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Roark Capital Buys Minority Stake in Culver’s

Culver's better burgers and frozen custardCulver Franchising System Inc. has sold a minority stake to Georgia-based private equity firm Roark Capital Group. Wisconsin-based Culver's retains majority ownership of its company. The terms of how much of the franchising company was bought and for how much were not disclosed.

Roark owns more than 61 franchisors and brands with multi-unit retail locations. It recently bought Jimmy John’s. It is the parent company of quick service restaurant chain Arby’s Restaurant Group and CKE Restaurants, a burger chain competitor of Culver’s.

“For many years the Culver family has been discussing ownership succession planning with the desire to remain a family-owned business, stay privately held and proceed with thoughtful estate planning,” said the company co-founder and board chairman, 67-year-old Craig Culver. “We want to make sure we set up the next generation of the Culver’s family and the entire franchised system for success,” he stated.

Culver's franchise disclosure is better than most, but still not quite transparent

Culver's Franchise Disclosure Document, which was filed in 2017 with state regulators and given to prospective franchisees who are engaged in due diligence about the chain, listed only one franchisee lawsuit against it, from 2007. That lawsuit was settled. Culver’s paid the franchisee $1.2 million for its franchise, or five times the restaurant’s cash flow (not revenue) in 2005. That paints a rosy picture of only one lawsuit and of a franchisor who tries to help franchisees monetize their assets.

On the other hand, there was a well publicized franchisee lawsuit in 2013, Jones and Wilburn versus Culver Franchising System, Inc., that alleged racial discrimination by Culver's against its franchisees, which was not disclosed.* If a prospective franchisee is about to legally commit himself to spend the next 20 years with a franchisor, he would want to know that there have been allegations that a franchisor has a bias against the development of new stores because of the color of the franchisee's skin.

In the end, Culver's won the discrimination lawsuit.

Still, embarrassing lawsuits should be disclosed by franchisors too.

In regard to store-level financial performance, Culver’s looks to be one of the most transparent burger chains. It has a lot to flaunt. The average gross sales of its 555 franchised restaurants and 8 company-owned restaurants in the United States that were open for at least 12 months as of December 31, 2016 was $2.25 million, according to its Franchise Disclosure Document that it filed this year. That is approaching the high restaurant gross sales levels of a McDonald’s or a Chick-fil-A quick service restaurant.

Culver Franchising System Inc has annually grown its net incomeHowever, disclosing bottom-line performance of a store’s net income is what counts the most. Although Culver’s did not reveal store-level earnings before interest, taxes, depreciation and amortization (EBITDA), which is a bottom-line proxy measure of cash income that is used to understand a store’s return on investment, Culver’s did reveal some store expenses as a percentage of gross sales. The company also went on to state that 45 percent of the stores met or exceeded its average gross sales of $2.25 million.

Another measure of franchise health is the amount of store churn in a system. It is a measure of business risk for a franchisee. The total turnover of franchise units, commonly called franchise churn, is low, but it has recently ratcheted up. In 2016 Culver's had 16 franchises that transferred hands. That’s double the number of the year before. That could be an indication that Culver's franchisees sense there is change in the air. They are a little more nervous than usual. Or on the contrary, it could simply mean that 2016's economy was a good time to sell compared to the years before. Looking at the total franchise turnover of Culver's competitors would give prospective franchisees a comparison to sense whether it was the economy that gave franchisees a reason to sell their business or whether there was something happening at just Culver's.

There is another turnover metric — how many franchises have ceased operations. The franchisor lists only one of its franchised restaurants for the past three years has ceased operation — back in 2014.

The result of its managing its franchise system is that Culver’s Franchising System Inc. has managed to increase its net income over the past few years (see chart), according to its audited financial statements. That increasing net income trend, among other things, must have looked enticing to Roark.

Culver’s assures that it will continue in a similar fashion

“We will continue to operate the business similar to how we do today and are excited to have the ability to tap into Roark’s knowledge base to build and enhance future capabilities as we continue to grow and develop future strategic priorities,” says Joseph Koss, president and chief executive officer of Culver.

Roark’s senior managing director Erick Morris said of his firm buying into the family-run franchising business: “We have long admired the Culver’s brand and its commitment to culture, quality and service.” Over 30 years old, the Culver’s brand has more than 600 hamburger restaurants in 24 states. “We are excited to be partnering with the Culver family and management team, and look forward to supporting the brand’s continued success.”

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