Why are Emerging Franchises Getting More Private Equity Money?

Welcome to another episode of Atlanta Franchise Today with host Leslie Kuban, expert franchise consultant and owner of FranNet Atlanta. Today, Leslie is joined by Beth Ewen, Senior Editor of Franchise Times Magazine, who discusses some interesting mergers and acquisitions activity happening in the franchising world.

Transcription:

Leslie Kuban:
Beth, welcome to the show.

Beth Ewen:
Hi there, Leslie, great to be here.

Leslie Kuban:
I love reading your publication, so it’s wonderful to spend some time with you here on my show. Thank you so much.

Beth Ewen:
Absolutely. Well, we cover a lot of great stories and franchising, as you do as well, so happy to be here.

Leslie Kuban:
Well, Beth, for our viewers who are meeting you for the first time, will you tell us a little bit about you and your area of expertise in franchising?

Beth Ewen:
Absolutely. So I’ve been a long time business reporter the last 10 years in the franchising world, and those stories of the intrapreneurs, the CEOs, the small business owners, the franchisees doing great things in franchising, are very, very interesting. As you know, I’m also an intrapreneur myself, because I’m co-founder of a magazine called Upsize Minnesota, and when I started that back in 2002, I learned, oh, it’s really hard to run a profitable and growing business. And so I became a much better business reporter and editor to really tap into the psyche of all of those great entrepreneurs out there.

Leslie Kuban:
Yes, having been on the entrepreneurship side, solo entrepreneur and then understanding what the benefits of franchising can bring to entrepreneurs and franchisees, that’s great.

Beth Ewen:
And it’s not so easy, right? To go it your yourself. So my work, I try to help others build bigger and more profitable businesses by connecting those people and those stories.

Leslie Kuban:
And Beth, I read your beat. You write a lot about the mergers and acquisitions activity happening in franchising today, so I’d love to have you speak to our viewers a little bit about what are the trends that you’re seeing, any main themes coming forth here in 2022 around the M&A activity in franchising?

Beth Ewen:
Absolutely. Well, as you know, there’s a ton of franchise M&A activity going on. I started coverage of it in franchise times in 2012 when I joined, because we needed to follow the money as that’s where all the best stories come from. I think the big story for your audience of small business owners, emerging business owners with brands, is there is a lot of money out there trying to find deals, trying to find acquisitions. And it’s not just for the big people anymore. 11.3 billion dollar acquisition of Dunkin’ Donuts two years ago by Inspire Brands. Okay, big numbers. Well guess what? There are so many private equity firms chasing deals that they’re going further and further down into brands with even as few as four units, 30 units, 60 units. And this is great news for all of your brand founders out there who are looking to bring in capital to really help them grow.
So I think that’s the big headline for an audience out there that might be interested in, hey, maybe I can attract that investment myself to help me grow that brand.

Leslie Kuban:
And what’s so exciting about that for franchisors but also for franchisees, is that institutional money can bring a whole lot of benefit to a young brand that probably couldn’t afford to invest in the resources, the technology, the headcount, the marketing, that just a small emerging company is not going to be able to do by themselves. So that is great news for founders of brands and their franchisees who want to see some meat on the bones of what is being offered in their franchise investment.

Beth Ewen:
Absolutely. So many franchise brands, they get started by pulling up their bootstraps and they don’t have a lot of resources, they don’t have a lot of money. And especially now with digital technology being very, very expensive and absolutely crucial for brands to grow, you need that backing to come in. Same thing with people, you need the executive suite to have highly talented, highly priced people to help the brand grow. And so you’re really seeing an opportunity for that to happen at a lot more brands at a much smaller unit count to kind of explode that growth.

Leslie Kuban:
Are you seeing this activity more so in any particular verticals? Is it happening a lot in food, or in home services, or is it across the board? Where’s the bulk of the activity happening?

Beth Ewen:
It’s definitely across the board, but there are a couple of segments that are super hot. Home services is a big, big one. Neighborly, formerly the Dwyer Group, is sort of the giant in this space, 30 brands now in the home services space. But now there’s several copycats, Threshold Brands is buying up a whole bunch of small home services companies. Horsepower Brands is doing it. Princeton Equity Group is doing it. This is hot, hot, hot. So if you’ve got a home services franchise, somebody wants to buy you. I can almost guarantee it.
Another big category is the so-called healthy food category. So that even includes the vegan places, the salad places, anything that has a little bit of a healthy food halo onto it. That’s very, very popular now. So I think those are two that are really going crazy. And then some, what I would call kids and family entertainment / edutainment, is big right now. Urban Adventure, which is a trampoline franchise, trampoline and indoor fun franchise, formed a parent company a couple of years ago and is buying up those types of brands. Snapology, The Little Gym, a number of things of building a portfolio in that category. So those are a few of the big movers right now.

Leslie Kuban:
And I would imagine that the growth in those segments are at least in part, demographically driven. I think about the millennial generation, the largest generation that is now in their mid thirties to early forties, and they’re tired of paying expensive rents, they want to buy their own home, they’re starting to have children. So home services, healthy eating, child related businesses, that makes all the sense in the world. I’m wondering is anything else that you see behind these particular verticals that seem to be getting so much attention from institutional interest?

Beth Ewen:
I think you hit the nail on the head. Also, home services, it’s pandemic driven. Everyone was home staring at their wall and saying, Why do I have this horrible home office in my bedroom? I need to fix up my home. And people spending a lot of time through the pandemic. So I think that’s another factor. And home services in particular, I’ve had people tell me, Young people today can’t do anything themselves. Now, that’s a little pejorative. I’m not saying I agree with that, but hey, I don’t want to do my own home services either, and I’m a boomer, not a millennial. But the fact is, people really are attracted toward services, having those things done for you.

Leslie Kuban:
I’m solidly in the Gen X category and I don’t want to do any of that stuff either, so I get it.

Beth Ewen:
Yeah, right.

Leslie Kuban:
So it sounds like it’s quite normal to expect, if I’m an emerging brand, a young franchise brand in some of these spaces, I’m a founder, then I’m probably going to get it approached for interest in investment or acquisition. So if I’m that entrepreneur, what do I need to be asking? What do I need to watch out for so that it’s a good deal for me and my brand and my franchisees?

Beth Ewen:
Well absolutely, and founders tell me they are getting multiple, multiple calls, cold calls of people wanting to invest. But I tell you what, the other thing that the founders tell me is, the most important thing to do is really get to know who that investor is, and the best way, and the easiest way to do that is to get that contact information from all of the founders that have already sold. And that’s where you are going to get the real story about how that firm interacts with its brands. And it’s so different from firm to firm. It’s never about only the money, it’s about what does that firm bring, how do they work with their founders, what can they give in terms of resources and contacts and so on.
And the overwhelming thing that founders have to keep in mind, if you’re not the majority owner, which most of the time you will never get anything other than that you will have a minority stake, because the investor wants to be in charge. You’re not no longer the boss anymore, and that’s very, very painful in very many situations. So trying to suss out what is this partnership going to be like and realizing it’s really not your baby anymore. The other big part of my beat is, I cover all the lawsuits and the conflicts. And believe me, unfortunately there are plenty of those that come from mergers gone bad, let’s call it. So, you want to try to avoid that side of the coin.

Leslie Kuban:
On that point Beth, is there any typical culprit? If it’s not going well, there was miscommunication or a mismatch in expectations. Are you seeing a couple of main reasons why that it could have been avoided?

Beth Ewen:
Yeah, well it’s almost always the vision of the founder conflicting with the expectations in performance of the equity investor. So it’s not meeting its targets, they’ve got all their investors that they are pleasing and placating. It’s not on the growth path. A lot of times the private equity majority owner then in those cases, will start insisting on things that the franchisees hate. He’s such as adding fees, adding costs. We’re going to up the technology fee because we’re putting a lot more money in it. We’re going to up this, we’re going to get a supplier that maybe doesn’t give the best deal for this franchisee or that franchisee.
So a lot of those conflicts, maybe they go away from a scratch kitchen, you’re not going to do that anymore because it’s too expensive. These things, everybody’s all excited when the deal is signed, but without that alignment it may go south. And again, talking with founders who have already sold and what the process was like one year, three years, five years later, is your best clue about the people which are driving these deals in these partnerships.
And then I would say, you have to be introspective yourself. Can you have a boss after 25 years of being an intrepreneur, really and truly? And if not, that’s not a good fit most likely.

Leslie Kuban:
Right, because it’s an exit in most cases for the brand founders, maybe not right away. And I’ve seen founders retain a consulting role, or a relational role with their franchisees for a period of time. Because a lot of the franchisees, especially if it’s a younger brand, they bought into the founder and their energy and their passion and their talent. So the founder will retain a role, but they’re going to exit at some point. And it’s probably important for that founder to have a plan of where they’re going to after they’ve completed their role with the new ownership in place, otherwise they are a little lost with their identities.
And in my work I’m hoping people buy franchises, sell franchises, and it’s the same thing that you’ve got to know where you’re going to in order to have a successful exit. So nothing new here.

Beth Ewen:
Absolutely. That’s absolutely right.

Leslie Kuban:
But there are a lot of benefits, and we’ve started to talk about, but any others, when we look at all the stakeholders, there’s the founder and then there’s the franchisees. So what do you see some of the best benefits are for franchisees, especially when private equity comes in at an early stage franchisor?

Beth Ewen:
Yep, a hundred percent, that investment in two things. Number one, people. And number two systems. And many of these private equity firms have great contacts with executives in franchising, you know this, Leslie. There’s a lot of trading the chairs, musical chairs, but a lot of contacts with executives to come in and shore things up. So all of a sudden you can afford a top chief marketing officer, a top chief development officer, a top chief operating officer, all of these things that that franchise founder may have been doing with many, many—right away you get this people investment, which can be huge, and of course a lot of these people are wonderful, lovely, fabulous executives and it’s great for the franchisees to get that support. Systems then is the other thing, particularly technology, but also all kinds of things. Real estate support, technology, marketing, all across the board to get those systems that in a lot of emerging brands just aren’t very well developed. You know this, I’m sure. Very few, it is something like 25% of brands ever reach the 100 unit mark, ever. So that’s a lot of small brands trying to make their name and if you don’t have a big enough name, it’s again, a little bit harder to get going.
So I think all across the board, that’s where the franchisees can really benefit. And particularly in my opinion, from what I’ve seen, when the founder retains some important role, perhaps his brand visionary or brand ambassador for some time, that’s the best situation I think, for the franchisees to cruise into the new situation together, instead of the person’s out the next day.

Leslie Kuban:
So having that transition plan and understanding that it’ll be a culture change. And change brings feelings of uncertainty and that can be unrattling for everybody involved, the franchisees, their employees. So having a really well thought out plan for a smooth and not so sudden transition seems to be the key to success when that happens.
Beth, as we start to wrap up, it’s always good to have some examples. Any recent M&A deals that you’ve seen that you felt are a good example of how it went really well for all the stakeholders involved? What made it a success for the stakeholders?

Beth Ewen:
Absolutely. So there’s some right in your neck of the woods there, in Atlanta. There’s a private investment equity company called 10 Point Capital, which is a spinoff of some of the folks at Rourke Capital, the big giant private equity firm in franchising. They’ve just invested in small sliders, which is a slider concept out of Louisiana, and just happens to be backed by Drew Brees, the NFL football star, retired. Four units they have and they just got an investment from 10 Point.
10 Point also invested in Walk-On’s, which is the Louisiana bistro concept founded by the same people at 30 units, it now is up to 60. So just those resources and being able to jumpstart is a great example. Another really interesting one, Card My Yard. Did you ever see those? Heroes Work Here.

Leslie Kuban:
Yes.

Beth Ewen:
Balloon greetings outside businesses or Happy Mother’s Day, Mom. I can’t see you because of COVID, but here’s your sign. They had about 200 units, really small revenue units, and Princeton Equity Group backed them. They’re operated by four founders, two husband and wife couples, and they had basically no management structure. And during COVID, the franchise just exploded. All of these franchisees were going crazy, trying to keep up with the orders. And so Princeton Equity came in, kept all the founders in place, but gave them some structure, put in some systems. And so now they’re really expanding in numbers, but also in franchisee satisfaction, because they just have more support.
Those are a couple really great examples when it works like it should, so everybody benefits

Leslie Kuban:
And that’s great. And actually I think our conversation, Beth, will really serve as a helpful point of questioning for our viewers who are would-be franchisees, prospective franchisees who are exploring entrepreneurship, shopping around for franchise brands. They’re going to find some have private equity involvement, some don’t. Many very well may in the not too distant future. So I think this gives some good questions, or at least a line of sight, a line of thinking for prospective franchisees to be thinking about as well.
Any last words of advice for that audience, Beth? The prospective franchisees who are going to encounter this and their due diligence?

Beth Ewen:
Absolutely. I would say be open, read that FTD, so who the owners are, and then when they change hands, read Franchise Times Dealmakers so you can get an insight into who those are. But you have to expect that your brand, if it hasn’t already, is going to attract that private equity. And it very, very much can be, and is in many instances a very good thing.
There are a few horror stories and people like me who report a legal column, think those are juicing stories. But honestly, the vast majority go beautifully. And so I think for franchisees, you want to be aware, does your franchise that you are joining, do they have the systems in place? Do they have the people in place? Do they need these investments? So it’s more of a feeling of being aware of what’s out there, hoping they do get that investment, and depending on the founder and the investor to be good people that are going to build the system well. Fingers crossed, right? As everything in business is a risk.

Leslie Kuban:
Yes, yes. If we all had that crystal ball.

Beth Ewen:
It does. So welcome it and educate yourself and get to know the players and try to contribute to the changes. Because that’s the other thing, the franchisor depends on the franchisees to test things, help them roll out ideas, create the culture together. And so, the franchisees play a big role in a successful partnership as well.

Leslie Kuban:
Yeah, that’s great. Well Beth, this has been a fabulous conversation, really insightful. Appreciate you coming and sharing your wisdom with our audience. Thanks so much.

Beth Ewen:
Thank you. Thanks for having me.

Leslie Kuban:
And folks, I hope you’ve enjoyed this episode of Atlanta Franchise Today. I’m Leslie Kuban. I look forward to seeing you again next week.