By Patrick Galleher
Franchising has long been a resilient business model, thriving across economic cycles and offering a pathway to entrepreneurship for thousands of Americans. As we navigate the uncertainties of today’s economic landscape, one trend stands out: the growing influence of private equity (PE) in the franchising sector. Far from being a passing phenomenon, private equity’s involvement is fundamentally reshaping how franchise systems expand, innovate, and weather economic storms. In fact, I believe that franchising is poised not only to endure but to flourish during a recession thanks to a number of factors.
The Transformative Role of Private Equity in Franchising
Private equity’s impact on franchising has been profound. According to the International Franchise Association’s 2024 economic outlook, PE has injected significant capital into franchise systems, fueling growth and enhancing competitiveness even as higher inflation and interest rates have raised barriers to entry. The influx of capital from PE firms has enabled franchisors to:
- Expand their geographic footprint
- Revamp and modernize existing locations
- Invest in technology and operational efficiencies
- Enhance marketing and brand visibility
This capital infusion is not just about growth for growth’s sake. It’s about building more resilient, scalable, and competitive franchise systems that can withstand economic headwinds. As the number of PE firms competing for deals has surged from 2,000 in 2015 to over 3,500 in 2023, valuations have risen and the bar for operational excellence has been set higher than ever.
Why Franchising Thrives in a Recession
Franchising has a unique ability to adapt and grow during economic downturns. Historical data spanning four recessions shows a clear pattern: while closures and transfers may rise in the early stages of a recession, franchise sales typically pick up as the downturn progresses, often outpacing general economic expansion. This counterintuitive trend is driven by several factors:
- Proven Business Models: Franchises offer a tested playbook, brand recognition, and ongoing support, reducing the risks associated with starting a business from scratch.
- Access to Capital: Unlike the 2008 financial crisis, banks remain in strong shape, and capital is generally available. Though lenders are more conservative and favor well-documented, resilient franchise systems.
- Diversification and Adaptability: Franchises that offer diversified services or products are better positioned to weather sector-specific downturns, as multiple revenue streams can offset declines in any one area.
The Private Equity Advantage
Private equity brings more than just capital to the table. For franchise owners and systems, PE investment can provide:
- Operational Expertise: Many PE firms have deep experience in the franchise sector, offering strategic guidance, professional management, and industry connections that can elevate a franchise’s performance.
- Economies of Scale: By consolidating operations or acquiring multiple units, PE-backed franchises can achieve cost savings, increase buying power, and improve profitability.
- Accelerated Growth: With access to additional funding, franchises can open new locations, enter new markets, and invest in innovation at a pace that would be difficult to achieve organically.
However, it’s important for franchise owners to carefully evaluate PE partners, considering their track record, investment horizon, and the level of control they seek. The right PE partner can be a catalyst for growth; the wrong one can lead to loss of autonomy and culture.
Corporate Orphans: A New Generation of Franchisees
The term “corporate orphan” refers to skilled professionals who find themselves displaced during economic downturns often through no fault of their own. These individuals are uniquely positioned to succeed in franchising. They bring:
- Leadership and management experience from the corporate world
- Access to retirement savings or severance packages that can be invested in a business
- A desire for autonomy and control over their professional destinies
Franchising offers these individuals a ready-made platform to leverage their skills, with the backing of an established brand and support system. As more corporate orphans enter the market during a recession, franchise sales are likely to accelerate, driving further growth across the sector.
Looking Ahead: Why Franchising Will Flourish
The convergence of private equity investment and a new wave of aspiring entrepreneurs is positioning franchising for robust growth even in the face of economic uncertainty. Here’s why:
- Resilience: Franchises have a track record of weathering recessions better than many independent businesses, thanks to proven systems and brand strength.
- Innovation: PE-backed franchises can invest in technology, marketing, and operational improvements that keep them ahead of the curve.
- Opportunity: As corporate orphans seek new beginnings, franchising offers a pathway to business ownership that is both attainable and supported.
In conclusion, the partnership between private equity and franchising is more than a financial transaction – it’s a catalyst for innovation, resilience, and growth. As we look to the future, I am confident that franchising will not only survive the next recession but emerge stronger, more diverse, and more dynamic than ever before.
- Patrick Galleheris the CEO & Managing Partner of Boxwood Partners, an investment bank headquartered in Jupiter, FL, where he leads transactions for Boxwood’s M&A advisory services.
Over the past 25 years, Patrick has led sell-side transactions on over 70 engagements. At Boxwood Partners, he and his team focus on transactions in the lower middle market between $50-$500m in Enterprise Value. Since 2011, Boxwood has successfully completed over 35 Franchisor sell-side transactions, assisting founder and private equity-owned businesses to find strategic or private equity partners for their next stage of growth.
Prior to joining Boxwood, Patrick was CEO of WILink plc (WLK:LSE), a global financial communications and compliance business which is headquartered in London, with operations in the United State, Canada, United Kingdom, Continental Europe, and Sweden. Through its IPO in 2000, Patrick became the youngest CEO on the London Stock Exchange. In 2006, he successfully led the Company through a public-to-private transaction with SVIP, a NYC-based private equity group, and delisting it from the London Stock Exchange.
Patrick made a minority investment in sweetFrog Franchising, LLC in 2012. During his investment, sweetFrog grew from 15 locations to over 380 locations. In 2015, Patrick stepped in as Chairman & CEO, until completing a successful transaction with MTY / Kahala Brands in September of 2018.
Patrick served on the Board of Directors for Issuer Direct (ISDR:NYSE), since 2014. He was Chairman of the Strategic Advisory and Compensation Committees.
Patrick holds a B.S. in Business Administration from the University of Richmond, where he played golf for the Spiders. He also holds a degree from the London Business School, as well as attending the Centre for Creative Leadership (CCL) in Belgium. He is a founder of the Virginia Chapter of Young President’s Organization (YPO), member of CEO.org and the former Finance Chair of the Southeast U.S. and Caribbean (SEC) Region of YPO.