Choose Your Partner
What you should know about private-equity firms.

By David Farkas

It’s a great time to be a restaurant company,” declares Roark Capital Group Partner Scott Pressly, citing the recent rush of private-equity funds into the industry. “But it won’t last forever,” he says. Pressly recently talked to Chain Leader about why private-equity firms such as his Atlanta-based outfit, which owns Carvel, Cinnabon and McAlister’s Deli, make good partners.

Why are you qualified to talk about picking a partner?

We at Roark have been looking at the franchise business for a number of years. In the majority of cases, the owner has had considerations other than just the highest price and whom they sold the company to. If it’s only that the owner wants full liquidity at highest price, the partner is not that relevant.

What do you want to know about the seller?

One of first things we talk to the seller about—whether they are selling today or three years from now—is what is important to them. We’ll ask, “Do you really care about highest price?” and, “Do you care about your management team’s role?” “Is selling truly what you want to do?”

Don’t most sellers already know what they want to do?

I wouldn’t say that. This is why I like going into this level of detail. In a number of cases, this is their one shot. For years [restaurant companies] have been busy growing and operating their business. Now they have three broad choices for liquidity: go public, sell to a strategic buyer or find a private-equity partner.

Yet going public is certainly not in the cards for most restaurant companies. The cost, exposure and Sarbanes-Oxley requirements have changed the playing field. Still, the one constant is a business’ need for liquidity and growth capital. What’s changing is where are they getting it.

If we were having this conversation four years ago, the majority of restaurant companies were being purchased by larger companies like Wendy’s, McDonald’s and Outback. Today, it’s the exact opposite.

Does a private-equity firm’s focus matter?

It makes a huge difference. There are a lot of private-equity firms entering the restaurant market for the first time. So if a seller is looking for just capital, he doesn’t need board-level relations; if he just wants to grow restaurants, there are plenty of firms to handle that.

And if the seller doesn’t?

If the private-equity firm is thinking of only owning the company for 18 to 36 months or taking the company public the next year, and the seller has developed a five-year plan to invest and grow the business, there will be an inherent conflict on priorities and focus post-close. The seller and the firm should have an open and direct conversation about this before they close the deal.

What’s the best way for a seller to learn more about a particular private-equity firm?

Talk to the CEOs of the companies they’ve partnered with. If I were selling a business, I’d ask what it’s like to work with these guys. These are long-term relationships in most cases, so I’d want to know what it’s like when things go wrong.