Why Franchising and Private Equity Make Such a Good Match

Franchising is a business model in which a company (the franchisor) grants the right to use its brand, business model, and products or services to another company or individual (the franchisee) in exchange for an initial fee and ongoing royalties. This allows the franchisor to expand rapidly and achieve economies of scale, while the franchisee benefits from the established brand and proven business model.

Private equity, on the other hand, is a type of investment in which a group of investors provides capital to a company in exchange for an ownership stake. This capital can be used to fund expansion, acquisitions and other growth opportunities.

The combination of franchising and private equity can provide a powerful growth engine for a company. By leveraging the established brand and proven business model of a franchise, a private equity firm can invest in a company and help it expand rapidly through franchising. This can provide a strong return on investment for the private equity firm, while also allowing the franchisee to benefit from the capital injection and growth opportunities provided by the private equity investment.

Furthermore, private equity firms can also help franchisees by providing them with the capital they need to open new locations, as well as the expertise they need to grow and improve their businesses. This can help franchisees achieve better performance, which in turn can lead to higher royalties and a stronger return on investment for the franchisor.

Private equity firms have been aggressively buying into franchise companies for several years now. Some big recent examples include:

• Roark Capital acquired a majority stake in Jimmy John's, a sandwich franchise chain, in 2016. Roark has since helped the company expand, with the number of locations increasing from 2,800 to over 3,000.
• L Catterton invested in CKE Restaurants, the parent company of Hardee's and Carl's Jr, in 2017. L Catterton helped the company accelerate growth, increase menu innovation and remodel existing restaurants.
• The Riverside Company invested in Massage Envy, a massage franchise chain, in 2018. Riverside helped the company grow its franchise base and expand its range of services.
• TPG Capital invested in Pet Supplies Plus, a pet supply franchise chain, in 2019. TPG helped the company accelerate its expansion plans with new store openings and remodels of existing stores.
• Apollo Global Management acquired a majority stake in Dunkin' Brands, the parent company of Dunkin' Donuts and Baskin-Robbins, in 2020. Apollo helped the company to accelerate expansion of its new store format, drive innovation and remodel existing stores.

These examples demonstrate how private equity firms can provide the capital and strategic expertise needed to help franchise brands accelerate their growth and achieve better performance. The private equity firms invest in the company and work closely with the management team to identify growth opportunities and implement strategies to capitalize on them.

Since the COVID-19 pandemic, private equity firms have continued to invest in franchise brands. The pandemic has accelerated the shift toward e-commerce and contactless services, which has led private equity firms to focus on sectors that can capitalize on these trends, such as home services and food delivery. 

Some examples include:

• In 2020, L Catterton invested in the home services franchise Mr. Handyman to support the company's growth plans.
• In 2021, Roark Capital invested in the home services franchise Home Franchise Concepts, which owns several home services brands such as Budget Blinds and Tailored Living.
• In 2021, TZP Group invested in the food delivery franchise Papa John's to support the company's growth plans and technology initiatives.
• In 2021, The Blackstone Group invested in the fitness franchise Snap Fitness to support the company's growth plans and digital transformation.

Additionally, private equity firms have also been investing in franchise brands that have been impacted by the pandemic but have a strong potential for recovery, such as restaurants and retail. Examples include:

• In 2021, TriArtisan Capital Partners invested in the restaurant franchise Friendly's to support the company's growth plans and expansion into new markets.
• In 2021, The Riverside Company invested in the retail franchise The Tile Shop to support the company's growth plans and remodel existing stores.

In summary, private equity firms have been active in investing in franchise brands and have a track record of helping them to expand and improve their performance, which in turn can lead to strong returns on investment for the private equity firms.