Since forming Roark in 2001, the firm has purchased five franchise businesses (Carvel, Money Mailer, FastSigns, Cinnabon and Seattle’s Best Coffee International) and one company that owns all of its stores (Pike Family Nurseries).
You’ve been very active in the franchising space. How did you get started?
I have pursued franchise companies since 1993 and finally purchased U.S. Franchise Systems in late 1995. I moved to Atlanta and ran USFS on a day-to-day basis with my partner. This active operating role gave me appreciation of and respect for small business owners and operators, which is the essence of the franchise business.
What opportunities exist in doing franchising LBOs?
Although the overall franchise industry is large and growing, the vast majority of franchise companies are still owned by entrepreneurs who built their business from scratch. The opportunity in franchising is to help these entrepreneurs gain critical mass for their company by providing resources (capital, people and systems) and advice. Success in franchising is best achieved with an active, hands-on approach.
Roark looks at both franchisor and franchisee opportunities. In both cases, strong unit-level economics are critical. With that in mind, the key to success in franchisor investments is [achieving] large-scale, but high quality new-store growth with franchisee investments is often focused on the improvement in profitability of individual stores.
What hurdles are present in franchise investments?
In order for a brand to gain critical mass through franchising, a company requires a significant up-front investment in its infrastructure (selling, marketing, brand management, training, construction/design, finance/accounting, administration, legal, systems, purchasing, etc).
Many entrepreneurial-owned franchise business have not yet made the required people and systems investment for the future.
Is it more difficult instituting changes to a company when you need to get a number of franchises onboard with your ideas versus just one management team?
Yes. If you own all of your stores, you can demand changes of your employees. In a franchise system, it is very difficult to demand anything. To accomplish change in a franchise system, you must build trust and rapport with a large number of franchisees, each of whom can have different individual circumstances, different time horizons, different experience or sophistication levels, or different opinions. Just think about your Thanksgiving dinner table-when is the last time your entire family agreed unanimously on anything? As a result, with hundreds of different individual franchisees, it takes time, patience, empathy and charisma to get changes implemented in a franchise system.
Do you see a lot of other firms participating in franchise company investments?
We do see other private equity firms participating in the franchise industry. However, we do not see many firms that have franchising as their primary focus. I think that is because many franchise companies are just too small for most private equity firms to be comfortable with (i.e., they cannot put enough equity money to work in most franchise deals to justify the time of the investment professionals).
Who’s a better Carvel character for a cake, Fudgie the Whale or Cookie Puss?
Fudgie the Whale. When you turn the Fudgie mold upside down, you can use it to make a Santa Clause cake.