Consolidation Wave Drives Up Prices For Franchisees
If you’re a big franchisee who operates a large, well-known brand and controls a big market, now might be a good time to sell. That’s because, amid a flurry of deals late last year and a growing interest in the franchise sector, multiples for such companies appear to be heading into a stratosphere typically reserved for franchisors.
When Apple American Group bought the 99-unit AmRest last fall, it paid 6.5X EBITDA—a steep price tag considering that franchisees usually fetch multiples of 4-5X earnings. We’ve been told that, since then, prices for big franchisees have exceeded 7X earnings.
The reason? There are more buyers than sellers. The buyers can get cheap debt, and bid up the price, creating a nice windfall for the seller.
To be sure, plenty of franchisees are selling now. And lenders say that the typical January lull hasn’t been evident this time around. Operators are retiring. Others fear cost increases like food costs and Obamacare and have decided to make the plunge. In addition, there is a growing sense within the franchise sector that bigger is better, because larger operators will have the scale to handle those increased costs. There is also the sense that more franchisors, including Burger King, Applebee’s, Yum Brands and Wendy’s, are eager to put their restaurants into the hands of bigger operators.
And many of those operators, including numerous private equity group-backed companies, are eager to take advantage because of the cash the brands can generate and the safety that comes with operating a top-tier legacy brand. Apple American Group, already one of the two largest—and maybe the largest—franchisee in the country recently added 76 Taco Bells as a starting point to expand into that brand. Carrols Restaurant Group has the OK, and the means, to own up to 1,000 units.
There are also new private equity groups taking a stab at the franchisee market. Sterling Investment Partners bought the 224-unit Southern California Pizza in December. Another new entrant, Nimes Capital, decided to get into the franchise business by purchasing 80-unit Pacific Island Restaurants. As one lender reminded us, “These guys didn’t just buy these companies, they bought them as a starting point.”
So, while there are plenty of sellers, there are plenty of buyers. And, for all of those sellers, fewer of them are the type of market controlling big operations that private equity groups and other investors covet so much. Such operations generate a nice income, and few people are willing to give up income-producing investments.
Private equity groups and existing franchisees have plenty of cash, and have ready access to cheap debt thanks to lenders eager to make large loans. The result: when a big franchisee does come to market, the bidding gets high.
Few people we’ve spoken with believe this trend will die down anytime soon, certainly not this year, and definitely not until interest rates come back up again or, perhaps, when there are simply no more franchisees in a large legacy brand left to buy. Either way, we’re at the outset of a major period of consolidation in the franchise sector. Hang onto your hats.