Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Franchise Owner Groups
Transcript
- Lucas: You walk into a Burger King. The Whopper tastes exactly the same as the one three towns over. The lobby layout, the uniforms, the signage—all identical. That consistency is the whole point of franchising. But here's something most people don't think about: who actually owns that Burger King? Luna: Right, we usually assume it's some local entrepreneur who owns one or two stores. And often that's true—but increasingly, it's a private equity firm. Lucas: Exactly. Private equity has been quietly buying up franchisee groups—the companies that operate dozens, sometimes hundreds, of franchise locations under brands like McDonald's, Pizza Hut, Great Clips, you name it. And this is a massive, mostly invisible corner of the buyout world. Luna: So PE isn't buying the brand itself. They're buying the operators of the brand's stores. Lucas: That's right. And the scale is staggering. There are over 800,000 franchise establishments in the US alone, generating nearly a trillion dollars in economic output. The top 1 percent of franchisees—multi-unit operators—now control more than 20 percent of all units. And that concentration has been accelerating, partly because private equity sees a huge opportunity. Luna: I want to get into the specifics. But first, if today's conversation has given you a useful lens on something you see every day, the way we keep these episodes ad-free is through listener support. You can buy me a coffee at buy me a coffee dot com slash fexingo. No pressure, just helps us keep the lights on. Lucas: Yeah, it genuinely makes a difference. And today's topic is one of those things you'll start noticing everywhere once you know about it. So let's get into the details. Lucas: Let's take a concrete case: Sun Holdings. Based in Dallas, they are one of the largest franchisees in the US, operating over 1,000 locations across brands like Burger King, Popeyes, Arby's, and Taco Bueno. In 2022, KKR—the big global private equity firm—acquired a majority stake in Sun Holdings. The deal was reportedly valued at over a billion dollars. Luna: A billion dollars for a company that runs Burger Kings and Popeyes. That's not your typical local franchisee. Lucas: No, it's a roll-up. Sun Holdings had been aggregating stores for years, buying up other franchisees and underperforming locations, fixing operations, and scaling. By the time KKR came in, it was a lean, efficient machine with predictable cash flows. And that's exactly what PE firms look for. Luna: Predictable cash flows. That's the key. A franchisee has a proven business model, a national brand, and usually long-term leases. It's not flashy, but it's stable. Lucas: Exactly. And the multiples reflect that. Typical franchisee acquisitions trade at 6 to 8 times EBITDA. That's lower than, say, a high-growth tech company. But the risk is also lower. You're not betting on a new product or a market shift. You're betting that people will still want fried chicken and haircuts. Luna: And that's a pretty safe bet. So what's the play for the PE firm? Buy a platform franchisee, then use it to acquire more stores? Lucas: That's exactly the strategy. It's a classic buy-and-build. You acquire a solid multi-unit operator—the platform—and then you bolt on smaller franchisees one by one. Each acquisition adds more stores, more revenue, and more operational leverage. Over time, you centralize purchasing, negotiate better terms with suppliers, streamline back-office functions, and increase margins. Luna: And the brand itself—Burger King, for example—they're okay with this? I mean, they're essentially having a single corporate entity own dozens of their stores. Lucas: Most of the time, yes. Franchisors generally prefer working with larger, well-capitalized franchisees. They're more reliable, they invest in upgrades, and they're less likely to default. So brands like Yum! Brands, Restaurant Brands International, and others have actually encouraged consolidation among their franchisee networks. Luna: Interesting. So the franchisor sees it as a win too. But there's a potential downside, right? If a big pe backed franchisee goes under, that's a lot of stores at once. Lucas: That's the risk. And it's not hypothetical. In 2020, during the pandemic, NPC International—which was at the time the largest Pizza Hut franchisee and the second-largest Wendy's franchisee—filed for bankruptcy. They had over 1,200 locations. PE firm Sentinel Capital Partners owned a stake. It was a mess. But that's actually the exception. Most franchisee roll-ups are carefully managed, with plenty of debt capacity to weather downturns. Luna: So the model isn't just for food. I've seen PE firms buying up franchisee groups in other sectors too. Lucas: Absolutely. In fact, some of the most active areas are services. Take Great Clips—the haircut franchise. Roark Capital, which is a PE firm that specializes in franchise and multi-unit businesses, has backed several large Great Clips franchisees. Then you have car washes—Mister Car Wash was built through acquisitions of franchise and corporate locations. Even things like janitorial services, pest control, and home healthcare are being consolidated through franchise roll-ups. Luna: It makes sense. The playbook is almost identical regardless of the industry. Buy a platform, add smaller operators, centralize, optimize, sell to a larger PE firm or take public. Lucas: Right. And the exit options are pretty clear. You can sell to another PE firm in a secondary buyout, or you can take the company public. In 2021, Inspire Brands—which owns Arby's, Buffalo Wild Wings, and others—was itself acquired by a consortium led by Roark Capital. That's a $11 billion deal. So the whole ecosystem is interconnected. Luna: Let's talk about the numbers a bit more. When a PE firm buys a franchisee, how do they value it? Lucas: It's mostly based on store-level EBITDA. Each store generates a certain amount of cash flow. The PE firm applies a multiple to the aggregate EBITDA. But there are nuances. For example, some franchise agreements restrict how much debt you can put on the stores. Others require the franchisee to reinvest a percentage of revenue into renovations. So the valuation depends on the specific contract terms. Luna: And the brand strength matters too. A McDonald's franchisee will command a higher multiple than a lesser-known brand, because McDonald's has incredible unit economics and brand power. Lucas: Exactly. McDonald's franchisees have some of the highest margins in fast food, partly because McDonald's is a real estate company disguised as a burger chain. They own the land and buildings, and franchisees pay rent. That stable rent stream makes the franchisee's cash flow very predictable. So McDonald's franchisees are especially attractive to PE. Luna: Are there any franchise brands that restrict PE ownership? Lucas: Some do. For example, Subway historically had a policy against large multi-unit operators, though they've relaxed that in recent years. And some brands require that the franchisee be an individual, not a corporation. But those are becoming rarer as the industry consolidates. Most big brands now accept that PE money is part of the ecosystem. Luna: So what's the next frontier? Where are we seeing the most activity right now? Lucas: I'd point to quick-service restaurants, especially chicken chains—Popeyes, Raising Cane's, Zaxby's—and also fitness franchises like OrangeTheory and Planet Fitness, though Planet Fitness is mostly corporate-owned. Another hot area is home services: window cleaning, lawn care, painting. Companies like Authority Brands, which is backed by PE, own a portfolio of franchise brands like Molly Maid and Merry Maids. Luna: So the same logic applies: you buy a platform franchisee, then roll up smaller ones. But in home services, the unit economics might be different because the average revenue per location is lower. Lucas: True, but the multiples are also lower, and there's huge potential for operational improvement. Many small franchisees are owner-operators who run a single location. They don't have sophisticated marketing or supply chain. A pe backed operator can bring those capabilities and rapidly expand margins. Luna: So it's a bit like the old 'roll-up' strategy we've seen in other industries, but applied to the franchise model specifically. Lucas: Exactly. And the key insight is that the franchisee is the bottleneck. The brand provides the playbook, but the operator executes. PE firms are betting that professional management can execute better than a fragmented network of mom and pops. And so far, that bet has paid off. Luna: I wonder about the long-term effects on the brand itself. If all your franchisees are owned by three or four big PE firms, what happens to the entrepreneurial spirit that made the brand successful? Lucas: That's a real tension. Some argue that pe backed franchisees are less innovative because they stick to the playbook and resist change. Others say the opposite: that they bring capital for technology upgrades and store remodels that individual franchisees couldn't afford. I think the truth is somewhere in between. But it's something the franchisors have to manage carefully. Luna: And what about the employees? Does PE ownership change the working conditions in franchise stores? Lucas: That's a tougher question. There's some evidence that pe owned franchisees are more focused on labor efficiency, which can mean tighter scheduling and pressure on hourly workers. But again, it varies. Some PE firms have a reputation for being hands-off, others for driving cost cuts aggressively. It's not a monolith. Luna: So if I'm a small franchisee with three stores, and a PE firm comes knocking, what should I think about? Lucas: First, understand your multiple. Small franchisees often sell for 4 to 6 times EBITDA, while larger platforms get 7 to 9 times. So there's a premium to being part of a bigger group. Second, consider the earn-out structure. Many PE deals include an earn-out based on future performance, which can be lucrative if the stores do well. But you also have to be comfortable giving up control. Luna: And the trend is only going to continue, I assume. More consolidation, more PE involvement. Lucas: I think so. As long as interest rates stay manageable and the economy holds, PE firms will keep buying franchisee groups. There's still a huge tail of small operators who will eventually sell. The franchise roll-up story is far from over. Luna: It's one of those things where once you see it, you can't unsee it. Every time you drive past a Burger King, you'll wonder who really owns it. Lucas: And that's the fun part. The financial system is hiding in plain sight. Next time you grab a burger, just think: there's a good chance a private equity firm owns that grill.