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Matt Perelman & Alex Sloane - The Art of Franchise Investing - [Invest Like the Best, EP.392]
Invest Like the Best with Patrick O'Shaughnessy
Deep Dive
Why did KFC reject Matt and Alex’s initial franchise application?
KFC rejected Matt and Alex's application because they had no money (less than the $1 million financial requirement), no restaurant experience, and were too young, being college students.
Why is the franchisee-franchisor relationship important in the franchise space?
The franchisee-franchisor relationship is important because it affects the long-term sustainability and growth of the business. Franchise agreements are often franchisor-favorable, and maintaining a positive relationship ensures that franchisees can negotiate beneficial terms and franchisors remain supportive.
Why do Matt and Alex focus on scale when investing in franchises?
Scale is important because it limits risks like traffic pattern changes, weather, or local market shifts. It provides a less risky, more stable business, which historically has been rewarded with better returns and more attractive financing options.
Why did the auto services franchise deal fail, and what lessons did Matt and Alex learn from it?
The auto services franchise deal failed due to over-leverage, poor management, and the business being in a discretionary and cosmetic segment. Lessons learned include the importance of underwriting deals through cycles, avoiding value traps, and focusing on mission-critical businesses with strong unit economics.
Why do Matt and Alex maintain a close relationship with their LPs?
Maintaining a close relationship with LPs is crucial because managing other people's money is a significant responsibility. They ensure LPs understand the investment philosophy, manage through cycles, and stay aligned with the firm's goals. This builds trust and secures long-term support.
Why does GSP invest in businesses with high unit economics?
GSP focuses on businesses with high unit economics (at least 20% EBITDA margins) because they provide a solid foundation for growth and value creation. These businesses can better absorb financial shocks and offer more opportunities for margin enhancement through technology and management improvements.
Why do Matt and Alex emphasize maintaining culture during business consolidations?
Maintaining culture is crucial during consolidations to ensure that operations run smoothly and that employee and customer satisfaction remains high. They invest in building strong relationships and ensuring that local business values are respected and enhanced.
Why is lease negotiation a significant area of value creation for GSP?
Lease negotiation is a significant area of value creation because it can be renegotiated to reflect changes in business performance, such as increased sales due to a nearby Walmart. This can lead to higher rent or lower rent, depending on the situation, and can be used to de-risk the investment and create arbitrage opportunities.
Why does GSP avoid using high leverage in their early investments?
GSP avoids high leverage in early investments to ensure they can weather economic downturns and make informed decisions. This approach was validated during COVID, where they were able to maintain their businesses without losing money or breaching covenants.
Why is managing labor turnover critical for GSP's investments?
Managing labor turnover is critical because it significantly impacts operational costs and customer satisfaction. High turnover can be costly, and reducing it even slightly can have a substantial positive impact on margins and overall business performance.
Why do Matt and Alex believe in writing the sale memo early in their investments?
Writing the sale memo early helps them focus on the exit strategy and ensure every decision aligns with maximizing the business's value for the next buyer. This approach has been successful, as all their exits have been on average meaningfully above their underwriting target.
Why does GSP avoid investing in businesses with high fad risk, such as certain gyms or early education centers?
GSP avoids high fad risk because these businesses can perform poorly through economic cycles and may not have the long-term sustainability they seek. They prefer businesses with consistent performance and strong underlying demand, like Planet Fitness, which benefits from a large ad budget and broad customer base.
Why do Matt and Alex read 'The Predators' Ball' every January?
They read 'The Predators' Ball' to appreciate the history and thoughtfulness of the private equity and high-yield securities era. It helps them understand the importance of capital structure and the impact of pioneers like Michael Milken on the industry.
Why does GSP often start with 100% equity in their investments?
GSP often starts with 100% equity to de-risk the investment and ensure they can navigate downturns. They avoid maxing out first lien debt capacity and use liquidity to make better decisions in downside scenarios.
- Partnership between Matt and Alex since childhood
- Initial KFC franchise acquisition attempt failed
- Successful acquisition of 23 Burger King restaurants
- Importance of relationship with Ray Meeks, a long-term Burger King franchisee
Shownotes Transcript