facebook pixal
Financing

Franchisee Carrols may give up its right to buy Burger King units

The company is negotiating with the franchisor to reduce unit openings and remodels and expects to give up an exclusive right to buy existing restaurants that are up for sale.
Photograph: Shutterstock

Carrols Restaurant Group, Burger King’s largest franchisee, expects to give up on a unique ability that helped make it a mammoth restaurant company with more than 1,000 locations.

Speaking on the company’s third-quarter earnings call on Thursday, CEO Dan Accordino said that Carrols expects to give up the right of first refusal that it received from Burger King as part of an unusual deal with the franchisor back in 2012.

That right has enabled the Syracuse, N.Y.-based operator to come in and buy any Burger King restaurant in several states after a sale agreement has been negotiated. The company has used that right to buy up massive numbers of restaurants.

Dan Accordino, Carrols CEO, said that the right “has diminished in value in the current QSR environment,” according to a transcript of Thursday’s earnings call with investors on the financial services site Sentieo.

Carrols said it expects to give up that right as part of a negotiation with Burger King to reduce its development commitment to just 50 locations over the next five years. Burger King would also remove annual remodel commitments.

Carrols now plans to focus on a slower rate of “organic growth.” Accordino said the company intends to build eight to 12 new restaurants per year beginning in 2021. It also plans to remodel 20 to 25 restaurants per year.

Carrols, which operates just over 1,000 Burger King restaurants and 65 Popeyes units, has been aggressively cutting capital costs all year long to increase its cash flow generation. The company amassed large amounts of debt to fund its acquisitions and its remodel responsibilities, and the debt has become a burden recently.

Carrols has $496 million in long-term debt and lease liabilities, up from $471 million a year ago. But cost cuts and sales growth this year have helped the company earn some profits—net income was $3.5 million, compared to a $6.8 million loss in the same quarter a year ago, due largely to interest payments on its debt.

The company is holding off on acquisitions until its ratio of debt to earnings falls below a certain level, which Accordino expects next year. After that, he said, the company expects to make “bolt-on restaurant transactions” as long as it keeps its debt level down.

Yet the willingness to give up that right of first refusal suggests the company will dramatically slow its acquisitions, at least within the Burger King system. The franchisee is by far Burger King’s biggest operator.

That right has spurred immense growth. Carrols acquired that right in 2012, at a time when it bought 278 locations from Burger King itself, which nearly doubled the company’s size. That right has helped fuel numerous acquisitions in the years since that have doubled the company’s Burger King holdings further.

At the same time, the right can be controversial within franchising when it is used. That’s because, when franchisors use that right of first refusal it can hold down the prices investors are willing to pay for a location put up for sale—after all, a buyer may not want to put the work into buying a location when someone else could step in and buy the restaurant.

And Accordino noted that the right hasn’t come into play in a while. “We haven’t done a right-of-first-refusal acquisition in some while, 18 to 24 months,” he said. “Deals that we have done have been deals that either the seller came to us or Burger King came to us and asked us to look into the opportunity.”

Accordino also noted that the overall market for restaurants all but ground to a halt this year. “There haven’t been a lot of transactions in 2020 because of the whole COVID thing,” he said. “We would expect that the deal flow will increase in 2021.”

Want breaking news at your fingertips?

Get today’s need-to-know restaurant industry intelligence. Sign up to receive texts from Restaurant Business on news and insights that matter to your brand.

Trending

More from our partners