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COVER: Acquiring opportunities
Deep-pocketed partners can help some concepts live up to their potential
October 5, 2008
This article was orginally published in Fast Casual magazine, October/November 2008.
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FOCUS brands also purchased the once-stuggling Schlotzsky's Deli in 2006. The chain now has 370 locations. |
"This is like a 30-year-old company reborn," said Au Bon Pain CEO Sue Morelli. "The opportunities and resources we now have to draw on are unlimited. The impact has just been tremendous."
Not only does White Plains, N.Y.-based LNK offer deeper pockets, but the firm brings with it a wealth of expertise and a Rolodex stuffed with influential contacts.
Morelli points to LNK founding partner Henry Nasella as the motivating factor behind the deal.
"Henry grew Staples from a $40 million company to $1 billion, and as a CEO, it doesn't get any better than that," she said. "We believe he is going to help us reach that next level."
And that is the driving force behind most acquisitions — reaching the next level.
Before being purchased, Au Bon Pain was a well-known, highly successful brand, but it wanted to continue to raise its profile. In order to accomplish that goal, it needed to bring in a partner with resources it didn't previously have at its disposal, Morelli said.
It's a common strategy within the fast casual segment that pays off in both the short and long run. Atlanta-based FOCUS Brands acquired Moe's Southwest Grill in 2007 from Atlanta-based Raving Brands, and Austin, Texas-based Schlotzsky's in 2006.
Schlotzsky's has 370 locations and plans to have 600 in the next few years, according to FOCUS. And just this year, Moe's has opened 52 new restaurants, including the company's 400th store. There also are plans to open more than 100 in 2009.
"We're not the type of private equity guys that come in and take out all of the assets and strip things out. We invest in really good companies to help them grow even more successfully." — Henry Nasella, LNK Partners |
"Our goal is to get to the point where we're opening a couple of stores a week," said Paul Damico, Moe's brand president. "Now we're doing one store every other week. None of this was possible before FOCUS. We're in a place where we're growing phenomenally."
Of course, for such phenomenal growth to take place, a large sum of money needs to be invested, and something like that isn't done lightly. LNK has a rigid set of guidelines a company must meet before being acquired.
LNK is not into turnaround projects. Their strategy is to find a company that is already poised for growth, founder Henry Nasella said.
"For a company to meet our criteria, and for us to get excited about putting substantial amounts of equity in a company, it takes quite a business," he said. "And Au Bon Pain fit the bill. It had some of the most exciting financial performances we'd seen and is exactly the type of company we like to invest in — great brand name, terrific management team, proven to be profitable and poised to grow. They've had 5 years of positive quarter-to-quarter sales performances and that's really impressive."
When LNK acquires a company it does not move in and completely take over operations, but it does provide an expansive network of connections that spur growth.
"We've never lost money in an investment and our average return is over three times the equity we put into deals," he said. "The companies we've backed have grown 28 percent a year. We're not the type of private equity guys that come in and take out all of the assets and strip things out. We invest in really good companies to help them grow even more successfully."
Turnaround and international opportunities
FOCUS Brands, on the other hand, doesn't shy away from turnaround projects. But for an acquisition to be worth the time and investment, it should add value to the company's existing portfolio of brands, said president and CEO Steve Romaniello.
For example, when FOCUS acquired Cinnabon in 2004, the baked-goods chain came with a built-in international infrastructure — several hundred units in 20 countries — that has been invaluable to the other FOCUS brands, including Moe's, Schlotzsky's, Carvel and Seattle's Best.
"It would have taken us 10 years to do what they had already accomplished," Romaniello said. "If you want to build international business the right way, you need to assume it will take a long time and that you will lose a bunch of money up front building the infrastructure, sourcing product locally and servicing the early franchisees. But they had already done that. It saved us years and money and gave us an immediate growth vehicle for our brands."
As a result of FOCUS' international infrastructure, Moe's expects to have new locations open throughout the world in the coming year.
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In 2007, FOCUS purchased Moe's Southwest Grill from Atlanta-based Raving Brands. Since the acquisition, more than 52 Moe's locations have opened. |
For pre-existing stores, an acquisition also can mean an influx of cash resulting in long-needed upgrades and improvements. After FOCUS purchased Schlotzsky's, franchisees were encouraged to reinvest in their businesses and renovate outdated buildings that had stagnated for years.
"The stores in place looked the same as they did six years ago," said Kelly Roddy, Schlotzsky's brand president. "Everything had aged. Nothing was updated or modern about the facilities. Now we're giving them incentives to remodel. If they spend $2,000, we'll match it. If they put in a new register system, we'll give them $1,000 per terminal. This could have never happened before. Instead of a small corporate staff to rely on, the franchisees have the entire FOCUS support system."
Part of the support system includes a research and development branch complete with test kitchens.
"Moe's never had an area to play with and test new products," Damico said. "Now we're testing a Moe's burger in Birmingham and will introduce a new green chili marinade pulled pork in September companywide in all 400 stores. That's a massive accomplishment to be able to do that in one year. Since the acquisition, the brand has been transformed."
Change, however, can make people nervous. Franchisees may question decisions made by the new owner and feel out of the loop.
To alleviate some of those fears, FOCUS created an advisory board made up of nine franchise owners from around the country for each brand. Major decisions that could impact the brand are put before the advisory committee to ensure FOCUS has their support and to receive their input and concerns.
"We as franchisors need to be cognizant that our franchisees have put their life savings into the development of one or two stores and that change can be a very scary thing," Damico said. "We want to make sure we protect our franchisees and that they understand everything we're doing and that we will support them. That's how we grow the company fast without turmoil. Some franchisees in large organizations are neglected. That won't happen under the FOCUS watch."
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