2014. A year when franchises were the poster child for initial public offerings in the United States. According to Renaissance Capital, 41 IPOs were set to happen in 2014 and it was considered the best year for IPO deals since the tech-stock boom of 2000. Fast forward to 2017-2018, IPOs and public listing are losing steam among franchises, with several large stocks opting for private equity monies instead of public shareholding.
According to FRANdata’s internal tracking and analysis, seven publicly traded franchise companies, which included the likes of Buffalo Wild Wings, Popeyes, Qdoba, and Rent-a-Center, opted to delist from the stock exchanges and go for private equity capital. These companies have all managed to get nearly billion-dollar valuations for their shares in the process. Even franchise concepts that were rumored to go public like Jimmy John’s, Checkers and Culver’s seem to have abandoned their IPO plans for private equity capital, for much higher valuations. For instance, Oak Hill Capital Partners acquired Checkers and Rally’s for nearly $525 million in early 2017, while the same year Roark Capital Group bought a majority interest in Jimmy John’s, a franchise that was reportedly valued at $2 billion during its IPO plans in 2015. There wasn’t a franchise IPO last year and, so far, we haven’t seen one in 2018. IPOs in general saw a downtick in 2016, so the fact that no franchise chains went public was hardly surprising (106 companies went public on U.S. exchanges in 2016, down from 164 in 2015).
The loss of interest in IPOs can attributed to several factors, including low market capitalization values among companies that recently listed on the bourses. For instance, in the restaurant space, one study suggests that 16% of the current restaurant market capitalization can be attributed to companies that went public in 2010 or later, and 24% of the current market cap in restaurants corresponds to companies who launched IPOs after the year 2000. By comparison, McDonald’s and Starbucks, which together account for about 57% of all restaurant market cap, went public in 1978 and 1992, respectively.
Additionally, many franchises that went public in 2014 and 2015 were priced aggressively relative to historical multiples—given growth expectations and the market’s infatuation with the restaurant industry. At these extremely lofty valuations, the market expected many of these companies to dramatically exceed expectations on metrics like same-store sales growth, as well as profitability. Many IPOs from 2015 merely met or mildly exceeded these expectations, which was not enough to satisfy investors.
However, as private equity money increases among franchises, it also a positive indication that the IPOs will re-open, as the now-current PE owners will be looking for an exit on their investments over a 5 to 7 year horizon; and when the IPO market does open up again, potential issuers will want to be ready for a slew of franchise investment options as was the case in 2014.