We recently advised LYNX Franchising (LYNX), a leading multi-brand franchise platform focused on commercial and industrial services, on its sale to MidOcean Partners.
Here, we discuss what makes franchisor businesses appealing for investors, what made LYNX stand out from the competition and what buyers should know about the space.
What makes franchised, multi-brand B2B services an appealing space for buyers and investors?
Spiller: As we’ve seen during the sales of Servpro, Dwyer, Authority Brands, and many others, investors continue to be drawn to strong franchisor businesses for several reasons. It's a great way for private equity investors to move into fragmented markets and quickly build platforms of scale with inherently positive economics. Franchises also generally have structures that accelerate professionalization and growth, from accounting systems to marketing to HR. And the best franchise businesses have a proven playbook for success in their respective markets, as well as structures and systems that incentivize franchisees to grow.
Pierce: The economics are another draw. The franchise model tends to deliver strong margins to business owners as well as recurring revenue and high free cash flow. These tend to be very capital-efficient businesses, and for winning concepts they also provide strong growth.
This particular niche—franchised B2B services—is especially attractive. It has demonstrated strong resilience during the pandemic. There are literally tens of millions of small and medium-sized businesses in the U.S. alone, and they're increasingly seeing the value of outsourcing everything outside of their core areas of expertise. Whether that's accounting, staffing, or cleaning services—which is what LYNX provides—SMBs are eager to offload essential tasks that don't generate revenue.
What made Lynx particularly appealing to its buyer?
Pierce: The buyer liked all of the factors we just walked through, plus the relevance of LYNX's services. Its largest brand—JanPro—is a leading workplace hygiene business, responsible for the cleanliness of offices around the country. Even before COVID-19, the company was experiencing solid double-digit growth. Its growth has continued through the pandemic—in fact, 2020 was its 29th consecutive year of positive organic growth.
Spiller: Even more importantly, LYNX enjoys first-mover advantage as a franchisor platform in the B2B services space. It's a very fragmented market, with many franchise concepts offering adjacent services to small and medium-sized businesses. LYNX is the first platform of scale in the sector, similar to Neighborly, our client active in home services.
Also like Neighborly, LYNX is well positioned to become the leading player in the commercial market and sell additional branded services to its clients as it grows via M&A. It had already successfully completed two acquisitions when it was sold, and it has the capabilities in place to do more. There's a real scarcity of assets like that in the commercial services market.
What advice do you have for other buyers and investors interested in the space?
Pierce: The quality of the concept is critical: Is this a business that lends itself to the franchising model? Does it have a healthy value proposition for customers and franchisees? Is it a leader in its category? Does it have good franchisee relationships? Do franchisees make money?
Spiller: Buyers should also take a hard look at the "bones" of the business: its management team, IT systems, and marketing capabilities, for instance. Do they set the business up to be a world leader and help their franchisees grow? Sometimes we'll see franchise businesses where that's not the case, and the platform can't reach the next level of scale. You want a situation where franchisees can focus on growing their businesses, and the corporate office takes care of everything else. That's what LYNX and other leading platforms are seeking to deliver, and it's been a key value driver for them.
To learn more, please contact our senior bankers.
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Published April 2021