American Leak Detection Franchise Owner Battles Parent Company Over Failed $70M Sale

Matthew Hill is the owner of an American Leak Detection franchise in North Little Rock that was started by his parents. (Steve Lewis)

Matthew Hill of North Little Rock and other franchise owners of American Leak Detection thought they had secured a deal to sell their businesses to a private equity firm last year.

But the deal went down the drain.

Parent company Water Intelligence of London held the right of first refusal if it could match the tentative offer from Banner Capital Management LLC of Lehi, Utah.

But instead of matching Banner’s price or allowing the sale to go through, Water Intelligence never responded to the offer, effectively scuttling a deal that would have merged 10 franchises into one company, Hill said. He owns the American Leak Detection franchise in North Little Rock, which services most of Arkansas.

“Water Intelligence doesn’t want to pay the price,” Hill said. “They had their first right of refusal, and we got no answer.”

The merged franchises would have had a value of about $70 million, Hill said. Franchise owners would have owned stock in the new company and continued to work at their businesses, he said. And the new structure would have made it easier for the shareholders to sell when they wanted to exit the business, Hill said.

He and the other owners have hired attorney W. Taylor Stanley of South Carolina to file arbitration claims against Water Intelligence.

Water Intelligence’s executive chairman and majority shareholder, Patrick DeSouza, didn’t return a call seeking his side of the story.

American Leak Detection’s CEO Will Knell, who owns a franchise in Dallas, didn’t respond to a message from Arkansas Business.

Hill said Water Intelligence wants the franchise owners to sell at its price and under its terms. “We should sell to whoever we want to sell to for the price that they’ll pay,” Hill said.

Hill accused DeSouza of buying individual franchises and operating them as corporate entities so the company doesn’t have to share that revenue.

Water Intelligence’s 2023 annual report said that the company’s growth plan was to buy American Leak Detection franchises and convert them to corporate-operated locations. That way Water Intelligence could capture some of the $100 million in gross sales that the franchisees generate, it said.

Water Intelligence received $6.7 million in royalty fees franchise owners paid in 2023 based on their annual sales. It received about the same amount the previous year. In 2023, it had 78 franchises operating more than 100 locations across 46 states and in Australia and Canada.

“They take our money every month, our royalties, and we don’t see any reinvestment into the franchises,” Hill said.

Hill’s location, which has 21 employees, generates more than $3 million annually by finding leaks and having its plumbers repair them. Bobbie and Ed Hill, Hill’s late parents, bought the franchise in 1995. Hill, 58, started working full time at the franchise in 1997.

On St. Patrick’s Day in 2023, some franchise owners began laying the groundwork for a sale, Steven West, owner of American Leak Detection of Columbus & Central Ohio, told Arkansas Business last week.

Eventually, in 2024, the group developed “some ideas of how we could structure leadership after the group got put together and was sold,” West said.

The group’s broker found several people in the summer of 2024 who were interested, including Banner Capital. Banner Capital didn’t return messages from Arkansas Business.

The deal with Banner meant that all the franchise owners would have been able to reduce some costs through synergies, Hill said.

At the time of Banner’s proposed offer, the franchise owners knew that Water Intelligence had the right of first refusal to match an offer or approve the sale.

Some owners thought Water Intelligence couldn’t afford to buy 10 franchises at once, because it had usually bought no more than two or three franchises a year, West said.

Banner Capital signed a letter of intent.

Water Intelligence told the group that “we didn’t meet two of the requirements of the franchise agreement,” West said. Those were that “we had not paid the transfer fees and we did not meet the requirements of an attempt to transfer.”

He said the group “immediately remedied one, by transmitting the transfer fees.”

Meanwhile, Banner was waiting on Water Intelligence’s decision on its right of first refusal, but it never came, West said.

Banner might have spent between $250,000 and $500,000 doing all of its due diligence and all of its quality of earning studies, West said. But even after that expenditure, it had no assurance that Water Intelligence wouldn’t exercise its right of first refusal, he said.

In October, the franchise owners asked for a response from Water Intelligence. Hill said the only response the group received from Water Intelligence was that it had the right of first refusal.

Banner then pulled its offer, Hill said.

Hill said he thinks that arbitration will rule in his favor and once it does, the group will return to Banner to see if it can revive the deal.

“We think they’ll come back,” Hill said. “We really do.”

If not, Hill said he wouldn’t sell his company to Water Intelligence’s DeSouza, because they have different management styles. “This is not friendship,” he said. “This is business.”