Franchisees are apparently less content these days with simply operating restaurants.
Over the past two weeks, franchisees have scooped up Fuddruckers, Au Bon Pain and Taco Cabana in a trio of separate deals.
That has accelerated a recent trend of franchisees buying up brands. Over the past several months, franchisees, have acquired Milio’s Sandwiches, Boston Market, Corner Bakery and Cici’s. Other brands have fallen under franchisee control, too, including Taco Bueno, Roy’s and Mooyah Burgers.
There’s a simple reason for many of these deals. The brands can be had cheap. Franchisees see those prices and believe their operations experience can lead to a turnaround.
But doing so is not so easy. These are struggling brands, after all, and turnarounds are difficult in even the best of circumstances. “Some of these franchisees have gotten tail-end deals,” said John Gordon, a restaurant consultant out of San Diego. “They’re almost the buyer of last resort.”
And franchisees have a learning curve. Many of them spent their careers operating restaurants for other brands. Their incentive was to find efficiencies. They may or may not spend what it takes on things like marketing and brand support that can be crucial for a concept’s success.
“Some attention to the so-called soft skills is required,” Gordon said. “They’re going to have to amp it up on marketing. They’re not getting premier assets. They are going to have to be creative on the marketing side.”
Plenty of franchisees that have found success operating their own brands, either those that they’ve acquired or those that they’ve started. Aurify Brands started out operating Five Guys restaurants, created a handful of concepts and most recently made acquisitions of concepts out of bankruptcy, notably Le Pain Quotidien.
A&W Restaurants was acquired in 2011 by some of the company’s operators and has done fine, though it has been shedding cobranded locations in the years since then. “Our AUVs have gone up dramatically since the acquisition,” CEO Kevin Bazner said in an interview earlier this year. “We’re attracting more interest not just from new franchise partners but from existing franchise partners that are wanting and committing to do additional locations.”
Roy Rogers, all but left for dead in the 1990s after a purchase and conversion by Hardee’s, continues to operate decades later after it was acquired by a franchisee in 2002. Carrols Restaurant Group operated both Pollo Tropical and Taco Cabana before spinning them off into Fiesta Restaurant Group in 2014. It was only since then that the chains struggled.
But for the most part, franchisees owning brands have a mixed track record at best. And it’s rare that the acquired company generates the kind of turnaround that puts growth back on the map again.
In some situations, the franchisee took on a role quite similar to a low-end investor seeking to pull whatever cash they can from a struggling concept.
Food Management Partners at one point was one of Buffalo Wild Wings’ largest franchisees before it started buying up brands, too, and often at ultra-low prices. The company bought up chains like Coco’s and Carrows, Old Country Buffet owner Ovation Brands, Furr’s and Don Pablo’s. It dramatically cut costs and collected cash while the brands themselves rapidly declined before they were either unloaded again or sent into bankruptcy.
That’s not the only way in which the companies have taken a page out of the low-end investor playbook.
In recent years, franchisees have taken the “loan-to-own” route of acquisitions, deploying a controversial strategy used for years by hedge funds. They buy the debt of struggling companies, force them into bankruptcy, then convert that debt to equity and take them over.
Sun Holdings acquired Taco Bueno two years ago using this method. Aurify acquired both Le Pain Quotidien and Maison Kayser by first acquiring their debt.
And many of the franchisees buying the companies already have extensive holdings. Yadav Enterprises, which is buying Taco Cabana, has more than 400 locations. Sun Holdings operates more than 1,000.
That can make it difficult for these companies to give the acquired brands the attention they deserve. And these companies often have heavy debt loads, which can make it more challenging for them to make the investments necessary in any turnaround.
“The franchisees get taken in by the siren song of easy money,” Gordon said.
Still, these can be low-risk deals. Many of these brands may not have even found a buyer had the franchisee not taken over. Or the task would have gone to some bottom feeding hedge fund, anyway.