Before selling, LLCP waited for spa franchisor to prove it had bounced back from covid

“We wanted to get through 2021 to have a full year of non-covid impacted performance before exiting,” said LLCP’s Schwartz.

Levine Leichtman Capital Partners will announce later this morning that it has sold Hand & Stone Massage and Facial Spa, a franchisor and operator of spas offering massage, skincare and health and wellness services.

Founded in 2004 and headquartered in Trevose, Pennsylvania, Hand & Stone currently operates nearly 550 locations in the US and Canada. According to sources familiar with the deal, Hand & Stone grew EBITDA by more than 8x under LLCP’s ownership.

LLCP held onto the asset a year longer than originally planned to ensure that the company had bounced back fully after covid hit the person-to-person service industry extremely hard. PE Hub conducted an exclusive interview with Andrew Schwartz, partner at LLCP, to talk about the growth strategy as well as the exit strategy.

“We invested in the company in 2015, and it was growing well,” Schwartz said. “It had double digit same store sales and was signing and opening about 50 franchise units per year when we invested, with just under 200 units but also a backlog of approximately 100 signed but unopened franchise units.”

He noted that LLCP participates in a niche of PE: structured private equity.

“We look to partner with exceptional management teams and market-leading businesses that are in a good spot and doing great things, and then we bring our expertise to bear to dial that up and help them enhance their growth,” Schwartz said. “We do that with a much more moderate amount of third-party debt than your typical leveraged buyout so that we can support the company’s growth and take EBITDA from X to a multiple of X, rather than through traditional financial engineering.”

And the Hand & Stone investment is a “perfect example of that.”

“Between that and the embedded growth in the units that were recently opened, as there was a maturation curve due to the company’s membership model, we knew that there would be strong growth right off the bat,” he said. “To help them on top of that, we bolstered the management team and supported the efforts to drive membership growth, pricing at the spa level and enhanced spa services.”

Hand & Stone was one of the first in the massage franchise space to make skin care a core part of its service offering, so when LLCP invested, skin care was about 20 percent of its system sales and by the time of exit, it was about 30 percent.

Andrew Schwartz, LLCP

Growing unit count, changing the royalty rate from 5 percent to 6 percent and increasing vendor rebates and gift card sales “drove double-digit same store sales growth every single year except for 2020, while the unit count also grew from under 200 to over 500, as it’s about 550 right now,” Schwartz said.

Last but not least, LLCP helped the company through inorganic growth with M&A activity, as the company hadn’t done much acquiring prior to LLCP’s ownership. During the seven-year hold period, there were 11 deals. The company bought back seven regional developers (a regional developer is someone who buys the rights early on to sell a territory) the company’s Canadian master franchisee, another brand in Canada called Massage Experts and two franchisees in Florida, “which have been growing really well since we bought them,” according to Schwartz.

LLCP held onto the asset a little longer than the average PE time frame – but there was a method behind it.

“When you have a significant signed but unopened backlog, you have strong visibility into the openings over the next one to two years: so for us, particularly in the franchise space which we have a lot of experience and success in, we are able to have the confidence to hold companies like Hand & Stone a little bit longer than average,” he said. “If you were sitting at any point in time and knew that this company is going to continue to grow at a really strong rate for at least the next two years but probably much longer, why wouldn’t you want to continue to hold the company a little bit longer?”

And even though the company, a multi-unit business providing person-to-person-services, managed “amazingly through the pandemic,” covid had an impact in 2020, so LLCP wanted to get through 2021 to have a full year of non-covid impacted performance before exiting.

Judging by the results, that was the way to go.

“We did a full auction, marketing process for the sale, and the question of ‘how is this company going to bounce back from covid?’ was off the table, because it already did bounce back, it led to a competitive process and a very successful outcome.”

This transaction follows a slew of significant exits for LLCP, which is one of the leaders across the franchising industry, having invested in 26 brands over the past 15-plus years. Specifically, Hand & Stone is LLCP’s fifth recent successful exit in the franchising sector.

LLCP mainly invests in the following sectors: consumer, education, healthcare and services. To read more about the firm’s healthcare investment themes and thesis’, read our healthcare spotlight series profile.