Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Franchisees Are Buying Up Their Own Brands
Transcript
- Lucas: So in late 2023, a group of Subway franchisees did something pretty unusual. They teamed up with a private equity firm called Roark Capital to make a roughly nine-point-six-billion-dollar bid for Subway — basically, the franchisees wanted to buy the franchisor. Luna: Wait — the people who run the stores were trying to buy the company that licenses them the brand? That feels like the inmates taking over the asylum. Lucas: Exactly, and that's why this deal is such a fascinating case. It didn't close — Subway ultimately sold to Roark alone for about the same price in early 2024 — but the fact that franchisees even proposed it tells you a lot about the tensions inside large franchise systems. Luna: And about how PE views franchisees as a source of both capital and operational expertise. I'm Luna. Lucas: I'm Lucas. This is The Buyout Show on Fexingo Business. Today we're looking at franchisee-led buyouts — when the operators of the stores decide to pool their capital and buy the parent company, or at least try to. Luna: Before we get into the Subway bid, give me the baseline. How big is the average Subway store's revenue? Because I feel like people picture a sandwich shop doing a couple hundred grand a year. Lucas: The average Subway store in the US generates about four hundred and eighty thousand dollars in annual revenue. That's not huge — it's a low-ticket, high-volume business. But with over twenty thousand US locations, the system-wide revenue is massive. The franchisees pay a royalty of about eight percent of gross sales, plus a four-and-a-half-percent advertising fund contribution. Luna: So on average, each store is paying roughly sixty thousand dollars a year just in royalties. And that's the fundamental tension — franchisees feel like they're doing all the work while corporate collects the checks. Lucas: Right. And that tension has been building for years. Subway franchisees have been squeezed by rising labor costs, commodity inflation, and competition from fast-casual brands like Jersey Mike's and Firehouse Subs. Meanwhile, corporate wasn't always responsive to their needs — there were disputes over menu changes, store remodels, and digital ordering fees. Luna: So what exactly was the proposal? Did the franchisees have a specific structure in mind? Lucas: The group called itself the North American Association of Subway Franchisees. They approached Roark Capital — which already owned several franchise brands like Focus Brands, the parent of Auntie Anne's and Cinnabon — with a plan. The franchisees would contribute a portion of their future royalties to help fund the acquisition, effectively reducing the purchase price for Roark in exchange for equity in the combined entity. Luna: So they were offering to trade a percentage of their future income for ownership. That's a pretty sophisticated move for a group of sandwich shop operators. Lucas: It is. And it highlights a broader trend: franchisees are becoming more financially sophisticated. Many of them operate multiple units — some have dozens of stores — and they've started to think like private equity investors themselves. They see the value they're creating and want a piece of the upside beyond just store-level profits. Luna: Is this unique to Subway, or are there other examples of franchisees trying to buy their franchisor? Lucas: There are a few. In 2017, a group of 7-Eleven franchisees in Canada attempted a similar bid — though it didn't go far. More recently, in the hotel space, some franchisees of major chains have formed consortiums to acquire underperforming properties and convert them to their brand. But the most active area is actually the opposite: franchisees buying up other franchisees. Luna: That's the roll-up strategy. Instead of buying the parent, they consolidate the operators. Lucas: Exactly. And PE firms love this because it's a way to invest in proven business models with existing cash flows. One of the biggest players is Craveworthy Brands, which has been rolling up fast-casual franchise concepts like Wing Warehouse and Budlong Hot Chicken. They're essentially a franchisee aggregator — they buy multi-unit operators and combine them under a single management team. Luna: So the franchisee-led buyout of the franchisor is the nuclear option. The more common move is pe backed franchisees buying other franchisees to achieve scale. Lucas: Right. And that's where the economics get interesting. A single Subway store doing four hundred eighty thousand in revenue — after food costs, labor, rent, and royalties — the store-level profit might be sixty to eighty thousand dollars. That's a living, but it's not scalable. But if you own twenty stores, suddenly you have corporate overhead that can negotiate better supply contracts, share managers, and optimize labor across locations. Luna: That's the roll-up thesis: centralize back-office functions while keeping the front-line operations decentralized. It works in dental, auto repair, and apparently sandwiches. Lucas: And the numbers bear it out. A study by the International Franchise Association found that multi-unit franchisees — those with five or more locations — generate about thirty percent higher profit margins per store than single-unit operators. They have better purchasing power, lower turnover, and more consistent execution. Luna: So why doesn't every franchisee just go out and buy more stores? Capital, I assume? Lucas: Capital is a big part of it. A Subway franchise might cost around two hundred thousand to open, but acquiring an existing store from another franchisee can be cheaper — maybe one to two times store-level cash flow. But the real barrier is access to debt. Banks are more willing to lend to a pe backed platform than to a single franchisee with a handful of stores. Luna: So PE steps in as the capital partner. The franchisee brings operational know-how, the PE firm brings the balance sheet. That's the model behind groups like Craveworthy and also behind the Subway bid. Lucas: Exactly. In the Subway case, the franchisees had the operational expertise — they knew which stores were profitable, which managers were strong, how to improve margins. Roark had the capital and the experience of rolling up franchise systems. Together, they could have created a vertically integrated company where the operators were also the owners. Luna: But it didn't happen. Why? What killed the deal? Lucas: A few reasons. First, Subway's board was skeptical that a franchisee-led group could raise the full nine-point-six billion. The franchisees were asking for a significant discount relative to what other bidders might pay. Second, there were concerns about governance — if franchisees own the franchisor, who enforces brand standards? Who decides when to raise royalties? Luna: That's a real conflict. If you own the company and you're also a franchisee, you have an incentive to lower your own royalty burden, which hurts the value for other shareholders. Lucas: Right. And that's the core tension in any franchisee-led buyout: incentive alignment cuts both ways. On one hand, franchisees have aligned incentives with the brand's success — they want the brand to grow because it drives their store traffic. On the other hand, they have a direct interest in minimizing the costs imposed by the franchisor, which can lead to underinvestment in marketing, R&D, and quality control. Luna: So the deal structure would have to include some kind of independent governance mechanism — maybe a separate board or an independent trust that holds the franchisor assets. Lucas: Exactly. And those structures are complex and expensive. Roark ultimately decided to go it alone, buying Subway without the franchisees' equity participation. But that doesn't mean the franchisees lost entirely. Some of them ended up rolling over their stores into the new ownership structure, and Roark has been working to improve franchisee relations. Luna: Let's talk about the bigger picture. Is the franchisee-led buyout a one-off, or is it a sign of things to come? Lucas: I think it's a sign. As franchisees become more sophisticated and PE firms look for new sources of deal flow, the combination is natural. We've already seen it in the hotel industry — groups like Ashford Inc. have created structures where hotel operators co-invest alongside PE. And in the restaurant space, there are now funds specifically targeting franchisee consolidation. Luna: Give me a concrete example of a fund that does this. Lucas: Sure. There's Sentinel Capital Partners, which has a practice focused on buying multi-unit franchise operators — they own brands like Taco Bell and Pizza Hut franchisees. Another is Brentwood Associates, which backed a consolidation of Gold's Gym franchisees. These aren't buying the franchisor; they're buying the franchisees and rolling them up. Luna: So the franchisee-led buyout of the franchisor is the exception, but the franchisee roll-up is the rule. Lucas: Exactly. And the economics of the roll-up are compelling. A typical franchisee roll-up targets an internal rate of return of twenty to twenty-five percent over five to seven years. The strategy works because the underlying businesses are cash-generative, have low capital requirements, and benefit from scale. Luna: But there are risks. If the franchisor changes the royalty structure or imposes new requirements, that can squeeze margins. And if consumer preferences shift — like the move away from fast food toward fast casual — franchisees can be left holding the bag. Lucas: Right. In the Subway case, one of the franchisees' complaints was that corporate was slow to adapt to the rise of delivery apps and mobile ordering. The franchisees felt they were innovating faster than the franchisor. That's a recipe for tension. Luna: So what's the takeaway for someone listening who might be a franchisee or thinking about investing in franchise concepts? Lucas: I'd say two things. First, if you're a franchisee, understand that your ability to aggregate capital and form coalitions is your biggest leverage point. The Subway franchisees didn't get the deal done, but they got a seat at the table. Second, if you're an investor, look for franchise systems where the operators are aligned with the brand — where royalties are seen as fair and the franchisor provides real value. That's where roll-up strategies work best. Luna: And if the alignment breaks down, you get a rebellion. Or a buyout attempt. Lucas: Right. And that's where it gets interesting for PE. Because a franchise system in tension is actually a ripe opportunity — you can come in as a peacemaker, buy out the franchisor, restructure the relationship, and create a more stable platform. Roark essentially did that with Subway, even without the franchisees' equity. Luna: So the franchisee-led buyout might fail as a structure, but it succeeds as a negotiating tactic. The franchisees made their point, and now Roark has to keep them happy. Lucas: Exactly. And that's the hidden story: the Subway bid wasn't a failure; it was a signal. It told the market that franchisees are an organized, capital-aware force. And that's going to shape how PE approaches franchise deals for years to come. Luna: I'm curious — are there any franchisee-led buyouts that actually closed? Or is Subway the closest we've come? Lucas: There are a few smaller ones. In 2021, a group of franchisees of the Canadian coffee chain Tim Hortons attempted a buyout of the parent company, but it was ultimately rejected. More successful have been the 'franchisee to franchisee' roll-ups, where a group of operators buys out a retiring franchisee's portfolio. Those happen all the time. Luna: So the big, headline-grabbing buyout of the franchisor remains rare. But the underlying dynamic — franchisees as a source of capital and operational expertise — is becoming mainstream. Lucas: Exactly. And that's the takeaway. The next time you hear about a PE firm buying a franchise brand, ask yourself: are the franchisees involved? Because if they're not, they probably should be. Luna: Or they might try to buy it out from under them. Lucas: Right. And that's the beauty of this moment — franchisees are no longer passive. They're players in the deal game. For The Buyout Show, I'm Lucas. Luna: I'm Luna. Thanks for listening.