Franchises: The Strategic Sweet Spot for Private Equity

Why private equity firms are betting big on the scalability and resilience of franchise models.

Amid the turbulence of recent global economic events—from interest rate volatility to shifting investor sentiment in equity markets—a quieter yet significant trend has emerged in private equity (PE): a growing affinity for the franchise business model. While its appeal may seem niche compared to headline-grabbing tech or renewable energy investments, franchising offers a compelling mix of scalability, predictability, and resilience that PE firms are finding hard to ignore.

Recent mega-deals underscore this enthusiasm. In late 2024, Blackstone made waves by acquiring Jersey Mike’s Subs for $8 billion, including debt. Earlier in the year, Roark Capital—already an established force in food franchising—finalised its $9.5 billion acquisition of Subway, setting the stage for a competitive battle between buyout-backed sandwich empires. These deals are the latest in a series of high-profile acquisitions targeting franchises, spanning industries from hospitality to fitness.

The European Context: PE’s Franchise Playbook Crosses Borders

The franchise model’s allure is far from limited to the US. In Europe, similar dynamics are at play. For instance, in 2023, EQT Partners acquired Espresso House, a Nordic coffee chain operating under a franchise-like model, citing its scalable structure and strong brand recognition. Meanwhile, the UK’s Pret A Manger has drawn interest from global investors, including JAB Holding, which leverages the chain’s franchising opportunities to fuel international expansion. As EQT Partner’s Thomas von Koch remarked during the deal announcement: “Franchises offer operational leverage and predictable cash flows, especially in fragmented markets like Europe.”

Resilient Revenue Streams in Uncertain Times

The predictable, recurring revenue of franchise operations is a major draw for private equity. Royalties derived from franchisees provide stability, even during economic downturns. This partially explains why hospitality franchising has been a particular focus for PE firms. Blackstone’s investments in Extended Stay America and WoodSpring Suites exemplify how long-term occupancy hotels offer resilience during both economic booms and busts. The firm’s historical success with Hilton Hotels—a $26 billion acquisition in 2007 that yielded a $14 billion profit by 2018—continues to shape its strategic approach.

Jonathan Gray, Blackstone’s president and COO, credited Hilton’s turnaround to aggressive debt management and international expansion, proving the franchise model’s adaptability. “It’s about understanding the brand’s pricing power and its ability to weather economic cycles,” Gray noted in an interview with Forbes.

Warren Buffett’s Franchise Playbook

The franchise model’s strengths—brand loyalty, pricing power, and scalability—align closely with Warren Buffett’s investment philosophy. “If you think a business will be around 20 years from now and can price advantageously, that’s a good business,” Buffett famously said at a 1991 lecture at the University of Notre Dame. His 1997 acquisition of Dairy Queen, among other investments, highlighted the long-term stability and high margins that franchises offer.

In Europe, PE firms are also leveraging franchise models in residential real estate. Berkshire Hathaway HomeServices, for instance, has expanded its operations across key European markets, tapping into the model’s inherent scalability and the region’s growing demand for branded real estate services.

Franchisors, Franchisees, and Private Equity’s Growing Role

Traditionally, private equity has targeted franchisors—the parent companies overseeing franchise systems. However, recent deals show increasing interest in franchisees, or the operators themselves. In 2021, Orangewood Partners acquired Pacific Bells, one of Taco Bell’s largest US franchisees, demonstrating how PE capital can accelerate growth for operators.

In the fitness sector, Brentwood Associates’ acquisition of Orangetheory Fitness franchisee Afterburn Holdings highlights another growing trend. In Europe, similar activity is evident in brands like Fitness First, where PE firms have injected capital to streamline operations and expand market presence. According to FRANdata, multi-unit operators controlled over 50% of franchise units globally as of 2023, underscoring the increasing consolidation within the sector.

Driving Valuations and Transforming Markets

The private equity rush into franchising has not been without consequences. Increased competition among PE firms has driven up valuations. According to PitchBook, median EBITDA multiples in middle-market PE deals expanded from 5.5x in 2010 to 7.8x in 2023. While this has created higher entry barriers, it also signals confidence in the franchise model’s ability to deliver strong returns.

“The infusion of private equity capital has been transformative,” observed the International Franchise Association in its 2024 economic outlook. “While inflation and interest rate hikes have raised initial investment costs, PE backing has helped brands scale faster and adapt more effectively to competitive pressures.”

The Future of Franchising in PE Portfolios

As private equity firms seek resilient, high-margin investments in a volatile global economy, the franchise model’s appeal will likely grow. The alignment of predictable cash flows, operational scalability, and diversified risk makes franchises an increasingly vital component of PE portfolios.

Europe, with its mix of established brands and fragmented markets, offers fertile ground for further expansion. Investors will continue to look for opportunities where strategic capital and operational expertise can unlock long-term value, ensuring that the franchise model remains a cornerstone of private equity strategy across both sides of the Atlantic.