Franchising M&A in 2025

April 2025  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

April 2025 Issue

Mergers and acquisitions (M&A) are complex and lengthy transactions that create significant challenges for all parties involved. However, they are vital generators of growth and value. One of the most intriguing and attractive segments of M&A today is franchising, with interest in the space growing rapidly.

Private equity (PE) firms, for example, are keenly pursuing franchising deals. In November 2024, PE giant Blackstone agreed to buy Jersey Mike’s Subs, in a deal believed to value the company at around $8bn, including debt.

For firms pursuing potential targets, franchisors offer several advantages. Franchisee-paid royalties, relatively low capital investment costs and well-established business concepts mean that franchisors perform relatively well even during low-growth periods in the economy.

Additionally, many service-oriented franchisors operate in industries that maintain demand even during recessions. Franchisors operating low-cost business models tend to be more insulated if the economy slows. In the restaurant space, for example, franchisors have shown they can successfully pass through costs during inflationary periods. Such factors demonstrate that franchisors can be a durable, all-weather investment.

Deal drivers

Drivers of activity include growing impetus in the consumer services franchise segment, particularly for companies with non-discretionary demand (offering services that consumers need regardless of economic conditions) and recurring demand (offering services that consumers use regularly, creating a steady stream of revenue). Investors are also increasingly attracted to multi-site services, such as childhood education and enrichment, and health and wellness. Indeed, in the health and wellness space there has been a boom in services focused on fitness, nutrition and mental health. Among other areas garnering attention are home maintenance and improvement services, senior care services, and quick-service restaurants.

The foundation of a franchise platform, including the quality of its brand and franchisee system, is critical for success. Franchise companies have strong brands and market positions, and proven concepts in their respective categories. This established model, along with the scalable nature of franchises, makes them attractive targets for acquirers. Franchise models often operate with advanced technology, integrating artificial intelligence and automation in their operations to enhance efficiency and customer experience. They also benefit from high customer satisfaction levels.

Diversification – particularly for PE firms seeking variety across their portfolio – is another driver of franchise-focused M&A. Consumer tastes are constantly evolving, making diversification an important strategy for firms to meet ever-changing needs. This is especially true for concepts that expand a company’s product or service range within their industry. Multibrand franchisor platforms are actively pursuing acquisitions to diversify their offerings too.

Globalisation is another motivating factor. Acquirers may wish to break into new international markets, which can be challenging. One way to successfully expand is to acquire local brands in other countries that already understand the culture.

Transaction planning

M&A transactions in the franchise industry require careful planning and risk management. The due diligence process can be particularly intricate in franchise deals due to the volume of agreements, contracts and documentation that must be assessed. Parties need to understand both pre- and post-deal considerations to be successful.

A clear picture of the target’s financial health, operational practices, brand reputation and overall viability is vital. Buyers will want to examine the franchisor’s financial health by reviewing its financial statements, including balance sheets, income statements and cash flow statements. They should also carefully review franchise agreements and the franchise disclosure document to gain insights into aspects such as royalty rates, territorial rights and renewal conditions.

Evaluating the operational efficiency of the franchise, including its approach to supply chain management, technology integration and customer service standards, can reveal areas for improvement.

Retaining or introducing an experienced management team is also crucial, helping to ensure continuity and stability post-completion. Buyers should interview current and former franchisees to discuss their experiences, challenges and satisfaction levels. This may yield valuable information about the franchisor’s support and the overall franchise system.

While franchise deals are attractive options for investors, there are potential headwinds. A clear view of regulatory requirements is necessary, and enlisting local expertise can help navigate potential roadblocks. In the US, for example, the Federal Trade Commission (FTC) has been examining M&A deals, and new rules governing transactions demand scrutiny.

Other jurisdictions may take a different approach. The UK, for example, does not have franchise-specific laws, making it an attractive jurisdiction for international brands seeking expansion. Unlike the US, there are no requirements for registration and no obligations on franchisors to provide disclosure to prospective franchisees in a specific format. The UK is a self-regulated market with the British Franchise Association establishing industry standards and providing a platform for franchisors, franchisees, suppliers and advisers.

Thorough due diligence ensures adherence to regulatory standards and facilitates the negotiation of equitable terms. In the end, careful planning and due diligence reduce risks, enhance value and create a foundation for seamless integration and long-term success. With a clear strategic vision, careful planning and robust due diligence, acquirers can benefit from the significant growth and value generation opportunities offered by the franchise industry.

© Financier Worldwide

BY

Richard Summerfield