Franchisee growth continues unabated

Applebee's restaurant

Franchisee growth continues unabated

With an unprecedented amount of financing available and a whole lot of restaurants up for sale, restaurant franchisees are finding a market in which they can quickly build large organizations, sometimes from the ground up.

Take, Tom Garrett, who resigned as CEO of Arby’s in 2010. He re-emerged on the restaurant scene two years later — as a franchisee of Burger King. Garrett founded GPS Hospitality Inc., starting with the acquisition of 42 Burger King locations in the Atlanta area. The company has done several deals since, and now has 221 units, already making GPS one of the largest franchisees in the system.

Garrett has no intent of stopping that growth. “Our goal is to have 400 GPS Hospitality restaurants by 2018, and I truly believe we can achieve that goal if we stay true to our core values,” Garrett told Nation’s Restaurant News. “In this last year alone, people have really started to recognize what kind of company we are, and that we are good operators.”

For Garrett, the move was a return to the franchisee world. He had risen from an assistant manager to become the president of RTM Restaurant Group, which for a time was the largest franchisee in the country with 775 Arby’s, before the franchisor bought the company.

Yet, the move is indicative of the current market, and the opportunities available for entrepreneurs. The market is attracting a flurry of investment from private equity groups and lenders, all eager to put money into the businesses.

It is also attracting a new generation of investors into the business, including former restaurant company executives and even those who operated businesses in other industries.

“Folks have figured out that restaurants, especially larger restaurants, are not as risky,” said Cristin O’Hara, managing director and market executive with Bank of America Merrill Lynch. “They’re cash generators.”

A few key elements are driving overall investment in the restaurant business, both among brands and among franchisees.

A safe investment

Consumer investors have shifted funds to the restaurant business because it’s generally safer than other industries. Other consumer sectors, notably retail, have faced intense competition from Internet retailers that compete with lower prices and lower margins.

The restaurant business generates a ton of cash while operating a proven business that, once it gets going, can be difficult to kill.

That consistency has brought a bunch of lenders into the industry in recent years. The lenders have competed to make loans to large-scale franchise businesses. That competition is driving down the cost of loans and the terms available to these companies.

“It’s a favorable market for borrowers right now,” said Brian Frank, who heads the Restaurant Franchise Lending Group with TD Bank. “With so many lenders in the marketplace, and folks wanting to do business, the terms are very favorable to the borrower.”

Large-scale franchisees like GPS Hospitality actually represent a relatively safe investment.

“It’s a cash business,” Frank said. “You know exactly how you did at the end of every day. There are not many businesses that you know at the end of the day how much you sold.”

Brands like Burger King, Taco Bell, TGI Fridays, Applebee’s Neighborhood Bar & Grill have long track records and have thrived in good times and survived recessions. They have the strength of national brands that often advertise heavily on television.

The operators are buying market-controlling positions in the franchisees. By purchasing, say, all the Burger King locations in a given market, the operators don’t have to worry about a nearby unit run poorly by a different franchisee ruining their business. They also control the marketing message.

 

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