Multi-Unit Franchisee Magazine Issue II, 2016 | Page 72

Consolidation Nation
had potential,” he says. And with Cheryl
Bachelder on board as CEO since 2007, he
said, “She was making all the right moves
and we thought, ‘Maybe we should get on
the bandwagon with Popeyes.’” In 2012,
they added 49 more and today have 161.
On the franchisor side, that’s a strategy
Applebee’s and Panera have embraced:
fewer, larger franchisees who are experts
at operating the brand and have proven
themselves capable partners focused on
building the system.
This makes sense from the franchisor’s
point of view as well as the franchisee’s,
says Perales. If he were a franchisor, “I
would rather have a few franchisees that
are strong. There’s value for franchisors
to have stronger franchisees,” he says.

Russ Umphenour
“I don’t think there’s a right or wrong
way to do it. It depends on how you want
to build your business,” says Russ Umphenour, managing partner at 15C, LLC,
following 6 years as CEO of Focus Brands.
“The key is building the infrastructure to
be able to handle it—not only operations
and marketing, but real est ate, finance,
construction, and all that goes with it,”
says Umphenour, founder and CEO of
the RTM Restaurant Group, which he
grew to 775 Arby’s over 32 years before
selling it to the franchisor in 2005. He’s
also the chair of Chicken Salad Chick and
a 10-unit franchisee of Shane’s Rib Shack.
Finding funding
At the Dhanani Group, the company funded
its growth through cash and banks, and
has never used private equity. Why not?
“Too much interference, too much control, and money is expensive from them,”
says Dhanani. “If we can fund our own

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growth, why use private equity?”
On the other hand, private equity
was “very helpful for us to get started,”
says Flynn. Since starting the company
in 1999, he has had two different private
equity partners, GS Capital Partners and
Weston Presidio. His first big acquisition
of 64 Applebee’s in 2001 made him the
first to attract a significant private equity
investment into a franchise business. “We
couldn’t have done that without private
equity. Both were great partners,” he says.
However, in 2014, he left the world of
private equity funds behind. “We brought
in a pension fund as a partner,” he says,
and recapitalized the company. The Ontario Teachers’ Pension Plan invested
about $300 million and, together with
Flynn and his senior management team,
acquired the stakes owned by the private
equity funds. Flynn was now the first to
attract direct pension investment into a
franchise business.
Flynn says he’s now “taking the next
logical step, bypassing the middleman”
with the direct investment from the pension fund. Another advantage, he says, is
that whereas private equity funds have a
5- to 10-year horizon to build and sell
their investments, this is not the case with
the government-run pension fund, which
has more than $170 billion in assets and
is in for the long haul.
Perales, who funded his first franchise
with an SBA loan in 1997, has come a long
way. To fund his ongoing acquisitions
and take advantage of strategic buying
opportunities, he assembled a bank syndication loan a few years ago. “It gave us
a lot of capacity to get money at a low

Tom Wells

price,” he says. “It’s a no-brainer when
rates are very cheap and you can buy at
a reasonable price.”
In addition to capital, private equity
firms with experience in franchising can
also contribute their management and
financial savvy to franchise brands and
franchisees alike. One reason behind their
growing interest in franchisee organizations, says Tom Wells, vice president at
BIP Capital in Atlanta, is that “valuations
in the franchisor market have gotten crazy.” This has made franchisees’ valuations
very reasonable by comparison. Thus, as
private equity firms have grown more
comfortable on the franchisor side, they’re
now seeing franchisee valuations and cash
flows as reasonably stable platforms for a
healthy return on capital, he says.
“It’s a lot less risky to invest in cash
flow versus building a new location,” says
Wells. Add in an existing customer base,
and it can be highly profitable for a fund
to invest in a franchisee, renovating stores
they can improve quickly, and then contributing their management expertise to
help the franchisee expand.
“Roark pioneered this in the franchisee space with Focus,” says Wells. “You
can create really competent management
teams to run the different brands with
best-in-class talent, reduced overhead
costs, and best practices between brands.”
BIP Capital’s franchise brand investments
currently include Tropical Smoothie Café
and Tin Drum Asiacafé
The BIP Franchise Accelerator, a division of BIP Capital, not only provides
advice to franchisees of those two brands,
it provides funding through BIP Franchise
Finance, a $20 million internal financing
program to help franchisees in its portfolio
get the money they need to grow. Formally launched in January, the program
will supply up to 80 percent for existing
franchisees to open new locations. Also,
with the commercial real estate market
tightening, this fund can preapprove a
loan, accelerating funding for a new unit,
allowing franchisees to nail down prime
locations and the franchisor to open more
stores through its better franchisees.
Can you get too big?
“No,” says Dhanani. “To me, at this point
where we are, I believe we can manage
twice as much as we have today. At some
point you can get too big, but I don’t think
we’re halfway there,” he says.
“Larger comes with larger responsi-

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