If you own an individual franchise business or small regional chain, you may wonder about the benefits of a re-brand or acquisition. If you own an emerging franchise concept, you may be asking yourself if it’s worth it to sell part, or all, of your business to a private equity company. And, of course, if you run a private equity company, you may be considering the upside of investing in franchises -- because you’ve seen the private equity power boost taking over the space.
In all three cases, there’s an easy two-part answer behind why all parties should considering saying "yes" to private equity leadership: money and growth -- and lots of both.
Of course, there are no guarantees with any investment. Private equity leaders must do their due diligence to ensure they invest in strong franchise brands with proven systems. There are always challenges when new leadership/investors enter the fold. Individual franchisees are much more likely to embrace the new direction if they’re already making money and believe the private equity investment will provide an additional spark for the system.
But what specific industries capitalizing on the franchise business model work well under private equity leadership? I'm glad you asked -- here are five I’m keeping my eye on -- and you should, too.
Frozen Yogurt
Admittedly, it isn’t surprising that I would champion this business model. I’m the CEO of sweetFrog Enterprises, LLC, which runs sweetFrog Premium Frozen Yogurt, and managing director of Boxwood Partners, a merchant bank in Richmond, Virginia. And what do I do at Boxwood? I lead transactions for our merger and acquisitions advisory services and private equity group. sweetFrog is one of our success stories: A frozen yogurt chain that has achieved rapid recent growth at 340 units and counting. When we began investing in sweetFrog in 2012 there were 36.
So, what is it about frozen yogurt that should appeal to any private equity firm? I could speak all day about the positives of frozen yogurt, but a few factors stand out. For instance, frozen yogurt attracts an upscale crowd with disposable income who appreciate that yogurt is healthier and more nutritious than ice cream. It’s also easy to make and serve, which means better customer service since younger employees won’t be overwhelmed behind the counter. And when you have the best tasting products and the most powerful brand name, the sky is the limit.
Fast-Casual Restaurants
Fast-casual restaurants have been a good buy for some private equity firms. A few years ago many restaurants were overvalued, and now valuable brands offering trending food options in a modern, fast-casual environment can be purchased for more reasonable prices. Many have recently been snatched up by firms looking for a healthy investment. There’s also a sense among the public, fair or not, that fast-casual restaurants are healthier than their fast food counterparts. In other words, as the public continues to clamor for healthier fare, these types of restaurants aren’t going anywhere.
Gyms And Fitness Centers
Are you sensing a trend? Healthy pursuits are in; gluttony and sloth, not so much. Private equity firms have been rushing to buy gyms and fitness centers for a few years now, and there’s no sign -- yet, anyway -- that the interest has diminished. For instance, private equity firm L Catterton purchased a significant minority ownership in Equinox, a luxury fitness club. Even if obesity rates are still out of control, there’s always a new fitness trend taking over.
Health And Wellness Brands
Yes, the health trend extends to beauty and looking good. And by health and wellness brands, I’m talking franchises such as massage centers, blow-dry bars and nutrition centers. Blow-dry bars, for those who don’t know, are salons that strictly wash, blow dry and style one’s hair -- there’s no cutting, coloring or anything else. It’s the idea that for a cheaper price -- like $40 versus $100 -- anyone can enjoy the salon experience of just sitting back and letting someone else make you look good. File this one in the mental health category. And that’s probably why, a couple of years ago, Roark Capital Group bought a minority ownership in the chain Drybar.
Auto Service Brands
This may seem to be an outlier, but we’re talking the health of your car instead of its driver. Leeds West Groups last December bought Auto Systems Experts, an employee-owned company based in Davenport, Iowa, that owns 42 Midas locations in six states in the Midwest. It’s not hard to see the appeal of these franchises. Car prices are generally going up, and those expensive vehicles are making car insurance premiums shoot up. Maintaining the health of your car is more important than ever -- unless you want to buy a new one and deal with payments and interest rates. Therefore, franchises committing to preserving and protecting vehicles are primed for prolonged growth.
So, really, if there’s a lesson for private equity firms interested in successfully investing in franchises, it's about looking beyond the money to think about the people spending the money. Think about why they’re flocking to these franchises and why they find them appealing. Follow the people -- and then, yes, the money will follow, too.
