Franchise Experts Confirm ‘New Normal’ as M&A Slows | Franchise M&A

With M&A activity still hampered by inflationary headwinds and other economic challenges, many franchise experts are skeptical that the market will see any significant changes in the second half of 2024, even if the Federal Reserve considers cutting interest rates.

For some, this represents a change from previous forecasts, when many franchisors and investors were optimistic about a revival of the transaction market this year.

“The truth is the world has changed, there’s less stuff for sale, and I’m not sure seller expectations have changed enough to meet the realities of this new world,” said Michael Esposito, co-managing partner at private equity firm Franchise Equity Partners. “With that in mind, I don’t expect to see much change in M&A activity for the rest of the year.”

Charlie Hurt, head of the consumer investment banking group at Fifth Third Securities, said that despite a slight increase in deal activity this year, M&A activity overall remains well below the levels seen in 2021 and 2022. He is cautiously optimistic that the market will warm up in the second half of the year, although he does not foresee a drastic change.

“Lower-margin QSRs tend to be more sensitive to inflation within their franchises, and our customers tell us they still have some concerns about the health of American consumers given current inflation,” Hurt said.

Hurt has completed more than $10 billion in buy-side and sell-side transactions over his 25-year career. He pointed to a recent report from restaurant performance analytics firm Black Box Intelligence that showed same-store sales were up a modest 0.1 percent year over year in March.

While that represented a 0.6 percentage point improvement from February and 4.6 percentage points more than January, Black Box said its restaurant traffic for the promotion fell 2.2 percent in March.

Buyers “are saying they’ll do it, but not right now,” said Hurt, who added that despite the slowdown in M&A activity, his firm remains busy and is looking to close eight to 10 deals before the end of the year.

Alicia Miller, founder of Emergent Growth Advisors and author of “Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity,” said the current state of franchise M&A activity is indicative of what she called a “new normal” for the industry in the wake of the COVID-19 pandemic.

“Buyers are generally more conservative now as they deal with inflationary headwinds, especially in labor and supply chain costs,” she said. “If you’re looking to sell or buy now, hopefully you came to the party prepared. You did your due diligence and you have a great story to tell.”

Miller said that with the slowdown in M&A activity, the fundraising environment in the franchise has slowed. “Only the largest investment firms with the best track records are getting the funds” they need to make deals, she said.

“We’ve seen some deals in the last six to eight months, but they’ve mostly come from large platform specialists like Craveworthy Brands and others who have been able to acquire some of the emerging brands that are struggling,” Miller said. “The specialists in niche markets now have a leg up and can move forward with a lot more confidence.”

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The good news, Miller noted, is that the economic challenges have brought exciting innovation around new restaurant concepts in recent years. Slower M&A activity and the challenges franchisors face in growing their brands in times of economic uncertainty have forced many to double down on tightening efficiencies in their systems, Miller said. Companies are focusing more on better training, field support and coaching for franchisees.

“For many years, we’ve been focused on getting to 100 units as quickly as possible,” she said, “and now it seems like we’re starting to be more selective about who we let into the system, which is actually a good thing.”

Meanwhile, Alex Dunn, managing partner at investment firm Larry H. Miller Company, believes the country has peaked in inflation and expects merger and acquisition activity to pick up in the second half of the year.

At the same time, however, he wonders about the long-term impact of the government’s COVID-19 relief package on the franchising and M&A markets.

“There’s been a tremendous amount of capital pumped into the economy during the pandemic, and I wonder if that’s created some kind of bubble or set us up for some kind of correction,” Dunn said. “What that’s going to be or what that looks like, I can only speculate.”