Franchise Experts Acknowledge ‘New Normal’ With M&A Slowdown

With merger and acquisition activity still hindered by inflationary headwinds and other economic challenges, a number of franchising experts are skeptical the market will see any significant changes in the second half of 2024, even as the Federal Reserve considers reducing interest rates.

NEW YORK, July 8, 2024 /Franchise Times/ -- For some, this represents a shift in earlier forecasts when many franchisors and investors were optimistic that the dealmaking market would pick up this year.

“The reality is the world has changed with less things for sale, and I’m not sure the expectations of sellers have changed enough to meet the realities of the new world,” said Michael Esposito, co-managing partner of private equity firm Franchise Equity Partners. “With that said, I’m not anticipating any big changes in M&A activity the remainder of the year.”

Charlie Hurt, who heads the consumer investment banking group at Fifth Third Securities, said despite a slight uptick in dealmaking activity this year, M&A overall remains well below 2021 and 2022 levels. He is cautiously optimistic the market will heat up in the second half of the year, although he’s not anticipating a dramatic change.

“Restaurants in the QSR space with the lower margins tend to be more sensitive to inflation within franchising, and what our clients are telling us is that they still have some concerns about the health of the U.S. consumer with inflation being what it is,” said Hurt.

Hurt has executed sell-side and buy-side transactions totaling over $10 billion during his 25-year career. He pointed to restaurant performance benchmarking company Black Box Intelligence’s latest report, which showed same-store sales year over year were up a modest 0.1 percent in March.

Although this was an improvement of 0.6 percentage points from February and 4.6 percentage points better than January, Black Box reported restaurant comp traffic decreased 2.2 percent in March. 

Clients who are looking to buy “are saying we’re going to do this but not right now,” said Hurt, who shared that despite a slowdown in M&A dealmaking, his firm remains busy and is trying to close on eight-to-10 deals before the end of the year.

Alicia Miller, the 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 M&A activity in franchising is indicative of what she called “the new normal” for the industry following the COVID-19 pandemic.

“Buyers overall are being more conservative now as they deal with inflationary headwinds, especially around labor and supply chain costs,” she said. “If you’re looking to sell or buy right now, hopefully you’ve come to the party well prepared. You’ve done your due diligence and a have great story to tell.”

Miller said along with the brakes being put on M&A activity, the fundraising environment in franchising slowed. “Only the biggest investment firms with the best track records are getting the funds” they need to transact on deals, she said.

“We’ve seen some trades in the last six to eight months, but they are mainly from the big platform specialists like Craveworthy Brands and others who’ve been able to pick up a couple of emerging brands in distress,” Miller said. “The specialists in niche markets have an advantage right now and can move forward with much more confidence.”

Miller noted the good news is economic challenges delivered exciting innovations around new restaurant concepts in recent years. Slower M&A activity and the challenges franchisors face in growing their brands during economic uncertainties forced many of them to double down on tightening efficiencies within their systems, Miller said. Companies are focusing more on better training, field support and coaching franchisees.

“For many years the focus has been on getting to 100 units as fast you can,” she said, “and now it seems to be shifting to being pickier about who to let into your system, which is actually a good thing.”

Meanwhile, Alex Dunn, managing partner of family office Larry H. Miller Company, believes the country reached the top of where inflation will land and looks forward to M&A activity picking up in the second half of the year. 

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

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