2014 Year End Overview | M&A in Franchising
The McLean Group
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Mergers & Acquisitions in Franchising
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The competition between private equity firms for good franchisors and large multi-unit franchisees is
intense. We have tracked more than 300 private equity firms that have invested in franchising and are
active in the market. Almost all of these firms are looking for additional brands in which to invest.
Finding brands of scale that need capital or have owners who are willing to exit and sell is the challenge
for most private equity and strategic investors in franchising. A lack of franchisors of scale in the
marketplace has resulted in more private equity investment in high quality multi-unit franchisees. The
combination of affordable debt and steady cash flow of multi-unit operators make them ideal leverage
buyout targets.
Franchise Industry in 2015 and Beyond
Since the recession, the franchise industry has experienced substantial growth based on the number of
newly opened franchised units. According to the International Franchise Association, in 2015, the
number of franchised establishments is estimated to increase 1.6% to more than 780,000, while the total
economic output from franchises is estimated to grow 5.4% to $889 billion. Gross domestic product
from the franchise sector is expected to increase 5.1% in 2015 as compared to total estimated GDP
growth of 4.9%. Based on these anticipated favorable franchise growth trends, combined with the
attractive cash flow dynamics generally inherent in most franchise models, private equity interest in
franchisors is expected to be robust in coming years.
In 2014, at least 20 deals were completed in the franchise industry by private equity firms. Valuations for
these franchisors generally have been considered to be at a "premium" – or at least at levels considered
above average M&A deal valuations in the middle market (i.e., many franchisor transactions are
completed at high single-digit, if not double-digit EBITDA multiples). These above market valuations can
partially be attributed to (i) a general scarcity of franchisors of scale (i.e., greater than $5 million of
EBITDA), (ii) the attractive cash flow dynamics of many franchisors, which can increase the leverage
available to consummate a transaction, (iii) potential untapped growth available to the company acquired,
and (iv) overall attractiveness of the acquired brand and value proposition within its marketplace.
