Download the 2013 Franchise Times' Restaurant 200 here.

Big and Bigger: Annual ranking bulges with pumped-up franchisees

The average franchisee on our list has 101 locations and $131.5 million in annual sales—up more than 20 percent since the end of the recession. How are they getting so large? With private equity fuel flowing to legacy brands.

Articles by Jonathan Maze

Research by Matt Haskin and Abbi Nawrocki

This isn’t your father’s franchise, anymore.

Franchising used to be about small operators, mom-and-pop companies that owned one or two locations and made it a family business. But franchisees have matured and grown over the years. Now franchising is dominated by giant, sophisticated operations run by people in suits with Ivy League degrees. They have restaurants across the country and collect hundreds of millions of dollars in sales a year.

Proof is in the Franchise Times Restaurant 200, our annual ranking of the nation’s largest restaurant franchisees by total sales. Operators on the list are getting bigger. Much bigger.

“It’s a natural evolution of the growth in the overall marketplace,” said Dean Zuccarello, CEO of the Castle Rock, Colorado-based investment bank Cypress Group. “As franchising has become more mature, franchisees have gotten larger. We’ve seen the industry from the 1970s and ‘80s grow from onsies-twosies, mom-and-pop shops to large platform franchisees.”

Consider: In 2009, the average franchisee on our list had 83 locations and $109 million in sales. By last year, the average operator had 101.6 locations and $131.5 million in sales. In other words: unit count and sales for franchisees on the Restaurant 200 have grown more than 20 percent since the end of the recession. And unit count and sales grew by 10 percent last year alone.

One franchisee, No. 1 Flynn Restaurant Group out of San Francisco, reported more than $1 billion in sales ($1.2 billion to be precise), the first time in the ranking’s history that an operator reported a 10-figure sales number. No. 2 NPC International, a Pizza Hut operator out of Overland Park, Kansas, isn’t very far behind at just a shade under $1 billion.

Put another way: Franchisee Flynn is only slightly smaller than the franchisor Jimmy John’s in terms of sales. In terms of unit count, 1,200-unit NPC is bigger than Carl’s Jr., and is actually the 9th largest restaurant operator of any kind in the United States, in terms of number of locations.

One reason for much of this growth: the influx of private equity into the market. Private equity groups own many of the largest franchisees, or they have significant investments in them.

“If you look at the investment criteria for private equity groups, and you think about franchisees, they almost always hit the hot spots for private equity firms,” said Adam Birnbaum, managing director at the New York-based investment banking firm Grandwood Capital.

One of those groups, Argonne Capital, has been on a franchise-buying spree lately. It bought several IHOP operators and then branched into Applebee’s and put them all together to become our third-largest franchisee: Richardson, Texas-based Summit Restaurant Group. Another private equity group, Altamonte Capital Partners, bought Taco Bell’s largest franchisee, Birmingham, Alabama-based Tacala (No. 13).
Private equity groups are helping drive the consolidation trend because they want the companies to grow. For instance, in 2011 Brentwood Associates bought the Fort Smith, Arkansas ,Taco Bell franchisee K-MAC (No. 15) and in 2012 K-MAC bought a 25-unit operator out of Missouri.

In 2011 Goldman Sachs bought out Weston Presidio’s investment in Flynn Restaurant Group and the next year Flynn made two huge deals, for 99 Applebee’s units in the Southeast from the Polish company AmRest and the 76-unit Taco Bell operator Southern Bells.

In 2011 Olympus Partners bought NPC and recently the franchisee started buying Wendy’s locations for the first time.

“The equity funds have come into the business in a big, big way,” said Steve Schwanz, president of Franchise Capital Advisors in Scottsdale, Arizona.

Investors in franchises have had the lending to make the deals. The largest franchisees tend to be concentrated in a handful of brands: Applebee’s, Burger King, Yum’s concepts (KFC, Pizza Hut and Taco Bell), Wendy’s and a few others. These are legacy brands with long records of steady sales and profits and are considered lower risks. And they attract lenders in droves.

This lending has only recently started to be made available to smaller operators and to other brands. But it’s been available to large franchisees of legacy brands for years now. “Two years ago, it was hard to find money,” Schwanz said. “If I had a deal, I was going to three or four institutions. Today, I could probably go to 15.

“Put it this way: availability of capital has opened up.”

These franchisees have also had plenty of available supply of franchise systems in which to purchase. Much of that is due to refranchising. To wit: No. 4 Carrols Restaurant Group, the Syracuse, New York-based Burger King franchisee, bought 278 units from its franchisor, doubling its size and setting itself up for a steady increase in the future.

Or consider Irving, Texas-based Sun Holdings, which jumped from No. 20 to No. 9 on the strength of two major refranchising deals: Sun bought 99 units in Orlando from Burger King, and then 50 locations in Dallas from Arby’s.

But franchisors aren’t the only ones selling. Numerous franchisees are selling. Some simply decide it’s time to exit. Others retire. Charlie Brown sold Southern Bells to Flynn when his partner decided to retire after 30 years in the business.

“We also thought it was a good time to sell,” Brown said. “Taco Bell had a great year. It had done well the last couple of years. And we had done a lot of asset improvements.” Brown remained with the company as president of the renamed Bell American Group, a subsidiary of Flynn Restaurant Group.

Franchisees that got into the business in the 1970s, ‘80s and ‘90s may start thinking along the same lines. “There are still a lot of franchisees that fit that profile,” Zuccarello said. “They’ve done it for 10 to 15 years. At some point, they’re going to look for an exit.”

In other words: Expect companies on the Restaurant 200 to keep growing next year.

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