2014 Year End Overview | M&A in Franchising
The McLean Group
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Mergers & Acquisitions in Franchising
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Record Valuations
YEAR END REVIEW
Franchise valuations currently mark historically high levels. While valuations for franchisors and large
multi-unit franchisees were negatively impacted during the recession, since then, the industry has
experienced another year of strong transactions in 2014. The M&A market for franchisors and large
multi-unit franchisees is as strong as it has ever been. Now is an ideal time to be a franchise brand owner
looking to exit or seek growth capital.
Capital Markets and Franchising
During 2014, the M&A market was robust and included some very prominent transactions. Key 2014
acquisitions included Massage Envy, a franchisor of massage and facial spas, trading from Sentinel
Capital to Roark Capital. In the fall, TZP Group sold Dwyer Group, a multi-branded home services
franchisor, back to Riverside Capital, which had owned the brand previously. Earlier in the year, TZP
acquired Snap Fitness from Summit Partners. Fastsigns, a franchisor specialized in digital and graphic
signs, was acquired by Levine Leichtman Capital Partners from Roark Capital; and Apollo Management
acquired CEC Entertainment, which operates Chuck E. Cheese’s restaurants. In addition, Sentinel
Capital acquired Newk’s Eatery in the first quarter.
During the same time, we have seen significant capital injections in franchise systems. Since 2012,
there have been more than 100 private placements involving franchise companies, including: European
Wax Center’s $24M financing from Princeton Ventures and Brazos Private Equity in March 2013; and
Smashburger’s $48M financing in September 2014.
Additionally, investors in capital markets have benefited from the successful IPOs of franchise systems. The
IPOs of El Pollo Loco, ServiceMaster, Papa Murphy’s, and LaQuinta have brought strong returns to
investors and entrepreneurs alike. The impressive gains reaped from M&A, Private Placements and Capital
Markets over the past two years have cemented investor interest in the franchising industry. Going forward,
the promising investment landscape offers entrepreneurs a wide range of opportunities. The M&A market
will continue to be robust for franchisors and multi-unit franchisees selling their companies as the
combination of low interest rates and strong, growing franchise brands supports higher valuation multiples.
What is driving these record values?
Several key factors are driving strong valuations today. We previously reported Prequin’s estimates that
private equity firms have approximately $1.2 trillion in cash to invest and strategic buyers have more
than $2.0 trillion to invest. While only a portion of these funds will be invested in franchising, this
$3.2 trillion in “dry powder” creates pent
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up demand – thereby driving up prices – because private
equity firms and strategic buyers are under pressure to invest their cash.
Strong debt markets support higher valuations. Most significant franchisors today have access to
inexpensive debt capital, especially if they have private equity sponsors and strong cash flows. The
availability of relatively inexpensive bank financing for acquisitions provides private equity firms the ability
to increase the purchase price they may be willing to pay in competitive situations for attractive companies.
