Alicia MillerIllustration by Jonathan Hankin
Most private equity investors in franchising are growth investors. A few are turnaround specialists. But it is relatively rare to find both skills in the same firm because investing mandates and timelines are very different. Thematic clarity permits aggressive execution and focus but also keeps PE firms from coloring outside the lines. Those firms able to carve out more flexibility for themselves can jump on great opportunities others simply can’t tackle.
One example is Gala Capital Partners, which has been a franchisee in multiple concepts and is also an investor or co-investor in Mooyah Burgers, Cicis Pizza (acquired out of bankruptcy), Dunn Brothers Coffee, Dillas Quesadillas and, more recently, Rusty Taco.
Gala invests its own capital, not money raised from limited partners, as in traditional PE. But the Gala example is worth considering because it represents a powerful hybrid investor in franchising—combining both capital infusion and deep operating experience to accelerate brands. Founders and multi-unit franchisees looking for a capital partner may find the perfect match in this type of hybrid PE firm.
Anand Gala is the founder and managing partner of Gala Capital Partners. I had the opportunity to speak to him recently. The following are excerpts from that conversation.
FT: How is your investing approach flexible enough to take on both growth and turnaround brands?
Gala: We have hands-on operating experience. We also know our strengths and where we may need to bring in outside talent. When we evaluate opportunities, we look carefully at their trajectory. Specific to turnarounds, we prefer “fallen angels,” that is, companies that have fallen out of favor but aren’t deeply distressed. We look at their unique needs, what it will take to put it back on the growth path and whether we have the right skills. We are tenacious about execution. We’re also investing our own capital and don’t use debt in our acquisitions. This gives us the time we need to figure things out and re-position brands for the long-term.
FT: What do you bring that the existing team perhaps wasn’t seeing or doing?
Gala: We start from the perspective that franchisees are our primary customers. Sometimes management needs to be reminded. We focus on the success and financial health of our franchisees. I am a franchisee myself. I know how important that mindset is at the management level. Franchisees must have consistent success, stability and strength or they won’t grow.
FT: That’s a future stall-out brewing if franchisees aren’t bought in.
FT: How do you evaluate franchisee buy-in and the potential to build a strong working partnership with franchisees in brands you’re considering and then execute?
Gala: Franchisee interviews and feedback are critical to the deal. Why did they join? Would they do it again? Are they making money? What does the business look like for them in 12 to 36 months? What are their joys/pain points? Which corporate support functions are strongest/weakest? We seek to understand and learn before making any changes. We try to be thoughtful, inclusive, and keep the best interests of all franchisees in mind. Every brand should have a franchise advisory council. If it doesn’t already exist, we help get one established. The FAC should meet on a regular basis with management. Franchisees are candid and will tell you what you need to know. You need to listen intently.
FT: Can franchisees actually impact deal flow? Bad franchisee validation blocks new license sales, but can it potentially scuttle a PE deal as well?
Gala: If an FAC is coordinated and can speak with one voice, then yes that voice can have a major influence on the direction of the business. But it must be what’s best for the entire system. Once personal agendas creep in, the FAC loses both ability and credibility.
FT: Inspire Brands stated it felt Rusty Taco would be better off in the hands of someone with deep experience developing emerging brands. What can a partner like Gala can provide?
Gala: A large brand at scale—1,000-plus units—is all about predictability. But emerging brands need creativity and flexibility. We refine and adapt quickly. Our entire organization is wired that way. An emerging brand is still trying to figure things out. They don’t know what they don’t know, especially if they are new to franchising. For example, we can help optimize supply chain, menu choices and execution. You learn these running a scale business. We bring them into an emerging brand and create tremendous value. Smaller brands often don’t think about the business this way. They also lack supporting systems we bring, like inventory management systems, food cost management systems and franchising best practices. Emerging brands are innovative, but they need to optimize, such as bidding things out or streamlining store-level execution. We help them balance innovation with operating practicalities to create more unit profitability.
FT: Regarding the FAST Act in California, does regulation impact your expansion priorities?
Gala: Administration and bureaucracy are always increasing. But we must move forward. There will be adaptations and new technologies. We’ll evolve. It challenges our thinking and creativity. FAST is concerning because it singles out one industry.
FT: How should a franchise founder vet potential PE partners?
Gala: A good or bad reputation as a partner is out there for you to discover. Ask your peers, and people who have been through it. Network far in advance. Get to know people without time pressure. Get clear about your expectations and what you hope to accomplish. And be self-aware. Are you really ready to work with a partner? Will you be happier and more effective? Our partners have thought it through and are ready.
Alicia Miller is a managing director at Catalyst Insight Group. Her Development Savvy column covers smart ways to market and grow a franchise. Reach her at firstname.lastname@example.org.