How a Venture Capitalist Views the Franchise Business: A Q&A with H. Scott Pressly of Roark Capital

Roark Capital is one of the most prominent private equity firms participating in the franchise industry. The company has been investing in franchise operating companies since 2001, and has invested in nine brands comprising more than 2600 locations in 50 states and 29 countries. The firm's roots are in franchising, as Neal Aronson, founder and managing partner, was co-founder of U.S. Franchise Systems, Inc., before selling the franchise operator and starting Roark Capital.

H. Scott Pressly, a Roark Capital partner, was in charge of acquisitions for U.S. Franchise Systems and is the point man for Roark's acquisition team. In this Q&A, Pressly talks about why Roark Capital believes in the franchising business, what it seeks in acquisition targets, and how franchisors can set themselves up to be attractive acquisitions and ensure a smooth transition under new ownership.

FBLA: What makes franchising attractive to your investment firm?

Pressly: Franchising, if done properly, is a great way to develop and grow a brand. If management is given the appropriate infrastructure to sell franchises and, more importantly, to support franchisees, it truly is a win-win-win model for the franchisor, franchisees, and our investors.

FBLA: What do you bring to the table for a franchisor?

Pressly: A proven track record in franchising. Our partners have direct operational experience and broad-reaching contacts in the franchise industry. We can tap the necessary skills, resources, and advice for our portfolio companies' management teams to ensure success. And, more importantly, we take a long-term view on our investments so that the franchisor can make the appropriate investments in infrastructure in areas such as franchise sales and support, real estate, R&D, IT, and marketing.

Frankly, for the first 2-to-3 years, we usually don't see a return on the incremental investment. But because our typical time horizon is 5-to-7 years, we have confidence and patience to see the fruits of the investment. Franchising is a great business model, but we feel you need to have a long-term time horizon.

FBLA: Lately there has been an influx of investor interest in franchise systems, and I don't think all of those investors have a 5-to-7 year time horizon. Are those shorter-term investors making a mistake?

Pressly: The influx of investors is a direct result of the increasing number of private equity firms over the last 5 years. And it's not just franchising they're interested in ' other industries such as health care and consumer products have also drawn significant interest from private equity firms recently. For franchisors, this is good news ' there is more capital available for investment. However, they need to look carefully at their investor's knowledge and experience, otherwise the brand could suffer and management could become frustrated.

In one of our deals, the founder was seeking a partner who would 'take care of' his brand and his franchisees. This proved to be as important to him as price (the founder still plays golf with our franchisees today). A lot of our initial dialogue involves sharing our philosophy on franchising and learning what the owner wants to do; it's not just about price.

FBLA: What do you look for in a franchise system, both qualitatively and quantitatively?

Pressly: It's not as hard to define the quantitative side. Ultimately, it boils down to strong unit-level economics, which are the linchpin of long-term success. We are also attracted to larger franchise systems with several hundred locations and the potential of substantial unit growth. If the franchise has a proven concept in multiple markets, we can help it go from a local or regional brand to a super-regional or national brand.

The qualitative work takes more time. The primary focus is looking for an experienced and motivated management team that really understands what makes franchising successful. Executives like Godfred Otuteye at Money Mailer and Steve Romaniello at FOCUS Brands [two Roark Capital portfolio companies] truly know how to focus their company's time and resources on supporting the franchisees and making them successful.

FBLA: Your acquisition target sounds fine for a franchise in which the founder-owner will stay aboard to manage the growth. But what if the owner wants to cash out and stop running the system?

Pressly: Actually, we don't have a one-size-fits-all solution. We have bought systems from the original founder, who sold 100% of the company and retired, but in many cases we have bought systems where the founder retained a portion of the company and continues to run it today. Remember, these companies have often been born, nurtured, and matured under the leadership of the founder. It is difficult for some of them to let go completely. Our approach is flexible, and each transaction is handled uniquely.

FBLA: What happens when you see a franchise concept that you like, but franchisor and franchisee are not working well together? It would be sort of the equivalent of buying an out-of-favor stock.

Pressly: In that type of situation, the fundamental question is, 'Can we help the franchisor, or has there been a fundamental change in the brand's competitiveness?' If the problem stems from a lack of capital, resources, or management focus ' those are areas where we can assist in growing the brand. But we can't do magic or fix all systems.

FBLA: How do you find acquisition candidates?

Pressly: We follow the industry very closely, and we actively participate as a member of the franchise community. I spend 100% of my time focusing on franchising. I'm on the Supplier Forum Board of Directors for the International Franchise Association ('IFA') and a trustee for the IFA's Education Foundation. I encounter interesting prospects on a daily basis.

FBLA: After you and a franchise system have expressed interest in each other, what happens next?

Pressly: Good question! There's no such thing as a typical process for an acquisition. We've purchased brands directly from the founder, as well as bid on companies through an auction. The owner-direct transaction usually takes longer and has more twists and turns than buying from an investment bank because the founder has a personal and emotional stake in the deal, but for me those are the most interesting transactions because we're providing a real solution for the founder.

From a timeline perspective it's the seller that drives the process. We've closed deals as quickly as 2 months, and we've had conversations with a seller for over 3 years until it was the right time to consider a transaction. We are patient and put the owner's interests first.

FBLA: During negotiations, do you tell the franchisor not to tell the franchisees that the system might be sold?

Pressly: Generally, we wait until the deal is closed, but we've done it both ways. I like to wait because it's not really closed until it's closed. Why stir up concerns and distract people from running their business about something that might not happen?

FBLA: After a purchase is agreed upon, do you have a standard integration process so that the system runs the way you want it to?

Pressly: Nothing is standard in our business. It would be nice to have a checklist, but it depends on what we find in diligence. In all scenarios, the first thing we do is communicate to the franchisee community. We want them to feel like family and understand that they have a voice at the table. We encourage franchisors to have meetings with their franchisee advisory council, have system-wide conference calls, and to tell them about us and our philosophy. Be direct and open.

FBLA: What if you get negative feedback during these listening sessions?

Pressly: A lot of our job is listening ' letting the franchisees articulate their concerns. We don't come in with guns blazing and tell them how to run their businesses. In most cases, franchisees want to be heard. And, of course, we would expect some negative feedback in even the best-run franchise system. There is no silver bullet for fixing all types of franchisor-franchisee issues. But the key is to be on top of the issues day-to-day and focus on making the system better.

If you are focusing on making franchisees successful and profitable, then there tends to be less discontent in the system. Maybe we can reduce the cost of goods sold for food products for a restaurant chain, or we can improve the effectiveness of the advertising expenditures. It's all about successfully executing on a thousand little ideas each day.

FBLA: What are common legal or contractual problems that you see when you look at prospective franchise systems?

Pressly: We have seen the gamut! But the main advice I would give to a franchisor with less than 100 units today is, 'Don't take shortcuts.' It is the biggest mistake that will impact the value of their system. It costs more to fix problems later than to do it right the first time.

For example, we often see that the entrepreneur did not hire qualified franchise attorneys. Franchise law is very specific, and it takes time to learn it. The franchisor needs to have a strong UFOC and franchise agreement on day one. Also, if you're thinking about selling down the road, you should memorialize any informal oral or handshake agreements. These will come out in diligence, so you might as well address it now and deal with it.

Another piece of advice: Keep all the appropriate documents and correspondence, and have it correctly filed. A complete, accurate, and up-to-date system gives a buyer much more confidence that you know what's going on.

FBLA: When you buy a system, what are your mileposts for selling it? To whom?

Pressly: We are backed by institutional investors who want a return on their investment, so we'll need to sell at some point. But, we are not in business to make a quick flip on our investments. When the time comes, we may seek a management buyout or, perhaps, look to sell to a financial sponsor. The time horizon is driven by sitting with our management team and understanding their goals and objectives in connection with ours. If the CEO wants to run this business for 5 years and retire, that is a key driver. As far as going public, I never say never, but it's not high on the totem pole. With Sarbanes-Oxley and other costs and exposure of being public, that option is much less attractive than it was several years ago.

H. Scott Pressly can be reached by phone at 404-591-3335 or by e-mail at [email protected].

Roark Capital is one of the most prominent private equity firms participating in the franchise industry. The company has been investing in franchise operating companies since 2001, and has invested in nine brands comprising more than 2600 locations in 50 states and 29 countries. The firm's roots are in franchising, as Neal Aronson, founder and managing partner, was co-founder of U.S. Franchise Systems, Inc., before selling the franchise operator and starting Roark Capital.

H. Scott Pressly, a Roark Capital partner, was in charge of acquisitions for U.S. Franchise Systems and is the point man for Roark's acquisition team. In this Q&A, Pressly talks about why Roark Capital believes in the franchising business, what it seeks in acquisition targets, and how franchisors can set themselves up to be attractive acquisitions and ensure a smooth transition under new ownership.

FBLA: What makes franchising attractive to your investment firm?

Pressly: Franchising, if done properly, is a great way to develop and grow a brand. If management is given the appropriate infrastructure to sell franchises and, more importantly, to support franchisees, it truly is a win-win-win model for the franchisor, franchisees, and our investors.

FBLA: What do you bring to the table for a franchisor?

Pressly: A proven track record in franchising. Our partners have direct operational experience and broad-reaching contacts in the franchise industry. We can tap the necessary skills, resources, and advice for our portfolio companies' management teams to ensure success. And, more importantly, we take a long-term view on our investments so that the franchisor can make the appropriate investments in infrastructure in areas such as franchise sales and support, real estate, R&D, IT, and marketing.

Frankly, for the first 2-to-3 years, we usually don't see a return on the incremental investment. But because our typical time horizon is 5-to-7 years, we have confidence and patience to see the fruits of the investment. Franchising is a great business model, but we feel you need to have a long-term time horizon.

FBLA: Lately there has been an influx of investor interest in franchise systems, and I don't think all of those investors have a 5-to-7 year time horizon. Are those shorter-term investors making a mistake?

Pressly: The influx of investors is a direct result of the increasing number of private equity firms over the last 5 years. And it's not just franchising they're interested in ' other industries such as health care and consumer products have also drawn significant interest from private equity firms recently. For franchisors, this is good news ' there is more capital available for investment. However, they need to look carefully at their investor's knowledge and experience, otherwise the brand could suffer and management could become frustrated.

In one of our deals, the founder was seeking a partner who would 'take care of' his brand and his franchisees. This proved to be as important to him as price (the founder still plays golf with our franchisees today). A lot of our initial dialogue involves sharing our philosophy on franchising and learning what the owner wants to do; it's not just about price.

FBLA: What do you look for in a franchise system, both qualitatively and quantitatively?

Pressly: It's not as hard to define the quantitative side. Ultimately, it boils down to strong unit-level economics, which are the linchpin of long-term success. We are also attracted to larger franchise systems with several hundred locations and the potential of substantial unit growth. If the franchise has a proven concept in multiple markets, we can help it go from a local or regional brand to a super-regional or national brand.

The qualitative work takes more time. The primary focus is looking for an experienced and motivated management team that really understands what makes franchising successful. Executives like Godfred Otuteye at Money Mailer and Steve Romaniello at FOCUS Brands [two Roark Capital portfolio companies] truly know how to focus their company's time and resources on supporting the franchisees and making them successful.

FBLA: Your acquisition target sounds fine for a franchise in which the founder-owner will stay aboard to manage the growth. But what if the owner wants to cash out and stop running the system?

Pressly: Actually, we don't have a one-size-fits-all solution. We have bought systems from the original founder, who sold 100% of the company and retired, but in many cases we have bought systems where the founder retained a portion of the company and continues to run it today. Remember, these companies have often been born, nurtured, and matured under the leadership of the founder. It is difficult for some of them to let go completely. Our approach is flexible, and each transaction is handled uniquely.

FBLA: What happens when you see a franchise concept that you like, but franchisor and franchisee are not working well together? It would be sort of the equivalent of buying an out-of-favor stock.

Pressly: In that type of situation, the fundamental question is, 'Can we help the franchisor, or has there been a fundamental change in the brand's competitiveness?' If the problem stems from a lack of capital, resources, or management focus ' those are areas where we can assist in growing the brand. But we can't do magic or fix all systems.

FBLA: How do you find acquisition candidates?

Pressly: We follow the industry very closely, and we actively participate as a member of the franchise community. I spend 100% of my time focusing on franchising. I'm on the Supplier Forum Board of Directors for the International Franchise Association ('IFA') and a trustee for the IFA's Education Foundation. I encounter interesting prospects on a daily basis.

FBLA: After you and a franchise system have expressed interest in each other, what happens next?

Pressly: Good question! There's no such thing as a typical process for an acquisition. We've purchased brands directly from the founder, as well as bid on companies through an auction. The owner-direct transaction usually takes longer and has more twists and turns than buying from an investment bank because the founder has a personal and emotional stake in the deal, but for me those are the most interesting transactions because we're providing a real solution for the founder.

From a timeline perspective it's the seller that drives the process. We've closed deals as quickly as 2 months, and we've had conversations with a seller for over 3 years until it was the right time to consider a transaction. We are patient and put the owner's interests first.

FBLA: During negotiations, do you tell the franchisor not to tell the franchisees that the system might be sold?

Pressly: Generally, we wait until the deal is closed, but we've done it both ways. I like to wait because it's not really closed until it's closed. Why stir up concerns and distract people from running their business about something that might not happen?

FBLA: After a purchase is agreed upon, do you have a standard integration process so that the system runs the way you want it to?

Pressly: Nothing is standard in our business. It would be nice to have a checklist, but it depends on what we find in diligence. In all scenarios, the first thing we do is communicate to the franchisee community. We want them to feel like family and understand that they have a voice at the table. We encourage franchisors to have meetings with their franchisee advisory council, have system-wide conference calls, and to tell them about us and our philosophy. Be direct and open.

FBLA: What if you get negative feedback during these listening sessions?

Pressly: A lot of our job is listening ' letting the franchisees articulate their concerns. We don't come in with guns blazing and tell them how to run their businesses. In most cases, franchisees want to be heard. And, of course, we would expect some negative feedback in even the best-run franchise system. There is no silver bullet for fixing all types of franchisor-franchisee issues. But the key is to be on top of the issues day-to-day and focus on making the system better.

If you are focusing on making franchisees successful and profitable, then there tends to be less discontent in the system. Maybe we can reduce the cost of goods sold for food products for a restaurant chain, or we can improve the effectiveness of the advertising expenditures. It's all about successfully executing on a thousand little ideas each day.

FBLA: What are common legal or contractual problems that you see when you look at prospective franchise systems?

Pressly: We have seen the gamut! But the main advice I would give to a franchisor with less than 100 units today is, 'Don't take shortcuts.' It is the biggest mistake that will impact the value of their system. It costs more to fix problems later than to do it right the first time.

For example, we often see that the entrepreneur did not hire qualified franchise attorneys. Franchise law is very specific, and it takes time to learn it. The franchisor needs to have a strong UFOC and franchise agreement on day one. Also, if you're thinking about selling down the road, you should memorialize any informal oral or handshake agreements. These will come out in diligence, so you might as well address it now and deal with it.

Another piece of advice: Keep all the appropriate documents and correspondence, and have it correctly filed. A complete, accurate, and up-to-date system gives a buyer much more confidence that you know what's going on.

FBLA: When you buy a system, what are your mileposts for selling it? To whom?

Pressly: We are backed by institutional investors who want a return on their investment, so we'll need to sell at some point. But, we are not in business to make a quick flip on our investments. When the time comes, we may seek a management buyout or, perhaps, look to sell to a financial sponsor. The time horizon is driven by sitting with our management team and understanding their goals and objectives in connection with ours. If the CEO wants to run this business for 5 years and retire, that is a key driver. As far as going public, I never say never, but it's not high on the totem pole. With Sarbanes-Oxley and other costs and exposure of being public, that option is much less attractive than it was several years ago.

H. Scott Pressly can be reached by phone at 404-591-3335 or by e-mail at [email protected].