Both have strong cultures, a unique offering, and passionate brand fans.
When Bubbakoo’s traded to Thompson Street Capital Partners early this summer, it had approximately 130 locations and $110 million in system sales in 2024. Its average unit volumes were also double what Tropical Smoothie’s were at PE’s first entry.
Thompson Street is not an emerging brand specialist. It’s more of a main street PE firm active in the middle and lower middle market, including outside of franchising. This isn’t to say every brand to reach 100 units open is going to trade to PE. But this acquisition signals change.
It’s largely a self-created problem. If PE wants to acquire an unaffiliated franchisor, most are now forced to look at smaller brands (compared to their usual acquisition profile) than they otherwise considered, compared to 10 or even five years ago. This is especially true if buyers want to acquire a brand directly without a formal auction process.
This also means the season of founder-led emerging franchise brands continues to shrink as more investors move down into younger brands. It’s sort of like global warming shortening winter and accelerating the arrival of summer’s heat.
And founders themselves are often more open today to bringing in a capital partner early compared to the recent past. Cost pressures and other market headwinds make it challenging for young brands to fight through the noise and achieve scale without deep pocketed sponsors—another challenge indirectly created by PE’s franchising activity.
Emerging brands end up bifurcated into a few breakouts and everyone else. This question of whether founders should delay bringing in PE sponsors and how to accomplish it given emerging brand headwinds will be the subject of a special breakout session at the Springboard Conference this fall in Philadelphia.
Early sale of assets
PE is under increased pressure to return investor capital; this also creates new acquisition opportunities. With average PE hold times already more than seven years, some sponsors are selling “early,” before all the benefits promised in the last transaction have materialized, to avoid a prolonged hold.
I’ve seen several marketing packages this year for PE-backed brands that are for sale again ahead of schedule. Why? Because a “good” (and certain) transaction that can return cash to investors is preferred in some cases to holding out for a potentially “great” (but therefore uncertain) outcome later. The result is that new buyers can find well-priced assets with plenty of gas still in the tank.
Finding outside targets
If multi-brand platforms or individual PE firms cannot find attractive franchisor targets, today they increasingly look outside of franchising. Fragmentation creates ample opportunities.
Multi-brand platforms are especially well suited to acquire strong corporate models and convert them to a franchise model. Frankly, it looks easier to acquire a well-established corporate-model and launch franchising than to accelerate a smaller franchise system. This also avoids any risk baked into the sold-not-open funnel. It’s a fresh start with a strong Item 19 based on proven corporate units.
Consolidating units
While there is a relative lack of unaffiliated “acquisition ready” franchisor targets, ample supply and resilient demand exists for multi-unit franchisee acquisitions in strong systems. Valuations are also much less frothy at the unit level, often leading to more productive buyer-seller conversations and faster speed to close.
FranData continues to receive significant inbound PE interest looking for consolidation opportunities in some cases driven by frustrated buyers finding a lack of good opportunities on the franchisor side.
Of the brands that made it to $100 million in systemwide revenue, 23 percent of that group never made it to $150 million, per FranData. Sizable yet stalled.
PE traditionally avoids franchise turnarounds. But given the dearth of scale opportunities available, I predict a coming shift where more PE sponsors take on “projects.” I further predict we will see PE firms struggle with these projects. The people side of franchising is PE’s weak spot. Here too is a big opportunity. Will PE listen?
Alicia Miller is the founder and managing director of Emergent Growth Advisors. Her Development Savvy column covers smart ways to market and grow a franchise. She is also the author of “Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity.” Reach her at [email protected].