At age 36, Mike Kulp sits atop a franchise empire that generated sales of nearly $700 million from 570 restaurants in 2017. How he got there is an illustration of how restaurant franchising is evolving into a business where scale and sophistication are no longer exclusive to franchisors. Yet it’s a homespun idea older than Kulp himself that enabled his KBP Foods to morph into an enterprise rivaling many brand owners in size and financial might.
The story starts in the ancient days when franchisors were okay with operating restaurants and mom and pops were content with the livelihood a handful of stores could provide. We’re talking all the way back in 2000.
Kulp was taken under the wing of Gary Zancanelli, who’d learned the business from the original franchisee of KFC, Pete Harman. Zancanelli and his son, Gary Jr., had just purchased five wheezing KFCs in Colorado. Kulp was hired away from an Applebee’s franchise to help father and son bring the stores back to sound health.
No sooner did he join the operation than an opportunity was presented to the Zancanellis. Another KFC franchisee wanted out, and father and son could double the size of their operation literally overnight. Kulp was suddenly ringside to an acquisition and the challenge of assimilating distinct cultures into a unified $40-million operation. By 2001, he was COO of Zancanelli Management.
The Zancanellis harkened back to a time when franchisees were focused on operations, heads down and hands dirty from doing whatever was needed to ensure success inside a restaurant’s four walls.
“The one thing that they weren’t old school about was how to engage restaurant leaders on the above-store level,” says Kulp.
Besides coming up with the idea for KFC’s bucket and slogan, “Finger lickin’ good,” Pete Harman had experimented with different incentives for multi-store supervisors within what would become his 350-unit franchise, Harman Management.
Back in the 1950s, ‘60s and ‘70s, he hit on the idea of giving above-store managers a piece of the business, figuring no one would be more conscientious and invested than an actual owner.
The Zancanellis had paid attention. “They realized, if you could engage [executives’] wallets, you could engage their heads and hearts,’” recalls Kulp.
The idea was a game-changer for Kulp in two ways. First, “that really afforded me the opportunity to buy into Zancanelli Management,” he explains. Once he became a co-owner, “Gary [Jr.] and I worked on everything together. There wasn’t a strategic discussion a compensation discussion and operational discussion that I wasn’t involved in.”
They learned together how to scale an operation. “It was the first business he and his father had been involved in on an ownership basis,” Kulp continues. “We had to figure out how we were going to build our own assessment tools, to handle debt financing and the sophisticated side of the investment equation.”
The other benefit of Zancanelli’s fraction-of-the-action incentive was the talent it enabled Kulp to attract after Gary Jr. decided he was ready to exit the business. Kulp found an institutional investor, Boyne Capital Partners, to provide the money in 2010 to buy the company, which he renamed KBP, for Kulp Boyne Partners. The name stuck, though Kulp would subsequently work with a variety of equity partners.
At the time, though he might not have realized it, Kulp was benefitting from currents gaining force within the franchise community. Younger generations often had little enthusiasm for taking over a family’s longtime franchise and wanted to cash out. Other operators felt the pressure on margins of increased costs and the heightened competition of a maturing market. Meanwhile, stockholders in big public franchisors were wondering why the companies were tying up capital by owning and operating restaurants. Why not unlock that money by franchising the stores?
Deals abounded, in part because franchisor Yum Brands was looking to divest its company-operated KFCs and Taco Bells. “We went from $70 million [in sales] to $130 million, to $180 million within the first 12 months.,” Kulp recalls.
All told, KBP completed 23 acquisitions in nine years, with $185 million spent in 2017 alone. The most recent deal was the purchase of yielding a portfolio of KFC, Taco Bell, Long John Silver’s and First Watch franchises. As Kulp notes, “we’ve done 23 deals, but probably said ‘no’ to 100 more.”
What he terms 100-miles-an-hour growth was possible, Kulp says, because of the inspiration provided by the Zancanellis for setting up an infrastructure.
The organization is flat by design, with three levels of supervision and a relatively narrow scope of responsibility for executives. “Most chains have someone responsible for two or 300 hundred stores in several markets,” he explains. “We put someone in one city and that’s all they’re responsible for—that’s it. We don’t test their elasticity by having them stretch to assume responsibility for another market.”
In total, the 570-unit operation has nine VPs, two SVPs and a COO. All, says Kulp, are in the field, close to the stores in their charge.
The incentive to maximize a territory is the individual’s stake in the business. In one program, senior execs buy an interest for around $100,000 to $400,000, with financing provided on attractive terms by the company if need be. “They’re someone who has a very comprehensive skill set, who could be put into the roll of a division president,” Kulp continues. “They have all the hiring discretion they need. They have all the accountability, with a lot of autonomy.”
But they also have a significant equity stake in a growing company, something usually deferred for senior officers and totally missing at the regional or divisional level.
A second program extends equity to managers who are closer to customers. If selected, they can work toward a partnership through a vesting process, using their bonuses. The company helps by matching the bonuses, which are rewarded on the basis of the top line (1%) and bottom line (4%) of a store’s P&L.
They’re also put through an intensive education process so they understand the legal and financial aspects of being owners. “There are tons of complexities when you become a partner in a business,” says a spokesperson. “That program is designed to show these folks how to become an equity program.”
About 36 individuals have become partners through that route.
Only two employees who have participated in either track have left the company, and that includes one individual who became COO of another large franchise, Kulp says.
When KBP acquires a company, it usually keeps the management layer above the store level, and installs its own people in higher supervisory levels.
“The most influential decision we ever made was to give equity to the first two people we gave equity to,” says Kulp. “Watching what happened to those two people and their families and lives absolutely changed the way we operate.”
The model will keep KBP growing at a rapid clip, Kulp vows, and not just through acquisitions. “We plan to open a new unit every other Monday next year,” he says. That will add about another $100 million in sales, he figures.
And the company isn’t foregoing its franchisee-acquisition mindset. Kulp doesn’t rule out the possibility of buying a franchisor or a brand as well.. “The question is, Can we find enough opportunities of scale and keep people motivated? If we can do that, I don’t see the need for us to diversify.
“If we can’t, then we’ll do so.”