A huge influence on the future direction of franchising could come from the private equity muscle being flexed all over the markets.
Cashed-up capital crusaders
Late last year, a prominent franchisor with a fast-growing national chain of service and retail franchises told me that he had taken calls from three private equity firms interested in investing in his business within weeks.
And he knew of others in franchising getting the same level of interest from private equity.
It is good news for franchises: there is capital available for expansion. Cashed-up private equity firms are scouring the sector for opportunities to fund consolidation and growth through acquisition.
Recent deals have included the sale of ice cream chain Wendy’s to the Asian private equity firm Navis Capital Partners, bookseller Angus & Robertson’s sale to Pacific Equity Partners, and the purchase of a 15% stake in the gourmet pie chain Pie Face by Brett Blundy, co-founder and biggest shareholder of Brazin, through a private company, Globell Glen.
Some founders are using private equity to exit the business entirely. We could see more of this as the baby-boomer franchise founders who built their businesses in the 1990s look for a way out.
It will be interesting to see whether the influx of money facilitates a generational change in franchising, from the older boomers to the Generation Xers.
Or it could see many more franchises listed on the Australian Stock Exchange. After all, private equity usually looks for an exit within three to five years and if a trade buyer cannot be found, an initial public offering can be attractive.
For a franchise to be big enough to list, it often needs to be part of a consolidated group, like Signature Brands or Retail Cube — neither of which have performed particularly well over the past year. Of course there are other listed franchises that have done better: Mortgage Choice and Domino’s Pizza are two.
In any case, private equity is sure to make a big impact on the franchising sector in the coming year, as it is making across the whole economy.