Why Private Equity Is Investing in Franchise Companies

Private equity firms that buy franchises follow an investment strategy with a proven track record of steady returns and resilience during economic downturns. The franchise model, engineered to provide stability and deliver cost-efficiency through shared resources, seems tailor-made for private equity. Home services, professional services, and the ultracompetitive food services industries are just a few verticals dominated by PE firms – and with good reason.

Private Equity and Franchising: A Love Story

While it’s difficult to determine the exact percentage of the US franchise industry owned by private equity, it’s safe to say that they own a significant share. The likes of Roark Capital, Sentinel Capital, and Leonard Green & Partners (to name a few) hold sizable or controlling interests in hundreds of franchises operating in diverse industries, including automotive services, healthcare, quick-service restaurants, and more.

This is why private equity franchise investors choose to invest:

• Recurring revenue: Consistent royalty fees generate a stable cash flow for the franchisor. Most PE firms lock in their investments for 3-5 years, and that steady revenue offers a way to deliver returns to fund investors in a pinch.
• Exclusivity: Territorial operating rights establish a safe market position, further protecting those predictable returns.
• Minimal capital: In most franchise systems, the primary source of capital investment comes from franchisees. This minimizes capital expenditure for the franchisor and preserves profitability.
• Efficiency: The franchise business model offers predictability through standardized operations, such as training and supply chains. This also makes performance benchmarking easier, with top-performing locations guiding system-wide strategic changes.
• Pricing power: Franchises enjoy considerable pricing advantages that protect operating margins at the unit level.
• Risk diversification: Franchise systems diversify risk by having many locations across the country; PE firms (through their holding companies) further diversify by investing in many different franchise systems in various industries.

Private equity firms that buy franchises have reliable cash flows, minimal capital investments, and the franchise’s brand equity to leverage when the time is right.

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Private Equity Buying HVAC Companies: A Snapshot

Over the past several years, PE companies have taken a shine to HVAC. Since 2022, private equity firms have purchased more than 800 HVAC companies, including single-location acquisitions and businesses with multiple brands and locations. Among the many advantages already listed, HVAC offers private equity firms these specific appealing opportunities:

• Fragmentation: The HVAC industry is highly fragmented, with thousands of small businesses competing across markets. So, PE firms have an opportunity to support regional consolidation to gain market share in key metropolitan areas and enhance operational efficiencies.
• Energy efficiency demand: Driven by consumer preference and government regulation, the demand for heat pumps and more efficient equipment presents an opportunity for HVAC franchise growth.

Other tailwinds include smart home technologies, more affordable and industry-specific booking and accounting software, and a demographic shift to hotter climates (Texas, Florida, Arizona) with considerable HVAC needs.

These factors have prompted private equity firms to invest in home services franchises more broadly. After 2010, the number of private equity and franchise acquisitions increased for a decade, only to decline from 2020 to 2023. Now it’s rising again.

Are We in Peak Private Equity?

Probably not. High interest rates have made more traditional investments (equities and bonds) equally attractive in the post-COVID era, which has led to a recent run on deal exits in 2024 and 2025. However, forecast rate cuts will likely make private equity more competitive with other investments. The diversification and steady returns experienced by firms with franchise holdings may also mitigate risk for investors facing inflationary and demand concerns.

We Know Franchising  

For more than 25 years, Oneupweb has provided expert marketing services to franchisors across various industries. We deliver measurable results and detailed reporting to marketing teams, empowering informed decision-making and burgeoning brand value. Work with a hand-picked team of marketing pros who can grow your business because we know your business. Let’s get started; contact us here or call (231) 922-9977 to schedule a conversation.