October 15, 2024 • 1hr 41min

Matt Perelman & Alex Sloane - The Art of Franchise Investing - [Invest Like the Best, EP.392]

Invest Like the Best with Patrick O'Shaughnessy

Patrick O'Shaughnessy interviews Matt Perelman and Alex Sloane, co-founders and managing partners of Garnett Station Partners (GSP). GSP invests in franchise and consumer services businesses, with a focus on consolidating and professionalizing multi-unit concepts. The firm was started in 2014 when Matt and Alex, then MBA students, bought 23 Burger King restaurants. They have since invested in 26 other multi-unit businesses across food service, auto services, health/wellness, and other consumer sectors. The discussion covers GSP's investment strategy, their approach to creating value in franchise businesses, and lessons learned from building their firm over the past decade. Matt and Alex provide insights into franchise economics, labor management, real estate strategies, and their process for scaling concepts and achieving successful exits.

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Key Takeaways

Garnett Station Partners (GSP) invests in franchise and consumer services businesses, focusing on consolidating and professionalizing multi-unit concepts
The firm was started in 2014 by Matt Perelman and Alex Sloane as MBA students when they bought 23 Burger King restaurants
GSP has since invested in 26 other multi-unit businesses across food service, auto services, health/wellness, and other consumer sectors
Their investment strategy focuses on:
- Buying businesses at attractive valuations (6-7x EBITDA)
- Adding technology, data analytics, and professional management
- Growing same-store sales by 4-5% and margins by 250 bps
- Scaling concepts through new unit growth and acquisitions
- Selling to larger PE firms after 3-5 years
Key attributes they look for in concepts:
- #1 average unit volumes in category
- 20%+ store-level margins
- Sub 3-year paybacks on new units
- #1 net promoter scores
GSP uses very little leverage initially, often starting with 100% equity, then adding debt as businesses scale
They focus heavily on labor management and reducing turnover as a key driver of profitability
The firm has achieved strong returns, with 10 exits to date at a weighted average multiple above 3x

Introduction

Patrick O'Shaughnessy interviews Matt Perelman and Alex Sloane, co-founders and managing partners of Garnett Station Partners (GSP). GSP invests in franchise and consumer services businesses, with a focus on consolidating and professionalizing multi-unit concepts. The firm was started in 2014 when Matt and Alex, then MBA students, bought 23 Burger King restaurants. They have since invested in 26 other multi-unit businesses across food service, auto services, health/wellness, and other consumer sectors.

The discussion covers GSP's investment strategy, their approach to creating value in franchise businesses, and lessons learned from building their firm over the past decade. Matt and Alex provide insights into franchise economics, labor management, real estate strategies, and their process for scaling concepts and achieving successful exits.

Topics Discussed

Origins of Garnett Station Partners (7:02)

Matt and Alex met as undergrads, then worked at Apollo and Catterton respectively
Developed thesis on franchise consolidation while in business school
Initially rejected by KFC as franchisees due to lack of capital/experience
Burger King approved them and introduced them to a 23-unit franchisee
"We realized pretty early on, while we were building value in that business, that there was a much bigger opportunity where we could take the playbook that we were developing...and we could apply it to what is a much broader set of businesses, which is the franchising multi-unit consumer services businesses." - Alex Sloane

Understanding Franchise Economics (12:08)

Typical franchise generates 15-20% store-level margins before royalties
4-5% royalty paid to franchisor
Results in high single-digit to low double-digit EBITDA margins for franchisees
Franchisee keeps ~2/3 of profits, franchisor ~1/3
Different incentives - franchisor focused on top-line, franchisee on bottom-line
Key costs are labor, food, and rent

Challenges and Lessons Learned (16:12)

Second deal in auto services was unsuccessful - "tuition" for the firm
Used too much leverage upfront
Hired young, inexperienced managers
Learned importance of experienced operators and conservative capital structures
Hired Howard Norwitz to help with restructuring, now a key partner at GSP
"We couldn't have made more poor decisions if we tried, which was truly impressive." - Matt Perelman

Navigating COVID-19 (38:37)

GSP's portfolio was heavily exposed to foot traffic-dependent businesses
Took quick action to mothball operations and furlough employees
Worked closely with management teams to navigate government programs
Provided liquidity support to franchisees
Pivoted some concepts (e.g. Kona Ice food trucks to residential delivery)
Opportunistically acquired distressed assets (e.g. Pizza Hut/Wendy's debt)
Didn't lose any portfolio companies or breach covenants

Challenges of Rollups and Integration (54:37)

Rollups are "really, really, really, really hard"
Common pitfalls:
- Too much leverage
- Poor integration
- Lack of appreciation for culture
- Relying on pro forma/adjusted EBITDA
GSP focuses on preserving culture while professionalizing operations
Careful about synergy assumptions and adjusted EBITDA metrics

The Importance of Culture in Business Consolidations (56:01)

GSP works to honor and respect culture of acquired businesses
Focus on retaining key people and customer relationships
Avoid "Excel math" approach that ignores human elements
"These are people businesses, and they're real customer relationships that matter. And if you agitate the wrong person, fire the wrong person...you can blow yourself up." - Alex Sloane

Strategies for Successful Exits (58:01)

Target 3x return in 5 years, have achieved higher multiples on average
Focus on creating consistent, predictable businesses
Typically sell to PE firms 2-4x GSP's size ($5-10B AUM)
Build businesses to $15-40M EBITDA - sweet spot for buyers
Demonstrate ability to scale across multiple markets
Often roll over equity and stay involved post-sale

The Fun and Challenges of Partnership (1:01:49)

Matt and Alex have known each other since childhood
Work very closely - share an office, take all meetings together
Complementary personalities and skill sets
Use executive coach to work on partnership and firm culture
Make all key decisions unanimously
"Our partnership is really special. We value it as much as anything in the world. We believe it's a big part of, certainly a big part of our culture and we believe it's a big part of our success." - Alex Sloane

Innovation in Business Operations (1:09:53)

Focus on adopting best-in-class technology rather than inventing new tech
Leverage operating partners with deep industry expertise
Use data analytics to optimize labor scheduling and operations
Implement customer engagement and employee retention technology
Constantly looking for high-ROI projects to reinvest cash flow

Real Estate and Financial Engineering (1:13:44)

View real estate as a key value creation lever
Often buy/develop properties then sell in sale-leaseback transactions
Use proceeds to de-risk investments and fund growth
Renegotiate leases to optimize terms and drive profitability
"Most people we find look at rent as a fixed expense. That's a contract you can renegotiate." - Alex Sloane

Managing Labor and Turnover (1:16:34)

Labor turnover is a major focus - costs $3-5k to train new employees
Use technology and incentives to improve retention
Link management bonuses to turnover metrics
Focus on general manager tenure as key predictor of success
Aim to beat industry average turnover rates by 20+ percentage points

Investment Themes and Criteria (1:19:36)

Look for fragmented industries with organic growth
Must be clear industrial logic for consolidation
Prefer concepts proven successful by other PE/strategic buyers
Focus on "why us?" - need clear edge as buyer
Typically first institutional capital into businesses
Partner with founders/families, buying 50-90% stakes

Selling to Larger Private Equity Firms (1:23:36)

Typically sell to PE firms 2-4x GSP's size ($5-10B AUM)
Build businesses to $15-40M EBITDA - sweet spot for buyers
Buyers looking for:
- Consistency and professionalization
- Scale across multiple markets
- Platform for continued growth
GSP often rolls over equity and stays involved post-sale

Maintaining Culture and Sourcing Deals (1:27:11)

Culture viewed as key driver of returns
Focused on maintaining ownership culture as firm grows
Formalized core values and reinforce regularly
Many deals sourced through portfolio company relationships
Goal to be "capital partner of choice" for founders/owners

The Importance of Cycles and Capital Structure (1:33:41)

Very focused on understanding business performance through cycles
Conservative approach to leverage, especially initially
Maintain liquidity to capitalize on opportunities in downturns
"Liquidity in downside scenarios is always worth more to you over a longer period of time than max leverage is in an upside scenario." - Matt Perelman

Partnership Dynamics and LP Relationships (1:37:18)

Matt and Alex have complementary personalities/skills
Work through disagreements productively
Recognize neither could do it alone
Very focused on LP relationships and alignment
Benefit from mentorship of experienced LP base

The Kindest Thing Anyone Has Ever Done For Matt & Alex (1:40:26)

Both cite their parents and upbringing as most impactful
Credit wives for support through ups and downs of building firm
Grateful to Burger King/RBI team for giving them a shot as young franchisees

Conclusion

Matt Perelman and Alex Sloane have built Garnett Station Partners into a leading investor in franchise and multi-unit consumer businesses over the past decade. Their partnership, focus on operational improvements, and disciplined approach to valuation and capital structure have driven strong returns. By professionalizing "Main Street" businesses and preparing them for institutional ownership, GSP has carved out a valuable niche in the lower-middle market. Their story highlights the opportunity for young, driven investors to build successful firms by bringing an institutional approach to fragmented industries.