From the New York Times, January 28:
The same playbook that has notched high returns acquiring things like foreclosed homes and highway rest stops is being tested by a family-oriented franchise.
Tiffany Cianci spends most of her days in socks, padding around the fitness studio she operates in Frederick, Md., about an hour outside Washington. Her clients are young: kids ranging from 4 months to 12 years old. They come to learn somersaults, try the monkey bars, sing some songs. (“Little Red Caboose,” complete with a train whistle accompaniment, is one of her favorites.)
Ms. Cianci, 41, spent the first part of her career as a sommelier, specializing in sake. In 2017, wanting to leave the hospitality industry for something that allowed her to spend more time at home, she and her husband bought their facility as part of a franchise chain called The Little Gym. Its slogan: “Serious fun.”
They got what generations of franchise owners have gotten out of similar deals, with brands like McDonald’s or Jiffy Lube: a known brand name and detailed business plans in exchange for an initial fee and a cut of the revenue. For Ms. Cianci, it was more than just a business. “I love it. I really love it,” said Ms. Cianci, a mother of three who studied dance. “I love my students, and I love that it lets me make a difference.” In the last year and a half, since The Little Gym was acquired by a private equity-backed firm called Unleashed Brands, her work has felt far less idyllic.
According to legal filings, internal documents, and interviews with more than half a dozen other franchisees — most of whom requested anonymity so as to avoid retaliation — Unleashed began to demand higher fees and institute more stringent requirements, which the independent owners thought would threaten their profits. The day after Ms. Cianci organized her fellow franchise owners into an association to push back against the changes, the corporate office told her it was terminating her license on the grounds that she was chronically late in paying her fees. Given the timing, Ms. Cianci maintains in the legal filings that it constituted retaliation.
Along the way, Unleashed Brands surveilled Ms. Cianci’s business with undercover shoppers, met with her landlord and disparaged her to fellow franchisees. When she tried to salvage her business under a new name — it’s now called Teeter Tots Music n Motion — the company sued, accusing her of violating its trademarks and a noncompete clause in her franchise agreement.
The episode has plunged Ms. Cianci about $300,000 into debt and enmeshed Unleashed in a nasty court battle not long after it acquired multiple new brands. The outcome will be a test of just how much a franchisor can unilaterally change the rules of a business relationship that has served as an on-ramp to entrepreneurship for hundreds of thousands of people.
The legal fight — along with two others Unleashed has faced with franchisees at its other brands — also reveals the challenges of applying the private equity playbook to the unique world of franchises.
Private equity has notched decades of high returns for investors by following a well-worn strategy: acquire distressed or undervalued companies or real estate, increase profits and then sell them. Greatest hits include foreclosed homes, highway rest stops and coal mines bought out of bankruptcy. Franchising has become one of private equity’s targets du jour. According to the research firm FRANdata, the number of franchise brands acquired by private equity firms and other investors rose from 52 in 2019 to 149 in 2021 and was on track to nearly equal that total in 2022. Private equity firms tout their ability to bring new ideas, technologies and efficiencies, and franchises, financially weakened by the pandemic, appeared ripe for those kinds of changes.
But the reality is not so straightforward. The nation’s franchisees — 237,619, according to FRANdata — like Ms. Cianci, think of themselves as independent small businesses, who have often sunk their life savings into the enterprise. That’s why Little Gym owners are resisting Unleashed’s attempts to squeeze their profits to pad its own. Unlike, say, factory workers, who can be laid off at will, franchisees are supposed to be protected by legal documents that prescribe a certain business model for years at a time. Moreover, Unleashed — and its investors — need franchisees to stay motivated so they can keep generating revenue and recruit others to keep expanding the franchise system....
....MUCH MORE
Warren Buffet doesn't much care for Private Equity, comparing them to porno purveyors:
``You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever,'' he says at the February meeting.
``Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.''
—Warren Buffett
June 25, 2008
On why a business may prefer selling to Berkshire Hathaway rather than a private equity firm.
I know Warren is talking down the bidding pressure that PE firms might
put on the price he has to pay for privately held businesses but looking
at his comments on PE over the years it's more than that:
He actually loathes private equity and its practitioners....
Last seen in "Berkshire Hathaway as Idealized Private Equity".
