The first thing Boxwood Partners looks for when working with a new franchisor is franchisee profitability, according to J. Patrick Galleher, managing partner at the boutique investment bank which has closed more than 35 transactions since launching in 2008. Factors such as the quality of each location and territory plus the health of the franchisee network come into play, including both retention of franchisees and tenure and new franchise development and validation.
“Franchisors, even if their financials are good, if franchisees’ financials aren’t fantastic, it’s going to have trouble during the process of doing good diligence,” Galleher said. “So the franchisors we see getting the highest multiples and the most interest when taken to market are the ones that truly have very strong franchisee financials and quality franchisees.”
Galleher was a panelist for “What’s Hot & What’s Not in Franchise M&A—Advice for Sellers” during the final day of Dealmakers Week, presented by Franchise Times and the Restaurant Finance Monitor. Jeff Dudan, founder and former CEO of AdvantaClean, plus Kelly Roddy, CEO of WOWworks, joined Galleher in the panel moderated by Franchise Times’ senior editor Beth Ewen.
On the buyer’s side, Roddy is leading the acquisition drive for WOWworks—new parent company of Saladworks—in the healthy restaurant space. For him, unit level economics is one of the biggest things they look for, in addition to concepts with a clean menu, or less additives and preservatives.
“There are several filters and gates along the way…we also look at the franchise base, which is a good place to start,” Roddy said. “We feel like we’ve got a good development infrastructure and a really strong management oversight team to help grow these businesses. We literally think we’ll quadruple some of these businesses in the next few years.”
Dudan grew his restoration and environmental services franchise AdvantaClean, which he founded in 1994, to 240 locations in 37 states before exiting and selling the brand, with advisory help from Boxwood Partners, to Home Franchise Concepts in January 2019. For him, though there was of course an emotional aspect to “selling his baby,” it wasn’t a difficult decision for him since it was right for the business.
“After 25 years, I felt there was more that this brand could do with a different narrative, different people, and more resources. Was it emotional? Absolutely, because my fingerprints were all over that business,” Dudan said. “There are franchisees I still have relationships with, we had dinner after the deal, which had nine people who had been there 20 years. We told stories for four hours all the way back to the beginning.”
“But you have to get past that,” he added. “Those are things to celebrate, but those aren’t reasons to hold onto a business if it’s time to let a business move on. Again, getting out of the way allowed some of these key people to get rewarded and allowed everybody a chance to move forward in their career under a new flag with a new group.”
Looking to the near future, the hottest sectors that panelists see trending in franchise M&A are, of course, home and essential services, healthy dining options, business services or other concepts people can operate without physical locations, and franchisors in the commercial services space who cater more to B2B (business-to-business) clientele.
“It used to be how did your client perform in the ’08 and ’09 recession. Now it’s how did your client do during the pandemic, and everyone seems much more confident if it did well,” Galleher added.
Dealmakers Week concluded on Thursday, April 22, but you can still access recordings of the panels here.