Sticker Shock, Founder Phobia Are M&A Hot Topics
“This founder phobia, I’ll call it, is real,” said Grayson Brown of Neighborly, which tries to allay those fears when acquiring franchise brands. Neighborly owns 22 service brands.
Neighborly’s blistering acquisition pace of late has slowed this year, said Grayson Brown, executive vice president and general counsel at the franchisor formerly known as Dwyer Group, with sticker shock the culprit.
“Neighborly has a lot they’re looking at but nothing to buy right now. It’s slowed down a lot because the valuations are so high,” which is “just not a fit for Neighborly,” he said, at the Faegre Baker Daniels M&A Conference today in Minneapolis. Other speakers at the conference said valuations in general are 20 percent higher than even two years ago.
Neighborly owns 22 service brands with close to 4,000 locations total and $2 billion in systemwide sales.
Meg Montague of The Mclean Group echoed the point, saying one sale fuels the next. “It’s hard, because expectations get set and owners hear the valuations. Like any deal, there are unique aspects about why that deal traded where it did. There was some strategic reason why the buyer paid that.”
She called M&A activity in the franchise space “robust” over the past six months to a year. “There’s a lot of capital put to work.” She noted two very large deals: ServPro was sold to the Blackstone Group, and FastSigns traded to LightBay Capital and Freeman Spogli.
But she’s seeing more action going toward brands with under $5 million in EBITDA, also known as cash flow, simply because there are so many of those emerging brands.
“The thesis behind those platforms is consolidation, so taking a great management team and adding brands to that platform,” she said. “We’re hearing that from private equity groups more and more because there’s just not that many franchisors that have $5- and $10-million EBITDA” and above.
Faegre’s Brian Schnell, panel moderator, said franchise research firm FRANdata estimates there are more than 60 private equity firms actively involved in franchising, up from “not more than 20 or 25” just five years ago.
“Private equity really loves the cash flow and asset-light model of franchising,” Montague said.
Montague said many founders of franchises fear their first infusion of private equity capital because of what she believes is an outdated view. “So many of the franchisors that we are working with…this is the first time they’re bringing institutional capital into their business,” she said. “You kind of have to play psychologist a little bit, to understand where they are in their life.
“We spend a lot of time understanding the objectives, and kind of giving them case studies about what private equity has done. It’s not the ‘Gordon Gekko, we’re going to flush your system.’ It’s the opposite,” she said, referring to the fictional character in the movies. Investors today will say, “I’m not going to change your business. I really like your business, that’s why I’m investing.”
Brown notes Neighborly encounters this all the time. “This founder phobia, I’ll call it, is real,” he said. “You’ve got to remember, these franchisees, they’re partners and friends for life, and this is the great unknown.”
At Neighborly, he said, the pitch to the founder is, “We’ll be able to snap in a marketing department, a legal department, an IT department, that they could never afford, to help them grow their business.”