Multi-Unit Franchisee Magazine Issue II, 2016 | Page 74

Consolidation Nation
Private Equity and Restaurants

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rivate equity firms have shown increased interest in restaurant companies in the
past 10 or 15 years, says Steve Rockwell, managing director of consumer investment
banking focused on restaurants at BTIG. One reason, he says, is that traditional
retail has become less attractive as an investment, mainly because brick-and-mortar
retailers are at risk due to the rise of the Internet.
“Investors are recognizing the restaurant industry’s attractive investment characteristics,” says Rockwell, noting that nationally known brand names have “incredible power,”
including consumer awareness, predictable unit-level economics, and established cash flows.
The model for established restaurant brands and their franchisees has been proven over
the years, backed by data from hundreds or thousands of locations to support financial
claims to investors and lenders alike. And as large operators become larger, “The risk of
investing in a franchisee is generally less than investing in a younger brand,” says Rockwell.
“Some scale is important to most private equity investors because they have a lot of
money to put to work. The more money they can employ in one investment, within reason, the higher the interest level,” he says.
“Many private equity firms want to develop a large company and have a strategy to
use the acquisition of a franchisee as a platform to add additional franchisees to leverage
their G&A, get economies of scale, and grow the value of their investment,” Rockwell says. “You need only one CEO or COO, whether
you have 20 or 100 locations. There is definite value in that strategy.”
Restaurants with real estate are a further draw for private equity
because following an acquisition they can do a sale-leaseback on the
property, significantly lowering the cost of a transaction and preserving capital for additional deals.
An example is NRD Capital Partners (part of the private equity
fund established by longtime restaurant franchisee and 2016 IFA Chair
Aziz Hashim), which did precisely that last summer. After purchasing
121 Frisch’s Big Boy Restaurants in an estimated $175 million deal,
NRD sold the real estate beneath 19 Cincinnati-area restaurants to a
real estate investment trust for nearly $47 million in a sale-leaseback
Steve Rockwell
deal under which NRD will continue to operate the restaurants.
Overbuilt for growth
BIP Capital, an investment firm based in Atlanta, is one of those private equity firms
gearing up internally for growth, primarily on the franchisor side, to support its investments in Tropical Smoothie Café and Tin Drum Asiacafé—with plans for further growth
in the franchise space.
“We’ve overinvested in infrastructure for franchise development, support, and building revenue through the system,” says Tom Wells, vice president at BIP Capital, who also
leads BIP Franchise Finance, the $20 million fund mentioned earlier.
In general, he says, private equity firms today have a lot of capital to put to work and
can overbuild their infrastructure with the intent of adding new brands and/or franchisees
to leverage their capacity, as well as their growing knowledge about franchising. “Their
returns are nice, particularly for franchisee private equity firms that know the space well
and have built great teams,” he says.
His company, he says, is looking to invest in emerging brands, targeting those with
10 to 100 units. “We give them capital and tell the entrepreneur-founders we can do all
the things they don’t like to do, such as training, franchisee issues, etc. We have the infrastructure in place to help them do that easily and quickly,” he says.
When a brand reaches 10 to 50 units, he says, the founder tends to run around putting out fires. “That’s when then you have to build a real team,” which he says is not only
hard to do, but expensive—which is where BIP Capital comes in.
The approach is the same on the franchisee side, he adds—finding franchisee organizations that could use this same type of help to grow. “Private equity firms have figured
out that as they build the infrastructure and expertise, they can operate the franchisee
better than the small franchisee could.”

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bilities,” he adds. “It’s not everybody’s
cup of tea to manage multiple markets
across the country. If you’re going to
do it, try it with one market first and
see how you do. It’s not for everybody,
I can tell you that.”
Umphenour concurs, adding that
a lot of franchisees can grow from 5
to 10 or from 20 to 30 units, “but to
make the next jump to triple digits is
a different game.”
Perales says many other franchisees
are growing at a faster rate than he is.
But do they have the infrastructure in
place to handle the increased numbers?
“For us to add 100 is not as heavy,” he
says, as for a smaller franchisee to grow
from 20 to 40 or 60 units.
“You’re under the influence of your
franchisor; but 90 percent is under your
control. And once you get to a certain
scale, you have a regular dialogue with
the franchisor and are very interactive
with them,” says Flynn.
“Anyone can do what we’ve done,”
he adds. “Success in the restaurant
industry is mostly a function of running your restaurants well. If you do
that, capital will be available.” And that
means paying attention to every detail.
“I don’t think you get big unless you
do the small wel l,” he says.
And while there’s always concern
about debt compared with cash flow
when looking to grow, Umphenour
says two factors are critical in building a franchise company: choosing the
best sites for each brand, and choosing
the right GMs and operating partners.
“If you get those two decisions right
and are not leveraged too highly you
can build a company and be successful,” he says.
Then there’s the leadership factor—who the leader is, how well they
do their job, and how their individual
goals fit with the organization. A good
leader, he says, understands the business, how to run a company, is skilled
at bringing along and growing strong
people, and can attract leaders across all
disciplines. “Like so many other things,
it comes down to individual leadership,
the decisions you make, and the people
you surround yourself with. I’m a big
fan of having big dreams.”
One final piece of advice from Umphenour: “Have fun. If you’re not having fun at what you do, working with
people you enjoy, go somewhere else.”

MULTI-UNIT FRANCHISEE IS S UE II, 2016

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