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When outside investors call, choose carefully, says Slim Chickens CEO


A few hours after our interview Tom Gordon headed to London, where the CEO of Slim Chickens visited the brand’s newest restaurant in the United Kingdom and its sixth to open there since signing a master franchisee agreement with Boparan Restaurant Group in 2018.

It’s a far cry—and a continent away—from Arkansas, where Gordon and co-founder Greg Smart were drinking beer in Smart’s garage, testing fried chicken recipes and dipping sauces.

The duo, along with an ever-expanding team, eventually built Slim Chickens from a single restaurant in Fayetteville in 2003 to an 89-unit franchise system that last summer attracted an investment from private equity firm 10 Point Capital.

Attracted largely by the stable revenue stream of royalties, private equity’s growing presence in franchise investments and acquisitions has in turn driven many founder-led and emerging brands to target such groups for third-party capital.

Though the money is alluring, brand leaders must first know what they want from outside capital and have a plan for how they’ll deploy those funds long before they bring it in.

They should be prepared, too, for the intense due diligence process and understand what that outside partner is getting in return for their capital. How much equity is the franchisor giving up? What’s the impact of this outside influence?  

Tom Gordon

Slim Chickens CEO Tom Gordon

Saying yes

These considerations and many others had Gordon and Slim Chickens telling people “no” for years as he and the leadership team couldn’t get comfortable with the firms they saw and didn’t want to lessen their ability to make long-term decisions for the brand.

“We had a lot of suitors for a lot of years,” says Gordon, “but we wanted to wait as long as we could to really maximize the first tranche investment that we took.” The “like-mindedness” of Atlanta-based 10 Point Capital, which came in with a minority investment in July 2019, was another factor in finally saying yes.

“You always hear horror stories about private equity coming in and wanting to chop and change,” says Gordon. Not so with 10 Point, which Gordon says shares their vision for growth while “maintaining our commitment to franchisees.”

“We spent a lot of time negotiating the deal to be mutually beneficial,” says Gordon, who first met with Tom Wells, 10 Point co-founder and managing director, at the Restaurant Finance & Development Conference in November 2018, after which they spent the next several months in discussions. Gordon & Co. wanted to retain their ability to hire and make investments in infrastructure and technology, with the CEO noting the importance of having those conversations early and often throughout the process.

“You want them to be more than just a check,” says Gordon of how he views 10 Point’s investment. “Certainly the money is important, but you want someone you can really talk to, bounce ideas off of.”

That strategy of working directly with founders is at the core of 10 Point’s investment approach, says Wells, who with business partner Scott Pressly launched the firm after both were with BIP Capital. Tropical Smoothie Café, which was owned by BIP, is now in 10 Point’s portfolio, along with Phenix Salon Suites, in which the firm has a minority stake.

“We really like to be the first investors in a business with the founders,” says Wells. “We believe really strongly that the founders are the right people to lead and grow the brand” with support and capital from 10 Point.

Slim Chickens

With its focused menu, Slim Chickens pulls in average gross sales of $1.24 million.

At Slim Chickens, which Wells says he’d “tracked for years,” he saw a brand that was quickly establishing itself in the better chicken space and whose leadership had demonstrated an ability to attract strong multi-unit operators—and effectively support them. “The building blocks were already there,” he says. And before the deal closed, he points out, many conversations were had about “here’s what we’d do to grow the brand, how we’re going to do it” to ensure both sides were aligned.

Franchisee validation calls further bolstered Slim Chickens’ viability, specifically that existing owners planned to open more locations and that their restaurants were profitable. Item 19 of the brand’s franchise disclosure document reports average gross sales per franchised restaurant of $1.24 million; the initial investment range for a single unit is $915,900 to $1.7 million.

As part of the diligence process in any deal Wells says the firm calls every franchisee directly and the biggest red flag “is if they’re not making money. A franchise system shouldn’t exist if franchisees can’t make money.” Franchisees’ growth plans are another part of the equation, and “would they do it again, or would they recommend it to a close friend,” says Wells.

Getting to work

“We want to be, intend to be and will be a $1 billion revenue brand,” says Gordon of Slim Chickens, which finished with $96.6 million in systemwide sales in 2018 according to the Franchise Times Top 200+. “And to do that takes investments and we’ll continue to drive that customer experience.”

Opportunities to enhance the customer experience, particularly the drive-thru experience, were initially identified after closing the deal with 10 Point. About 50 percent of sales come from the drive-thru, notes Sam Rothschild, Slim Chickens’ COO, and the company is working now to improve execution and ensure the process is user-friendly.

“They’ve been able to help us focus on the things that really move the system forward,” says Rothschild of the team at 10 Point.

Additional technology investments are already in the works to improve the Slim Chickens app and mobile ordering platform, says Gordon, with the goal of reducing barriers in customer access to the brand. “We’re really trying to expand the total usage and frequency of usage” of the app, he says, “so we’re driving marketing dollars toward the app.”

With six restaurants in the U.K. and two in Kuwait to go along with 81 U.S. locations, Slim Chickens is at the right stage in its development to effectively put outside capital to work. Gordon says the deal with 10 Point was worth waiting for and advises other emerging brands to do the same.

“I’d suggest waiting as long as you can and driving that first round valuation as high as you can,” he says.

Each month Editor Laura Michaels talks with emerging brand leaders about what it takes to build a better franchise system.

Advice from the experts

Speed isn’t the name of the game. From an investor standpoint, the problem Winmark’s Steve Murphy sees is “everyone wants to get big fast, they think that’s what private equity wants. But it’s quality over quantity and what the profitability is for each franchisee and what their ROI is and how long it takes to get there.” Murphy, president of franchising at Winmark, franchisor of Plato’s Closet, Play It Again Sports and others, is also on the team at Winmark Franchise Partners, the company’s consulting and investment arm.

Unit economics win. Matt Frankel, a partner at investment firm Levine Leichtman Capital Partners, says while there are many key factors to evaluating a franchise investment, “It always starts with unit economics. If you have happy, profitable franchisees, they’re going to open their second and third” location. A brand must also have sizable white space and a strong development pipeline, among other factors.

Be “buttoned up.” Make sure from the start that the brand has the right advisers around the table, says Tom Wells, managing director of 10 Point Capital. The right attorney and the right accountant are essential to help prepare a brand for the due diligence phase that comes with bringing in outside capital, private equity or otherwise, and will ensure “everything is really buttoned up.” “Any private equity group is always going to find the challenges, the skeletons in the closet, so to speak,” says Wells.

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