Guillermo Perales likes to build restaurants. And so he builds a lot of them. “Every year we try to build as many locations as we can,” the CEO of Sun Holdings said. At the moment, he has close to 50 projects in various stages of development.  

2014 Restaurant 200

Download the 2014 Franchise Times' Restaurant 200 here

Yet Sun Holdings has grown so much—it is the eighth largest restaurant franchisee in the country, based on our Restaurant 200—that it can’t build new locations fast enough to meet its expectations for growth. And that means new acquisitions. So in recent years, Sun has added new Burger King, Arby’s and now Krispy Kreme locations to its stable. And Perales keeps looking.

“For me to keep my growth, I really have to look for other brands,” he said. “You look for buying opportunities. It’s another area of business. You cannot grow if you can’t buy, so I have to buy.”

This is our Restaurant 200, the ranking of the nation’s largest restaurant franchisees, in a nutshell: The franchisees on the list are so big now that to maintain self-imposed growth levels they have to keep buying existing units, simply because nobody can build that fast. The companies on the ranking have been buying locations at an impressive rate, driving up the prices for those acquisitions. And they’ve gotten into new concepts.

The acquisition frenzy has carried these companies through a post-recession environment that hasn’t exactly been friendly to the restaurant business. Sales at many of the chains that dominate the ranking—like Burger King, Applebee’s, Wendy’s and others—haven’t  been flourishing. 

Consider this: Today, the average franchisee on the Restaurant 200 has 109 locations and $143.5 million in revenue. Both numbers are about 30 percent higher than they were in 2009. The big are getting bigger. 

There are now two companies, Flynn Restaurant Group (No. 1) and NPC International (No. 2) that have more than $1 billion in sales. And each of the top 11 companies on our ranking had more than $400 million in sales. Sales for the 25 largest franchisees on the ranking grew more than 10 percent last year. 

The franchisees we talk to don’t grow just for growth’s sake. Operators say they try to be opportunistic with their acquisitions, looking for good deals that make sense from a business standpoint. 

Sun Holdings is a good example. Two years ago the company took advantage of Burger King’s eager refranchising of company stores with a 99-unit purchase in the Orlando market. Perales followed that up with a 50-unit Arby’s purchase at a time when that chain was struggling. And then he bought the Dallas Krispy Kreme market when that became available.

Allendale, New Jersey, franchisee Doherty Enterprises, (No. 12), bought 38 Applebee’s in Florida in what the company’s chairman, Ed Doherty, called a strategic opportunity. “The franchisee wanted to get out of the business,” he said. “We grow strategically where we think it makes sense, and where we think it’ll make money, and which will provide growth opportunities for people who work with us.” 

The buying spree enabled several franchisees on our ranking to grow by leaps and bounds. Fifteen companies on the ranking had increased sales of at least $40 million last year. Carrols Restaurant Group grew the most. The fourth largest franchisee in the country got a full year’s benefit from its 2012 acquisition of 278 Burger King units from its franchisor. Carrols’ sales grew 23 percent last year. 

Other companies grew, too. Team Schostak Family Restaurants bought 65 Applebee’s in late 2012 and had a year to enjoy the additional sales, which more than doubled that company’s sales and helped it skyrocket to No. 30 on our ranking from No. 74. The Livonia, Michigan-based franchisee also operates Burger King and Del Taco as well as Olga’s Kitchen. 

Franchises expanded because the market is flush with investment cash. Private equity groups have been pouring money into the sector, buying up large franchisees quickly, creating behemoths overnight. No. 16 RMH Franchise Corp. became Applebee’s second largest franchisee almost overnight with a series of purchases. The company is backed by a Washington, D.C.-based private equity group, AKON Investments.  

Franchisors with the most franchisees on the Restaurant 200

Likewise, debt has been readily available, from a growing number of lenders that have eagerly entered the restaurant finance market in the past couple of years. 

“There is plenty of money, provided your paperwork is accurate, and provided you have your ducks in order,” said Tony Lutfi, owner of No. 58 MarLu Investment Group, based in Elk Grove, California. “It’s pretty friendly from a financing standpoint, and from a franchisor standpoint.”

As these operators have grown larger, they get more opportunities because both franchisors and existing franchisees are eager to do deals with them. Franchisors like the large operators because they have experience and access to financing. So a number of the franchisees on our ranking have bought into smaller growth chains. 

Nearly half of all franchises on the ranking, including most of the very largest companies, operate more than one brand. So in addition to big legacy brands like Taco Bell, Burger King, Wendy’s and Applebee’s, operators have been getting into chains like Biggby Coffee, Freddy’s Frozen Custard, Great American Cookie and Corner Bakery. Doherty recently started developing Noodles & Company units. 

And they are also among the first people called when another franchisee goes on the market. “There are plenty of deals available,” Lutfi said. “We’re currently looking at three very large deals. We’re going after all three.” 

Research by Matt Haskin and Nick Sommers

Playing in the middle

The growth of large-scale franchisees has created concern in the restaurant business for the fate of small franchisees, the “mom-and-pops,” or “onesies-twosies” as they’re often called, because they own just one or two units.

But what about the mid-sized operator? Many of the franchisees on the Restaurant 200 are getting bigger not by purchasing these mom-and-pops, but because they’re buying out mid-scale operators with 10 to 20 locations. These franchisees are retiring or simply getting out of the business. 

“It’s happening a lot,” said Rick Ormsby, co-founder of Louisville-based investment bank NDA Inc., which works on the sale of a number of franchisees—but especially the Yum Brands concepts, Taco Bell, KFC and Pizza Hut.

Ormsby recently created a database, and found that 25 to 30 percent of operators in the Yum system with 10 to 15 units or fewer have left the system over the past four or five years. Most have sold their businesses.

That trend is playing out over many other chains. At least part of the reason is due to retirements. The legacy chains that dominate the Restaurant 200 grew in the 1970s and ‘80s. Their franchisees are reaching retirement age, don’t have heirs who want to continue in the business and they sell. 

But that’s not the only reason. Many believe the current operating environment is increasingly difficult for smaller operators, even mid-sized franchisees. That has reduced operating margins. Add into that remodel requirements from a number of legacy brands, and older franchisees may opt to leave the business rather than keep going.

“Many aging franchisees have impending remodeling obligations,” Ormsby said. “There’s a lack of clear generational pass-downs. Everyone wants to retire at some point in time. And the average age in a lot of these systems is high.” 

So big franchisees will keep getting bigger. And mid-sized operators will be fewer.

Cutting out the go-between

Private equity groups have become an increasingly important investor in the franchise sector—they own many of the top companies on our Restaurant 200, and are buying up more of them all the time.

And yet, there is a certain level of conflict about these groups within the industry. Franchisors are historically wary of private equity groups. The firms also have short investment horizons, meaning that whenever they buy a franchisee, they’ll look to sell that company in five or so years.

But what if a franchisee could find a way around that? Greg Flynn might have done just that.

The CEO of the top company on our ranking, Flynn Restaurant Group, recently inked a deal with the Ontario Teachers Pension Plan, which invested $300 million in the San Francisco-based operator as part of a management-led buyout of its private equity owners, Goldman Sachs and Weston Presidio.

The deal values Flynn’s company at $1.1 billion, an enormous valuation for a franchisee and the first one in the U.S. to reach that level. But it’s the involvement of that pension plan that makes this a big deal. 

Pension plans are among the large investors that invest in private equity groups, which turn around and buy out companies or make other investments. In essence, said Flynn, “This eliminates the middleman.” 

Pension funds will periodically, albeit rarely, invest in companies themselves. But this is the first time we could find that one has invested in a franchisee. It might not be the last, either. Flynn’s deal has generated considerable buzz within the franchise community, because it could provide a longer-term alternative to the private equity investor. 

“There are no fund life issues,” Flynn said. “They don’t have to sell. They’re not led to sell just to create a data point. They can be as patient as appropriate for the business without regard to the capital source.”  

With a growing number of large-scale franchisees, pension funds could be viewed as an attractive alternative to the private equity group. And franchisors could get on board, too. 

The franchisees could also be a good investment for the funds themselves, for many of the same reasons that private equity groups have been buying out the operators. The businesses generate cash, and some of the biggest franchisees on our ranking are growing at rates that easily rival some of the fastest growing restaurant chains. 

How we compiled the ranking

Franchise Times Restaurant 200 is compiled annually using a combination of companies’ self-reported information and estimates gleaned from publicly available documents. Those documents include annual reports, Securities and Exchange Commission filings, and Franchise Disclosure Documents. The ranking is compiled by Franchise Times’ sister publication, the Restaurant Finance Monitor.

The ranking is based on the companies’ prior year revenue from their operations for which they are a franchisee. It does not count franchisees’ privately owned, non-franchised concepts, or concepts for which they are the franchisor. Nor does the ranking include revenue from other business operations, such as hotels or real estate interests. For companies that did not respond to our survey, we confirmed the number of units operated by the company and then estimated the revenue. In the case of a tie in the amount of total revenue we give favor to the company with the most units. We give preference on our ranking to companies that provide us with their information, rather than companies for which we have to estimate annual revenue. 

Our ranking of the top 200 franchisees is combined with the second 200 franchisees in a report prepared by the Chicago consulting firm Technomic. 

For more information, contact Abbi Nawrocki at (612) 767-3200; abbi@franchisetimes.com

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