“These changes to store-level operations require monitoring, training, and better alignment of worker incentives, suggesting PE firms improve management practices throughout the organization,” the authors wrote.
The Oct. 6 paper, “The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry,” is written by Shai Bernstein, assistant professor of finance at Stanford Graduate School of Business, and Albert Sheen, assistant professor in the finance unit of the Harvard Business School.
All told the authors looked at the records of health inspection conducted from 2002 to 2012 of more than 50,000 individual restaurants based in Florida; of the total, about 3,500 belong to chains owned by buyout shops. In particular, the authors compared the performance of company-owned restaurants, presumably more responsive to sponsor direction, with franchised restaurants largely independent of that direction. Among the findings:
* Restaurants don’t commit as many health violations after being acquired by sponsors, especially those violations “whose potential hazards are deemed most dangerous for customers”;
* Such improvements do not result from hiring more employees or raising menu prices, suggesting “not only appropriate capital budgeting” at the sponsor-backed restaurants but also “better training, monitoring, and alignment of worker incentives through the chain”;
* The improvements created a “spillover effect” in which franchise restaurants located near the sponsor-backed restaurants were compelled to step up the quality of their operations as well.