In the wider world of business, acquisitions are par for the course. The industry giants do not maintain their grip on the market sheerly through R&D and innovation, it often involves acquisitions. Smaller brands and start-ups have more room to respond to the market and customers, and can often lead to the creation of a successful and relevant brand that punches well above its weight.
The most obvious examples of market leaders buying up small and successful companies comes from Silicon Valley. The giants have established their products and services to great success, and now dominate the industry to such an extent, that everyday life cannot be imagined without them. Facebook, or Meta as it’s now known, saw the rise of apps like Instagram and WhatsApp, and instead of directly competing, bought both companies out.
Franchisors always opt for acquisition, since developing a brand and process takes more time and resources than a relatively simple acquisition. Recently, Pimlico Plumbers, the famous London-based plumbing brand was acquired by Neighborly, a group franchisor of home service brands.
If current trends continue, more and more brands will join franchisor groups to support aggressive expansion strategies.
Why do franchisors acquire brands?
Brand power
Some of the most iconic franchise brands in existence are decades old. Two of the most recognizable global franchises, Pizza Hut and McDonald’s were established in 1958 and 1940, respectively. The largest and most recognizable brands were established decades ago, and today dominate their industries. Time is an important factor for brands as they accrue generational goodwill with customers, know-how and innovate over the years to build their profiles.
“Franchisors create brands and buy brands because we all know that brands sell. Consumers love brands, they favor brands, and so it makes sense economically to own brands. Brands are very attractive in franchising and acquiring a franchised brand is a quick way to become a franchisor,” said John Hayes, Titus chair for franchise leadership at Palm Beach Atlantic University in West Palm Beach, Fl.
Building a powerful, strong brand takes a long time, and a lot of resources. Time itself is one of the resources that has to be spent to build a brand’s profile – one many franchisors do not have. When franchisors acquire brands, they also purchase the time and effort that went into building the brand.
“Brands maintain their relevance by evolving to meet customer demand and at Neighborly, our vision is to “Own the Home” by offering a suite of brands that provide maintenance, repair and enhancement services for every stage of home ownership,” said Mike Bidwell, president and CEO of Neighborly.
“To ensure our brand relevance, we strategically expand our portfolio to reflect the services homeowners want.”
Brand power and time investment are why vacuum cleaners are often called ‘hoovers’, because the entire category has come so closely associated with a single brand, giving it a clear advantage in the market.
Neighborly, a franchisor of home service brands has itself been bought out by Kohlberg Kravis Roberts & Co (KKR), a diversified American global investments firm. Neighborly hasn’t stopped acquiring since it wants to establish itself as the one-stop shop for all home service needs.
“Ultimately, we want our growth to benefit the brands we acquire. And perhaps the biggest advantage of being under the Neighborly umbrella is our ability to extend the customer from one brand to another,” said Bidwell.
“This lowers franchisees’ customer acquisition costs and creates a more adhesive relationship with the customer. Each brand also benefits from the scale of being able to extend functional expertise and heft to the brands where they would not individually be able to access these capabilities.”
With brands like Aireserve, Molly Maid, Mr. Handyman, the recently acquired Pimlico Plumbers and many more to its name, Neighborly wants to cover every single aspect of home service and maintenance. This, alongside its regional expansion plans, guides acquisition strategy.
Scaling up
Franchisors can build exceptional brands and products and services. But it doesn’t always help with scaling up. A franchise can run at full capacity for a length of time but still not be able to expand to match demand due to a lack of capital. This is where larger franchisors, or franchise groups come in and acquire the brand, inject capital and grow the brand’s footprint.
“In the early days of Neighborly, we started many of our franchise brands from the ground up, but today, that process is too slow to meet our current ambitions,” said Bidwell
“Each brand we add brings an existing set of customers that then has the potential to be serviced by our other Neighborly brands as well. Since our ultimate mission is to “Own the Home”, we take both a micro and macro approach to acquisitions.”
COVID-19 dealt a blow to virtually every franchisor in the world, and consequently would have harmed scaling-up efforts, especially for brands that are heavily reliant on physical locations and an in-person experience. Brands would sooner come under the umbrella of another group or franchisor than to miss out on expansion while there is still demand.
Private equity firms have always acquired franchises. Franchises represent a class of very stable businesses that have powerful brands, efficient processes and stable revenue behind them. Private equity firms are there to provide financial support to commercial ventures through a number of avenues, from leveraged buyouts to venture capital. Unlike the aims of a group or franchisor, a private equity firm focuses more on the bottom line.
While a franchisor group may be reluctant to close a far-flung location serving a small, unprofitable region, it’s possible a private equity firm could close the location down with the intention of making the business more efficient, though it is equally likely that the negative effects of such a move would stay such a decision. A franchisor would take into the brand’s image and local community into account before taking such a decision.
They are always seeking out profitable businesses that require capital, or legacy businesses that are running inefficiently and have a lot of potential. Beyond acquiring franchisors, private equity firms can also invest in franchisee groups to support the growth of a brand.
What does the future hold for franchisor acquisitions?
While it may be impossible to accurately predict the future, the past is always a good indicator of what may come. There is no reason to believe that franchisors and groups will let up with acquisitions. This will especially be the case with smaller but well proven concepts that may struggle with franchisee recruitment and general scaling up.
Groups like Neighborly, Focus Brands, Hero Brands and others will continue to scour the franchising landscape for profitable and efficient concepts they can bring into their families of brands. The growth of these groups is underpinned by the continual success of its brands and dominance of their industries, which will likely involve acquisitions in the future.
“Our intent is to go deeper in the markets we currently operate in versus searching out new markets to venture into,” said Bidwell.
As private equity firms become more comfortable in the world of franchising, the industry is likely to see more acquisitions and buyouts of large, established brands and groups. The inherent stability of a franchise brand is certain to attract more buyers in the future.
“Brands maintain their relevance by evolving to meet customer demand. If franchisors/groups/private equity firms want to achieve growth, they’re going to constantly be looking to evolve through acquisitions,” said Bidwell.
More franchisor acquisitions are likely
Franchise groups are constantly looking for hot, new concepts to invest in and to grow their portfolios, and private equity firms are comfortable in the franchising industry.
Franchisors recognize that brand-building is painstaking work with no guarantee of a viable brand at the end of the tunnel, therefore the larger franchisors who have the ability to acquire, will do so. While private equity firms may not produce brands or anything tangible, they are expected to park resources into safe and growing ventures, which franchises certainly are.
As more and more brands emerge on a daily basis, it makes it that much harder to establish one in a crowded marketplace, placing a higher premium on already built and recognizable brands, leaving them ripe for acquisition by bigger players.
Take a look at our list of six of the biggest acquisition deals in 2021.
