19 August 2024: Private Equity, Franchises and Roll Ups
Private equity, franchises and roll ups… Many people would see that headline and wonder, “what’s one got to do with the others?” Surprisingly, a lot.
The relationship of these three terms in the realm of business occurred to your humble correspondent last week as I watched as a technician performed a service on a property of mine. The technician was part of an operation that embodied each of those designations – and that operation is perfect example of the life of a growing business.
WHAT WE’RE LOOKING FOR: Industry agnostic: Revenue of $5M+. EBITDA of 1M+ Location: Continental U.S.
in**@Wo**********************.com
The service in question was mosquito treatment.
We live on the U.S. East Coast, an area with a well-deserved reputation for those nasty little critters that can plague the unprepared in the summer months. Anyone who remembers the opening chapters of Michener’s Chesapeake has an idea to what lengths of frustration and anger they can drive one to.
Over the years, many companies – mostly chemical ones – worked to develop mosquito repellants that the consumer would spray on or rub into their skin. Original efforts met with some sales resistance because they stank; literally. Chemical recipes were tweaked, perfumes were added and eventually several companies arrived at serviceable products that would not overly offend the olfactory nerves.
But though the product for the most kept the little boogers off one’s skin, none of these products did anything to thin the herd from one’s immediate surroundings. Enter The Entrepreneur.
The Entrepreneur
In 2011, four neighbors and friends, one of whom was an Army Ranger, embarked on a mission to make their properties usable in the summer. They developed a supposedly “all-natural” formula that could be sprayed in a mist over lawns, gardens, wet areas, wood lines, etc., that appeared to keep the “‘skeeters” at bay. The effect lasted about 30-45 days – a condition that lent itself to recurring revenue from repeat business via service contracts. The company they founded was Mosquito Joe, “Making Outside Fun Again!”
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Being a schmaat cookie, The Entrepreneur chose franchising to expend – and expand he did.
The Franchise
As we’ve often discussed, franchising is an excellent method of expanding a small business using other people’s money and within six years Mosquito Joe had awarded 288 active territories across 34 states and the District of Columbia.
Many territories are owned by so-called “Master Franchisees” – franchisees that acquire the rights to a large geographic area and then open multiple locations of the same business. We, in fact, have performed valuations for several Master Franchisees; from carpet cleaning to landscape contracting, companies that owned dozens of locations of the same business.
Anyone who has been reading this blog for any period of time – or any Member of The Brokers Roundtable℠ – knows that such a business is of great interest to both roll up specialists and to private equity groups. Mosquito Joe was a tantalizing target – for both, as it turned out.
Enter the “roller-upper”.
The Roll Up
The Dwyer Group was founded in 1981 as the franchisor of Mr. Rooter, a plumbing service that specialized in unclogging drains. It – The Dwyer Group – grew not only Mr. Rooter but by the end of the 1990s acquired or launched five new brands, all focused on services, most of which were for the residential market.
In need of capital to fund its growth, The Dwyer Group went public in 1993. But private equity does not limit itself to small, private companies and 10 years later, The Dwyer Group was bought by The Riverside Company which injected fresh capital to kick start further growth. Like all PEGs, Riverside had the return its investors’ money by a certain date and, in 2010, sold the business to another PEG – TVZ Capital Partners – only to buy it back in 2014 for another growth spurt.
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In the early 2000s, Dwyer continued its grow and by the end of 2017 owned and franchised 20 different brands from Project Painters and The Grounds Guys to Mr. Appliance and Molly Maid.
If you’ve been paying attention, you can see that each of these brands markets a service primarily to home owners and small and mid-size residential property investors and small businesses. The idea was that someone who needed their drains unclogged probably needed some painting, yard work, roof repair, handyman assistance and more.
The Dwyer Group was hardly sated. They saw more and more opportunity.
But their appetite may have out-stripped their capital. They wanted to continue acquiring (or launching) businesses in the home services market but that growth requires some deep pockets. Enter said pockets
The Private Equity
Private equity groups including Riverside and TVZ Capital Partners, invest in companies that they belief have serious upside potential in the near term. The idea is to grow the acquired company and then exit in a few years – generally by selling to a larger PEG, a publicly-traded company or going public itself. Next in line in this procession was Harvest Partners, a private equity firm founded in 1981 to invest in “middle-market” companies. The Dwyer Group, by 2017 a $1.3 billion (revenue) company, fit the description perfectly.
In 2017, The Dwyer Group launched Neighborly, a comprehensive home services platform that leveraged its brands in the US. One year later, Harvest Partners acquired The Dwyer Group (now Dwyer Franchising) and the Dwyer Group became Neighborly. With capital from Harvest it grew into is the world’s largest home services franchisor with 32 service brands focused on repairing, maintaining and enhancing homes and businesses.
Like all private equity firms, Harvest had to return its investors’ capital – hopefully with a handsome profit – within a fairly short window, generally five to seven years. In 2021 Harvest cashed out of Neighborly by selling to publicly-traded KKR (Kolberg Kravis Roberts), a New York-based leveraged buyout firm.
The Bottom Line
We’ve often written about how we get approached weekly by small private equity firms looking for companies providing residential or commercial services to acquire. (We list these targets in the search space in The Brokers Roundtable℠.) We’ve described how such firms are rarely long-term investors and how they focus on fast-growing companies or ones that, with the right amount of capital and management, can be increased in value in a relatively short time.
We’ve also described how smaller private equity firms sell to larger PE firms as the businesses they own grow. Wash, rinse and repeat. Right now we see enormous interest in home and residential services businesses from private equity.
The story of Mosquito Joe is the story of a couple of friends trying to find a way to provide their families with the ability of enjoy their property year ’round. With good counsel, they were able to grow a business – through franchising – that appealed to multiple strategic buyers in the franchise industry. The Dwyer Group, essentially rolling up specific types of franchise companies – home services – was the ideal strategic buyer. Riverside, TVZ and Harvest – larger and larger strategic buyers – were the capital that kept the ball rolling.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at
jo*@Wo*******************.com
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If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at
jo*@Wo*******************.com