Middle Market Growth - January/February 2016 by Association for Corporate Growth

Growth MIDDLE MARKET

// JANUARY/FEBRUARY 2016

GIORDANO’S

A PIZZA STORY STUFFED WITH GROWTH POTENTIAL

UNDERSTANDING THE NEW DEFINITION OF ‘JOINT EMPLOYER’ A QUALIFIED OPINION: DAN ROWE, FOUNDER & CEO, FRANSMART

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EXECUTIVE SUMMARY GARY LABRANCHE // President & CEO, ACG Global

Dishing up Opportunity in 2016

appy New Year! Welcome to the January/February issue of Middle Market Growth. Restaurants and leisure companies are the focus of this edition of the magazine, a sector about which

most everyone has strong opinions. Will McDonald’s ever recover the mojo of its glory days? Are casual dining chains such as Ruby Tuesday and Red Lobster going the way of landline phones? Are restaurants the next sites for a completely customizable customer experience? Our cover story takes a look at the comeback of a storied deep-dish pizza chain, Giordano’s. The longstanding business, which filed for bankruptcy protection in 2011, is now on the rebound, fueled by investment from Victory Park Capital and other private equity firms, and a fresh strategy for growth, including expansion outside the Chicago area. Restaurants have become very formulaic businesses; if you don’t have the right ingredients to rise above the din, you’re not going to make it. Dan Rowe, who heads restaurant development group Fransmart, knows all about this. The subject of this issue’s A Qualified Opinion, Rowe has scaled dozens of successful restaurant concepts, including Five Guys Burgers & Fries, Qdoba Mexican Grill and Freshii. Find out why he finds the fast casual sector such a compelling space. This month’s inside feature story examines a labor-related issue that could have a profound impact on the restaurant industry, as well as a range of other service businesses—the recent NLRB ruling to consider franchisers so-called “joint employers” of employees, even those who are hired and managed locally by franchisees. This is an important issue that ACG is watching from our newly opened Washington, D.C., office. ACG recently supported legislation that would limit this ruling. You’ll find out more about this and other regulatory issues of concern in the expanded public policy section of the magazine. Speaking of food and dining, ACG is busy gearing up for InterGrowth® 2016 in New Orleans, one of the country’s greatest dining towns, where you’ll find everything from grilled oysters to gumbo and much more. Combine that great city with the fine-tuned programming and networking this event promises, and you have a great recipe for success. We hope you enjoy this issue of the magazine. Bon appetit! Laissez les bons temps rouler!

EXECUTIVE SUITE DEXTER MANNING // Partner, Audit Services, Grant Thornton LLP

WHAT IS THE BIGGEST CHALLENGE FACING THE FRANCHISE INDUSTRY TODAY? DEXTER MANNING: The biggest issue creating waves right now is the National Labor Relations Board’s ruling that McDonald’s can be treated as a joint employer with its franchisees. The NLRB ruled that McDonald’s is a joint employer with its privately owned franchise restaurants and legally responsible for workplace practices and the general welfare of franchise employees. If this ruling is upheld, it will have major implications for all franchise businesses because it makes franchisers everywhere potentially liable for employee complaints that take place at individual franchises and for providing required employee benefits, such as health insurance under the Affordable Care Act. For example, the ruling could make the franchise parent culpable in a wage dispute between an employee and a franchisee, or it could be held responsible for the bad behavior of an individual employee at one franchise unit. This all started with a case the board ruled on involving a company called Browning-Ferris Industries of California, which the NLRB found was a joint employer of workers hired by a contractor to help staff the company’s recycling center. The ruling had an immediate impact on McDonald’s and several of its franchisees.

BIO // DEXTER MANNING is an audit services partner at Grant Thornton and national practice leader for food and beverage. He has more than 20 years of experience in financial accounting and advisory services specializing in the food industry, including eight years as CFO of a regional beverage distributor.

DO YOU THINK THE NLRB RULING AGAINST MCDONALD’S IS CORRECT?

DM: No. It violates what it means to be a franchise. Franchises are independently owned companies that use the intellectual property and trademark of the franchise and, in return, pay a royalty fee to the franchiser. With more than 14,000 restaurants in the United States alone, McDonald’s is one of the largest franchise chains in the country. However, more than 90 percent of McDonald’s restaurants are franchise-operated. It’s not surprising that standards and working conditions can and will vary from franchise operator to franchise operator. Continued on next page

EXECUTIVE SUITE DEXTER MANNING // Partner, Audit Services, Grant Thornton LLP

Many people agree this ruling is unfair. Hundreds of franchise owners have been lobbying Capitol Hill on the issue. Republicans in Congress are now looking to nullify the ruling. Sen. Lamar Alexander, R-Tenn., told a Capitol Hill news conference that 43 senators have signed on as co-sponsors of the Protecting Local Business Opportunity Act, which moves to have the ruling overturned. Additionally, at a hearing on the issue, two law professors testified they didn’t agree with the ruling’s ramifications. Not surprisingly, McDonald’s has responded with strong opposition as well. I do believe the ruling will be appealed and ultimately overturned, even if it makes its way to the Supreme Court. This ruling threatens to cripple the franchise industry as we know it today.

HOW COULD THIS IMPACT PRIVATE EQUITY INVESTORS?

DM: In 2015, the franchise sector was projected to grow twice as fast as the broader economy in the United States for the fifth consecutive year, according to the International Franchise Association. Franchising has been a great business model for private equity firms. But this ruling will have consequences. First of all, it affects any private equity firm that already owns franchises. The ruling leaves them vulnerable to lawsuits even though they can’t control exactly how every franchisee runs its business and how employees behave. Second, the ruling may force private equity firms to think twice before they invest in a franchise. Some companies are already getting swept up in the change. A manager at a Bourbonnais, Illinois, hotel stalked and sexually harassed housekeepers and coerced them into sex, according to a pair of federal lawsuits. Lawyers for the women don’t just want the manager and the franchisee, the Fairfield Inn by Marriott, held accountable. Citing the recent landmark ruling by the NLRB, they want Marriott held responsible as well. //

MIDPOINTS RANDY SCHWIMMER // Founder and Publisher, The Lead Left

Tipping Point

anny Meyer startled the restaurant world in October with a dramatic announcement—he was eliminating tipping from all his Union Square Hospitality Group fine dining locations.

Many revolutionary ideas seem obvious in hindsight. This one is being

launched against a firmly entrenched practice that defies common sense yet remains the economic foundation for many service sector employees in the United States. The reaction on op-ed pages was favorable, thanks to Mr. Meyer’s sterling reputation among cuisine cognoscenti. Since launching the Union Square Café in 1985, he has consistently been on the forefront of restaurant trends, propelling him to the role of industry statesman.

BIO // Randy Schwimmer is senior managing director and head of origination and capital markets at Churchill Asset Management LLC, a middle-market senior debt provider. He is also founder/publisher of The Lead Left, a weekly newsletter about trends and deals in the capital markets.

It is also a campaign years in the making, dating back to Meyer’s partnership at Gramercy Tavern with chef Tom Colicchio (whose new Craft restaurant concept has a no-tip lunch). Prior to the public news, the USHG team worked with various industry groups to ensure a smooth launch. One target of Meyer’s decision was the income inequity among his 1,800 employees. Tips reward the wait staff, when arguably the kitchen staff has more to do with putting that awesome meal on your table than “Hello, my name is Sean, I’ll be your server tonight.”

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Meyer’s solution, to offer instead an across-the-board price (and thus wage) increase at his eateries, is bold and fraught with risk. Will diners rebel at higher meal tabs in an already pricey environment? Will competition follow suit or rush to take market share? Continued on next page

MIDPOINTS RANDY SCHWIMMER // Founder and Publisher, The Lead Left “THE ISSUE IS A TWO-TIERED SYSTEM OF ‘HAVES’—THE FRONT OFFICE THAT EARNS A GOOD LIVING— AND EVERYONE ELSE SURVIVING ON THE MINIMUM WAGE.”

But there’s more here than culinary currency. For Meyer, there’s a “destructive nature of tipping” that has “perpetuated racism (and) sexual harassment,” he told the Financial Times. Strong stuff. Turns out there’s a negative socioeconomic undercurrent running through the table service segment. The issue is a two-tiered system of “haves”—the front office that earns a good living—and everyone else surviving on the minimum wage. As one commentator pointed out, some states do not cover the “have-nots” under the same higher minimum wage laws as non-tipped workers. Fine if you happen to be a top waiter at a high-end Midtown Manhattan steakhouse. Otherwise your income may still be only half of that of workers whose wages don’t include tips. Tipping represents beaucoup bucks in America. The Journal of Applied Economics reports it amounts to $42 billion a year in restaurants alone. Another study estimated that tipping is common in 31 different professions, including housekeeping, blackjack dealing and bartending. As ubiquitous as tips are, their etiquette is equally mysterious. Is 15 percent enough, or is 20 percent or even 25 percent now the norm? If service is poor do you leave nothing, or does that punish the entire wait staff since tips are pooled? Travelers confront the issue regularly. Do you tip the doorman who opens your cab door? (Hey, I just got here!) The housekeeper cleaning your room? (Battle pay if my two young daughters are with me.) The concierge arranging reservations? (Unless it’s Shake Shack). Like many things in life, it may all come down to control. As one veteran waiter put it, “I’d rather have my boss determine my pay than some total stranger.”

Challenging the status quo in Private Equity. With more than 25 years experience in PE markets worldwide, Dentons’ Private Equity team advises fund sponsors and their portfolio companies on all aspects of their business, including fund formation, M&A and financing transactions, tax and regulatory matters. Dentons and 大成 have combined. Together we form the world’s largest global elite law firm.* Contact: Paul Gajer Partner, New York T +1 212 398 5293 paul.gajer@dentons.com Steve Rist Partner, Kansas City T +1 816 460 2645 steve.rist@dentons.com Michael (Mick) J. Cochran Partner, Atlanta T +1 404 527 8375 michael.cochran@dentons.com

dentons.com © 2015 Dentons. Dentons is a global legal practice providing client services worldwide through its member firms and affiliates. Please see dentons.com for Legal Notices. *Acritas Global Elite Law Firm Brand Index 2013-2015.

Growth MIDDLE MARKET

// JANUARY/FEBRUARY 2016

Cover and above photos by Alyssa Schukar

FEATURES

Giordano’s: A Rising Pizza Chain Just a few years ago, iconic Chicago pizza chain Giordano’s was struggling. After a capital infusion from private equity firm Victory Park Capital and new leadership, the business is now thriving in its home city, and expansion plans are underway. Read more.

“WE HAVE MADE THIS AN UNQUESTIONABLY PROFITABLE ENTERPRISE—THEY TALK ABOUT GIORDANO’S WITH RESPECT TODAY.” // YORGO KOUTSOGIORGAS, CEO, GIORDANO’S

Untangling the New Definition of ‘Joint Employer’ A recent National Labor Relations Board decision will change the relationship between franchisers and franchisees, but what are the implications? Read more.

TABLE OF CONTENTS

IN EVERY ISSUE

PRESIDENT & CEO Gary LaBranche, FASAE, CAE glabranche@acg.org

Executive Summary

VICE PRESIDENT, COMMUNICATIONS & MARKETING

Executive Suite MidPoints by Randy Schwimmer Growth Economy Face-to-Face Quick Takes B-Side The Ladder It’s the Small Things The Leadership

Kristin Gomez kgomez@acg.org

DEPARTMENTS POLICY POINTS • What Middle-Market M&A Can Expect in 2016.

Deborah L. Cohen dcohen@acg.org

• Candidate Tax Proposals to Eliminate Interest Deductions Miss the Mark.

ASSOCIATE EDITOR

• Food for Thought: Illinois Congressman Talks Policy and Pizza. • Michigan’s Middle Market: Alive and Thriving. Read more.

THE ROUND • Dutch Treat at EuroGrowth 2015.

READ ONLINE Read additional content on the MMG website.

• Sale Lease-Backs: An Alternative Means to Raise Capital. • Middle Market Growth Takes Folio Award For Design. Read more.

A QUALIFIED OPINION

2015 Folio Ozzie Digital Winner, Standalone Digital Magazine 2014 Association TRENDS All-Media Silver Award, Monthly Trade Publication 2014 Folio Eddie Digital Winner, Standalone Digital Magazine 2014 Apex Award, New Magazine, Journal & Tabloid

EDITOR-IN-CHIEF

Dan Rowe, Founder and CEO of Fransmart, Discusses the International Opportunity for Restaurant Franchises and Due Diligence Issues to Consider. Read more.

ACG@WORK

Kathryn Mulligan kmulligan@acg.org

DIRECTOR, COMMUNICATIONS & MARKETING Larry Guthrie lguthrie@acg.org

VICE PRESIDENT, EVENTS & PARTNERSHIPS Christine Melendes, CAE cmelendes@acg.org

DIRECTOR, STRATEGIC DEVELOPMENT Maggie Endres mendres@acg.org Custom media services provided by Network Media Partners, Inc.

• ACG LA Event Maintains Star Appeal. • Richmond Conference Quenches Thirst for Networking.

THE PORTFOLIO

Association for Corporate Growth 125 South Wacker Drive, Suite 3100 Chicago, IL 60606 ACG Membership: membership@acg.org www.acg.org

The latest middle-market trends and thought leadership written exclusively by a team of expert ACG Global featured firms. Read more.

• M&A East Sets the Pace for Networking. Read more.

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

PUBLIC POLICY UPDATE POLICY POINT NEWS

What Middle-Market M&A Can Expect in 2016

Candidate Tax Proposals to Eliminate Interest Deductions Miss the Mark

3 4

What Middle-Market M&A Can Expect in 2016 By Amber Landis, ACG Global As the 2016 presidential race heats up, M&A professionals recall the last presidential election with feelings of regret. In 2012, against the backdrop of the passage of Dodd-Frank and the lingering impact of the global

Food for Thought: Illinois Congressman Talks Policy & Pizza

financial crisis, they watched as many politicians and media

Michigan’s Middle Market: Alive and Thriving

responsible for everything wrong with the U.S. economy.

assigned blame to the M&A industry. Private equity firms and others in the finance industry were cast as greedy job destroyers and antagonists The industry has come a long way in the past four years. As the current presidential campaign season gains momentum, ACG continues to serve as the “voice of the middle market,” educating political candidates and government regulators about issues affecting middle-market M&A, and advocating for change. ACG’s constituents have learned that a seat at the political table means an opportunity to tell the noteworthy Continued on next page

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET story of the middle market and the important role that ACG members play by helping companies grow, add jobs and improve local communities throughout the United States. Much of the campaign season will center on candidates’ political posturing. There will be pressure on long-time friends of the industry to reposition themselves for voters seeking a more populist message. It will be more critical than ever for ACG and industry practitioners to remind candidates that policies to sustain the middle-market economy

Amber Landis

are helping Main Street, not Wall Street. ACG has made some important investments to boost its presence in the policy arena. In September, it announced the opening of a Washington, D.C., office to maintain a fulltime presence in the Capitol and a consistent voice with Beltway media, lawmakers, regulators and their staff. This preemptive step will help prevent additional blows to the industry, such as the broad-brush approach of Dodd-Frank, whose regulations affecting middle-market investors were often designed for larger financial services firms. ACG has also acted proactively to combine its resources with likeminded organizations and has joined a number of broad-based coalitions, including the Coalition to Save Local Businesses, a Washington, D.C.-based group dedicated to protecting businesses impacted by the National Labor Relations Board. By working together, these meaningful coalitions will have an impact on important issues, such as maintaining interest deductibility and reversing recent action by the NLRB to expand its definition of joint employer. ACG’s strength is derived from the volunteerism of its members. With the recent creation of the Private Equity Regulatory Task Force and the existing public policy committee, both comprising members throughout the United States, ACG is positioning itself to have a positive impact on the issues most important to the middle-market M&A community. ACG encourages others to get involved in the organization’s efforts. Consider getting started by attending the upcoming ACG Middle-Market Public Policy Summit on Tuesday, Jan. 26 at the Park Hyatt Hotel in Washington, D.C. See a list of the key issues ACG will be monitoring in 2016. // If you have questions or comments, please contact Amber Landis, ACG Global vice president of public policy.

READ ONLINE // Find updates and insight on policy issues on the MMG website.

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

Candidate Tax Proposals to Eliminate Interest Deductions Miss the Mark By Steven Bortnick, Pepper Hamilton LLP With a presidential election less than a year away, the majority of Republican candidates have by now released tax reform plans, many of which would eliminate the deduction for interest expense. Sen. Marco Rubio and former Gov. Jeb Bush, for example, would eliminate interest deductibility entirely, while Donald Trump’s proposal includes an undefined cap on interest deductibility phased in over time, according to the BUILD Coalition, an alliance of businesses supporting tax reform efforts. These plans, unfortunately, are bad for business. The elimination of this longstanding component of the U.S. tax code poses an imminent threat to the health of middle-market companies.

Rationale Behind Proposal Rubio was among the first of the candidates to make his plan public when he released the Economic Growth and Family Fairness Tax Reform Plan with Sen. Michael Lee, R-Utah, last March. Describing the rationale behind their proposal, the senators said the change to the treatment of interest deductibility would not result in any economic disadvantage for borrowers. Rather, they maintained that if a lender does not have to include the interest income in taxable income—another provision of their plan—that lender would be willing to accept a lower rate of interest. Rubio and Lee drew an analogy to the current rules for municipal bonds—state and local governments pay lower interest rates on these tax-exempt debt securities. Further, they said that eliminating the interest deduction (as well as the tax on interest and dividends) would allow an issuer to determine whether to issue debt or equity without regard to the interest deduction; companies will be less inclined to issue debt, thus making American corporations financially stronger, they said. Unfortunately, the loss of the interest deduction is likely to hurt, rather than help, middle-market American companies. Interest deductibility isn’t exclusively a GOP issue. The leading Democratic presidential candidates have released tax principles but have yet to publish comprehensive plans at the time of this issue’s publication. Some Democratic senators, however, have made their positions clear. Sen. Ron Wyden of Oregon, chairman of the Senate Finance Committee, for example, has included limits on interest deductibility in previous tax reform proposals. Continued on next page

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET U.S. Lenders Will Be Taxed and Demand Higher Interest Rates Although Rubio’s plan would exempt most taxpayers from tax on interest income, this is not the case for financial services companies. These companies will continue to pay tax on interest income and be entitled to a deduction for interest expense. Banks and insurance companies certainly would continue to be taxed on interest, while the plan does not delineate which financial services companies would continue to be subject to tax on interest. These entities constitute the primary lenders to middle-market companies. Many of the other candidates’ plans do not include any provision for eliminating taxation on interest, dividends and capital gains. Accordingly, banks, insurance companies and other financial services companies will not benefit from the exclusion of interest from taxable income and, in response, will insist on a higher rate of interest on loans. As the prime rates, LIBOR and other market rates are determined by financial services companies; it does not seem likely that interest rates will drop as a result of the candidates’ proposals. Middle-market companies are likely to pay a higher effective rate of interest when the loss of interest deductibility is factored in. Many U.S. trading partners, including the United Kingdom, Germany and France, provide a deduction for interest against taxable income. The interest deduction helps to reduce the effective rate of interest on debt. Without an interest deduction, U.S. companies may pay a higher effective rate of interest on borrowings than their foreign competitors, thus putting them at a competitive disadvantage.

There Are Business Reasons for Issuing Debt The primary business of a bank is to make loans, not to make equity investments in privately held companies. Banks generally expect a return based on the passage of time, not on the success or failure of the issuer. Accordingly, the typical debt instrument provides for repayment at a specific time with a stated interest rate. In the event of an issuer’s insolvency or bankruptcy, debt holders are paid before equity owners. Even among debt holders, it is typical to have agreements indicating which creditors get paid first in the event that the assets of the issuer are insufficient to pay all debt holders. For such lenders, common stock is not a substitute for debt; repayment of common stock is subject to the success or failure of the business. Before the redemption of common stock, all senior equity and debt holders must be repaid. Moreover, the payment of any returns (dividends) is at the discretion of the directors. From the issuer’s standpoint, the issuance of common stock also has a dilutive impact on the equity of the issuer that debt does not have. Thus, a certain amount of debt in a capital structure is healthy. Continued on next page

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET Even preferred equity may not be an adequate substitute for debt. In a bankruptcy, debt holders will always be paid first. Although a preferred stockholder usually has certain protections to ensure payment of dividends, corporate law typically restricts payment and the redemption of stock in certain cases—including where such payments would make the company insolvent. Steven Bortnick

As a matter of corporate law, the payment of dividends generally falls under the discretion of the board of directors. Additionally, a company that issues significant preferred stock may be considered no healthier financially than a company with significant debt. The type of preferred stock that may come close to being a substitute for debt—that with a stated return, set maturity date and default provisions designed to ensure current payment of yield and redemption upon bankruptcy—may well be treated as debt for accounting and rating agency purposes. As the presidential candidates campaign for the nation’s highest office, they should consider the importance of interest deduction to the health of American businesses. Interest deductibility is a longstanding element of the U.S. tax code; eliminating it would have an adverse impact on the midsize businesses that form the backbone of the American economy. // —Steven Bortnick is a partner in Pepper Hamilton LLP’s tax practice group and the firm’s investment funds industry group, an interdisciplinary group made up of more than 60 lawyers assisting all types of investment funds throughout their entire life cycle. Bortnick is also a member of ACG’s public policy committee. This article is brought to you by Pepper Hamilton LLP. It was adapted from a version originally published in the July 30 edition of the Middle Market Growth weekly e-newsletter.

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

PRESIDENTIAL CANDIDATES ON INTEREST DEDUCTIBILITY, 100% EXPENSING AND THE CORPORATE TAX RATE* Proposed Corporate Tax Rate; Territorial System

Candidate

Released Tax Reform Plan

Maintains Full Interest Deductibility

Proposes 100% Expensing

Jeb Bush

Yes

No – Eliminates

Yes

20% (8.75% deemed repatriation); territorial

Ben Carson

No full plan, just principles

Undeclared

Chris Christie

No full plan, just principles

Unclear

25% (8.75% repatriation holiday); territorial

Ted Cruz

Yes

No – Eliminates

Yes

16% (10% repatriation holiday); territorial

Carly Fiorina

Undeclared

Mike Huckabee

Undeclared

John Kasich

No full plan, just principles

Unclear

Yes

25% (repatriation at a “low rate”); territorial

Rand Paul

Yes

No – Eliminates

Yes

14.5%; unclear

Marco Rubio

Yes

No – Eliminates

Yes

25%; territorial 20% (10% repatriation, unclear if this is a holiday or deemed); unclear 15% (10% deemed repatriation); not a territorial system

Rick Santorum

Yes

No – Eliminates

Yes

Donald Trump

Yes

No – Undefined cap phased in over time

No – Maintains current structure

Hillary Clinton

No full plan, just principles

Unclear

Unclear; unclear

Bernie Sanders

No full plan, just principles

Unclear

Unclear, but wants to increase corporate tax rate; unclear

Unclear

ACG is a member of the BUILD Coalition, a group that supports comprehensive tax reform efforts and aims to preserve 100 percent interest deductibility. *List of candidates and positions at press time.

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET GROWTH AWARD // ACG President and CEO Gary LaBranche (second from left) presents Rep. Quigley (center) with the ACG Growth Award.

Food for Thought: Illinois Congressman Talks Policy & Pizza By Kathryn Mulligan, ACG Global Reaching compromise in Congress to create business-friendly policies isn’t pie in the sky. At least not according to U.S. Rep. Mike Quigley, who spoke with a group of private equity executives at a pizza chain based in his home district in Chicago. The discussion addressed public policy issues impacting middle-market companies— including regulation and taxation—as Quigley emphasized the need for lawmakers to find common ground. Gary LaBranche, president and CEO of the Association for Corporate Growth, presented Quigley, a Democrat, with the ACG Growth Award in recognition of the congressman’s efforts on behalf of the middle market. The Nov. 23 event was hosted by ACG at Giordano’s, a Chicago-based pizza franchise backed by private equity firm Victory Park Capital. Yorgo Koutsogiorgas, the restaurant chain’s president and CEO, described the benefits of private equity investment he’s seen firsthand. Continued on next page

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET “If it wasn’t for Victory Park, we wouldn’t have the capital to grow,” he said. Koutsogiorgas added that even for a company like Giordano’s with healthy cash flow, outside capital was Read more about Giordano’s growth story in this issue’s cover feature.

necessary to open new restaurants. Giordano’s currently has 57 locations along with nine new restaurants in the pipeline. To help private equity firms that invest in businesses like Giordano’s, Quigley has crossed party lines. He voted to amend the Dodd-Frank Act, the sweeping legislation passed in 2010 following the recession that increased the regulation of financial services firms, including private equity. Most recently, the congressman helped introduce H.R. 3784, the SEC Small Business Advocate Act, which provides small and midsize businesses with a voice on the Securities and Exchange Commission. “One way to deal with Dodd-Frank is to have an entity embedded within the SEC that focuses on small and midsize businesses,” he told the group at Giordano’s, which included members of other Chicago-area private equity firms. Another issue of particular importance to franchise businesses like Giordano’s is the joint employer standard. The National Labor Relations Board in August ruled to expand the definition of a joint employer, a decision that would make franchise owners liable for actions of their franchisees. “If it were to become law, it would create a wedge,” Koutsogiorgas said. “Anything (Giordano’s franchisees) do, we’d have to be extremely involved in because the risk would be shared,” he added. Amber Landis, ACG Global vice president of public policy, told Quigley that the joint employer issue is “rising in terms of importance” with ACG and its constituents. She described the uncertainty felt by many private equity firms. “Is private equity going to be considered a joint employer?” she asked, noting “the NLRB decision puts every business-to-business relationship in jeopardy.” Quigley promised to look into the issue. //

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET ‘HEART’ OF THE ECONOMY // Michigan Lt. Gov. Brian Calley stresses the contribution of midsize companies.

Michigan’s Middle Market: Alive and Thriving By Kathryn Mulligan, ACG Global The middle market is thriving in Michigan, a state home to recognizable brands like Jiffy Mix and the Detroit Pistons, along with lesser-known companies like ADAC Automotive. A full-service supplier to the Big Three automakers, ADAC employs more than 1,200 workers in some of Michigan’s hardest-hit local economies. ADAC and other midsize companies are leading the state’s jobs and sales growth, and generating tax revenue. Many are growing with the support of private capital investment, a source of much-needed financing that many middle-market companies struggle to find elsewhere. To celebrate the successes of these businesses and the investors that back them, ACG’s Detroit and Western Michigan chapters in October hosted the inaugural Michigan Middle-Market Summit in East Lansing. The event brought together more than 100 senior executives, policy experts and professionals from the middle-market community to discuss the economic and policy issues facing midsize businesses. Continued on next page

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET The Power of Private Capital Among those who spoke at the summit was Joseph Gumbis, CEO of Packaging Concepts & Design, a Madison Heights, Michigan-based provider of packaging solutions with a focus on automotive module packaging. Gumbis discussed the partnership between his firm and its private equity backer, O2 Investment Partners, also based in Michigan. O2’s team has helped PC&D achieve its strategic vision and broaden its market share. During his opening address, Michigan Lt. Gov. Brian Calley emphasized how firms like ADAC and PC&D create jobs and contribute to economic growth. “Small and midsize businesses are the heart of Michigan’s economy,” he said. Quan Mac, managing director of Legacy Trust, highlighted another benefit of private capital investment. Mac oversees her firm’s family office services platform, managing investments on behalf of the wealthiest families in western Michigan, a region known for its high level of philanthropic giving. Many of Mac’s family office investments are made in private equity funds. When their portfolio companies do well and sell for a profit, funds pass on a share of the returns to their family investors; these families then have additional resources for philanthropic efforts. When private equity does well, the community benefits—not just through business growth, but also through the generosity of wealthy individuals, Mac said.

A Seat at the Table For private equity to be an effective tool for growth, however, favorable policies must be in place. Following the passage of Dodd-Frank and the increase in regulatory scrutiny of investment advisers, ACG has increased its engagement on legislative issues impacting the middle market. From the Congressional Caucus for Middle Market Growth to the Private Equity Regulatory Task Force and local grass-roots efforts, ACG is engaging with policymakers and creating industry best practices to ensure private capital can continue to help companies thrive. To further explore the themes of public policy and economic growth, the summit featured two panel sessions. “Private Capital, Public Good” included a discussion of private equity’s positive impact on the economy and society. “Michigan’s Middle Market” looked at the state’s economy and policies. Representatives from the Michigan Chamber of Commerce and the Michigan Economic Development Council participated, along with Jim Teets, president and CEO of ADAC Automotive. In his closing remarks, Doug LaLone, partner with Fishman Stewart Yamaguchi PLLC and president of ACG Detroit, noted the significance of the summit, given that more than 30 percent of Michigan’s workforce is employed by middle-market businesses. “We had a very informative discussion on topics and trends for local business leaders to better understand their role in economic growth in Michigan and the Midwest states,” he said. //

GROWTH ECONOMY THE IMPACT OF MIDDLE-MARKET PRIVATE EQUITY

ILLINOIS // 1995-2013 Illinois has seen tremendous jobs and sales growth driven by private equity-backed middle-market businesses, including a jobs growth rate more than six times that of all businesses in the state between 1995 and 2013.

63.2%

+98+2T

ACG CHICAGO

JOBS GROWTH IN PE-BACKED BUSINESSES

98.8%

10.1%

JOBS GROWTH IN ALL BUSINESSES

SALES GROWTH IN PE-BACKED BUSINESSES

25.9%

32,296

SALES GROWTH IN ALL BUSINESSES

JOBS CREATED BY PE-BACKED BUSINESSES

See the impact of middle-market private equity on your state at GrowthEconomy.org.

JOBS GROWTH % BY SEGMENT 12.7%

SALES GROWTH % BY SEGMENT

6.3%

MM Seg 1: $10-50M in sales

27.3%

MM Seg 2: $50-100M in sales

8% 38%

Small: Less than $10M in sales

5.2% 42.9%

59.5% 0%

KEY

MM Seg 3: $100M-1B in sales Large: More than $1B in sales

All stats are from PitchBook and the Business Dynamics Research Consortium at the University of Wisconsin-Extension.

P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .® To d a y ’s f a s t - p a c e d m a r k e t r e q u i r e s a n e d g e . A C G G l o b a l P a r t n e r s prov ide y o u wit h t h e e x pe r t is e a n d be s t pr a c t ic e s n e e de d t o c l o se t he d e a l .

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

Strengthen the Middle-Market Voice Attend the ACG Middle-Market Public Policy Summit and Fundraising Reception It’s a presidential election year and taxes, financial regulation and other issues affecting middle-market M&A are topics for debate. Now more than ever, ACG’s advocacy efforts are critical to ensure that the middle market is well-represented on Capitol Hill. To make sure its members have a voice, ACG is hosting the fifth annual Middle-Market Public Policy Summit on Jan. 26 at the Park Hyatt in Washington, D.C. During the event, industry experts and Beltway insiders will offer insight into how Washington policymakers view the middle market and discuss strategies for communicating the positive impact of private capital investment. Speakers include John Harris, co-founder and editor in chief of the political newspaper and website Politico, who will offer his take on D.C. politics and policy. Marc Wyatt, director of the SEC Office of Compliance Inspections and Examinations, returns to the summit for a second year for a Q&A session addressing regulatory and compliance issues impacting middle-market private equity funds and registered investment advisers. Attendees can directly support ACG’s public policy efforts by attending the MiddleMarket Voice Fundraising Reception on Monday, Jan. 25 at the Park Hyatt. Tickets are $150, and all proceeds benefit ACG’s public policy efforts. //

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS Get involved! This winter, ACG chapters across the globe will host hundreds of local events. Check out what’s happening at your local chapter, register and join in on valuable educational and networking opportunities.

ACG Dallas/Fort Worth Dealmakers Charity Classic at Gleneagles Country Club Left: ACG DFW golfers Ryan Nicholson, David Taylor, Ethan Boothe and Phil Claybrooke on the course. Right: Hein & Associates sponsored the Leaderboard Air Cannon on hole No. 10 to raise money for The First Tee of Greater Dallas, a golf-based youth development program. From left, Katherine Helms and Annie Verret from The First Tee with Hein’s Megan Barnhill and Kristen Scherer.

ACG Atlanta Chapter

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View Calendar

Had a newsworthy chapter event? Send a 150to 200-word summary and high-resolution photos to Associate Editor Kathryn Mulligan.

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THE ROUND NEWS THAT MATTERS

VIEW SLIDESHOW // Two days of European networking.

Dutch Treat at EuroGrowth 2015 EuroGrowth celebrated its third successful year as 250 middle-market deal-makers gathered in Amsterdam for two days of networking and educational programming focused on international investment opportunities. Kicking off EuroGrowth 2015 on Nov. 16 and 17 at the Mövenpick Hotel were keynote addresses from Invest Europe CEO Dörte Höppner and 3i Managing Partner Menno Antal, who shared insights about Europe’s current private equity trends. They were then joined by Richard Jaffe, ACG chairman of the board and partner, Duane Morris LLP, for a brief question and answer session. Throughout the event, guests chose from breakout sessions addressing European IPOs, the European lending environment, fundraising, the oil and gas market, international firms and PE owners, and cybersecurity. Cultural considerations in cross-border deals, the effects and influence of work councils, fundraising from institutional investors and family offices, reputation management of private equity firms and innovation best practices were among 14 wide-ranging topics offered as roundtable discussions. Continued on next page

THE ROUND NEWS THAT MATTERS ROUNDTABLES // Expert-led discussions focused on a variety of topics.

Recreational highlights included an ACG Capital Connection® wine tasting and opening reception, and, new this year, a reception hosted by the ACG European chapters, PitchBook and Merrill DataSite, which was held at the Heineken Experience. Tuesday was jam packed with breakout sessions and three keynote addresses. At lunch, attendees heard from PE experts on the topic “State of PE in Europe,” moderated by Stewart Licudi, managing director, William Blair. The closing session of the conference was led by Marlies Dekkers’ CEO, Eppo Van Berckelaer, and was among the most highly attended and rated sessions. Meanwhile, plans are now afoot for next year’s EuroGrowth event, October 20 and 21 at the Hotel Arts in Barcelona. Hasta luego. //

THE ROUND NEWS THAT MATTERS

Sale Lease-Backs: An Alternative Means to Raise Capital By Jason Wiltshire, Stan Johnson Company Over the past two decades, sale lease-backs have become more common in the marketplace, given that they can provide numerous benefits to companies and investors alike. There is no shortage of companies looking to raise capital or improve their financial position; likewise, there is no shortage of investors looking for stable, long-term investment options. A sale lease-back achieves both objectives. The term refers to the arrangement in which a company sells real estate it owns and occupies to a buyer while simultaneously signing a long-term lease to continue to occupy and use the property.

Market Overview Sale lease-backs, or SLBs, occur in nearly every commercial real estate sector: retail, office, industrial, medical and hospitality. Between the low point of the recession in 2009 and 2013, sale lease-back volume has increased more than twelve-fold to nearly $12 billion in transaction volume. Continued on next page

THE ROUND NEWS THAT MATTERS The underlying factors that have led to the increase include: • Significant economic improvement since the recession. GDP, job growth and M&A activity are all on the rise and companies need capital to continue to grow. • A strong abundance of buyers looking to acquire attractive real estate assets and an imbalance between quality net lease supply and demand for the product. • The lack of new product supply—traditionally from corporate expansion via build-tosuits, or property built to a tenant’s specifications—makes sale lease-backs with longterm leases attractive to the buyer pool. • Interest rates at historic lows.

Key Advantages of a Sale Lease-Back Transaction For many companies, whether private or public, real estate is not considered part of their core business, yet it remains one of their largest expenses. Motivating factors for sale leasebacks might differ from company to company, but unlocking the value in real estate can offer significant benefits when handled properly. Reasons may include: Raising capital to expand or reinvest in the core business • An SLB offers 100 percent of the value of the real estate with no restrictive debt covenants. • It also enables a company to reinvest in new technology, equipment or its workforce. Improving financial health • An SLB can improve a company’s liquidity position by converting a fixed asset (real estate) into a current asset (cash). • It provides the company a tax benefit, as the rent is 100 percent fully deductible against taxable income. Preparing for a sale or restructuring • When preparing for a company sale, selling the real estate via an SLB separate from the business enables a company to maximize its return and net proceeds. Reducing property ownership risk while continuing to occupy the property • Transferring ownership limits the risks associated with real estate, including property casualty, functional obsolescence and unknown residual value. • Because of the passive nature of an SLB transaction, companies are able to continue to operate in a “business as usual” fashion, with little or no business interruption by the new landlord. Continued on next page

THE ROUND NEWS THAT MATTERS Factors to Consider Before Executing a Sale Lease-Back Although the sale lease-back market conditions are strong and the benefits are numerous, there are many factors to consider before going through with a sale. Such factors may include: • Operational flexibility vs. financial returns from a sale—Is your main objective to maximize your cash proceeds to reinvest back into the business, or do you require more flexibility in your lease terms? • Lease structure and accounting implications • Tax implications • Execution strategy—Do you sell as individual transactions or as a portfolio? What’s the marketing strategy based on your objectives? Sale lease-back transactions can often be an effective tool for companies looking to raise capital. The SLB market is ripe and full of buyers, providing companies an opportune time to take advantage of a seller’s market, which enables them to negotiate advantageous lease terms while maximizing capital raised. The right strategic partner is invaluable when navigating the questions that arise during an SLB transaction. First and foremost, the partner must have both the technical expertise and proven track record within the SLB arena so that she can provide you with sound guidance. A good strategic partner also brings a highly capable and qualified network of industry contacts that can further assist in the sale lease-back process. // —Jason Wiltshire is an investment sales broker with Stan Johnson Company, a firm serving a wide range of clients in the single-tenant, net lease industry. Wiltshire focuses on sales lease-back transactions for single-tenant industrial, office and retail properties across the United States.

Jason Wiltshire

THE ROUND NEWS THAT MATTERS DIGITAL EXCELLENCE // Industry award recognizes MMG’s design quality.

Growth MIDDLE MARKET

Growth ET MIDDLE MARK

// JANUARY/FEBRUARY 2015

// OCTOBER 2015

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// SEPTEMBE

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‘VETTING’ NEW TALENT, MIDSIZE FIRMS LOOK TO EX-MILITARY

AL PE’S NEW VIRTU E DEAL REALITY: ONLIN ORMS SOURCING PLATF

A QUALIFIED OPINION: NICK DILKS, MANAGING PARTNER, ECOSYSTEM INVESTMENT PARTNERS

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Middle Market Growth Takes Folio Award For Design Middle Market Growth took home a prestigious 2015 Folio “Ozzie” award in the category of “standalone digital magazine,” winning in this area for the second straight year. The flagship magazine of the Association for Corporate Growth is produced using a digital format seven times each year in partnership with Network Media Partners, a Baltimorebased design and content development firm. Clinical Laboratory News, a publication of the American Association for Clinical Chemistry, was this year’s runner-up in the category.

MMG was also given honorable mention in Folio’s “Eddie” awards in the category of “association news coverage” for its story “The Alchemists,” featured on the cover of the January/February 2015 issue. The article, written by MMG Associate Editor Kathryn Mulligan, profiles Biogenic Reagents, a private equity-backed company in northern Michigan using new technology to turn paper pulp and other wood waste into carbon for water and air cleanup. The winner in this category was onEarth, the magazine of the Natural Resources Defense Council, for its story, “The Gulf Disaster Five Years Later.” For more than 20 years, Folio magazine’s Eddie & Ozzie Awards have recognized excellence in magazine editorial and design across a wide variety of industry sectors. This year, a panel of more than 300 judges narrowed 2,800 entries into a pool of about 1,000 finalists. In total, more than 250 awards were given out across 33 categories. This January/February edition marks the 25th issue of Middle Market Growth, part of ACG’s suite of MMG publications. //

THE ROUND NEWS THAT MATTERS

VERTICAL VIEW // FEAST OR FAMINE Corporate acquisitions are the most prevalent exit route for food and restaurant-related investments—they comprised 57% of exits in 2014.

5.8

BILLION

44.8

Among the decade’s largest food-related exits was the 2015 sale of Big Heart Pet Brands. A group of PE firms sold the maker of pet food and treats for $5.8 billion to the J.M. Smucker Company.

BILLION

Secondary buyouts of middle-market food businesses have steadily declined as a share of total exits, falling to one last year from 12 in 2009.

1 EXIT All stats are from PitchBook.

Middle-market corporate acquisitions of restaurant and food companies have declined steadily since 2011, falling to four in 2015 from 17.

Two of the largest food deals in the past five years involved iconic ketchup maker Heinz: the 2013 takeover of the firm by 3G and Berkshire Hathaway for $23.2 billion, and Heinz’s $44.8 billion purchase of Oreo cookie parent Kraft Foods in 2015.

12 EXITS

The number of middle-market restaurant and food-related PE investments has declined since 2010, falling to 16 in 2014 from 21 in 2011; in contrast, aggregate deal flow for all industries steadily increased during the same period.

“The majority of food-related deal flow occurred in the core middle market. This may be because restaurant groups or chains (which warrant upper- or middlemarket prices) interest PE firms more than smaller restaurants with a single owner.” —Chelsea Harris, data analyst, PitchBook

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Chad Peterson of Victory Park Capital (left) with Giordano’s CEO Yorgo Koutsogiorgas.

GIORDANO’S A PIZZA STORY STUFFED WITH GROWTH POTENTIAL

BY SUSAN NADEAU

Photos by Alyssa Schukar

GIORDANO’S // Business: Chicago-based chain of 57 full-service pizza restaurants Claim to Fame: Longstanding recipe some consider to be the first commercial version of stuffed pizza in the United States Ownership: Victory Park Capital, which purchased the business out of bankruptcy in 2011 Strategy: Pare menu to the core, refurbish restaurants, expand into new markets

alk into any one of the many Giordano’s pizza restaurants around Chicago, and you may notice the homey red-checkered tablecloths or the fresh polish on the floors. Without a doubt, you’ll notice the pizza. Deep-dish pizza pie, known to Chicagoans as “stuffed” pizza, was arguably invented here. It’s that pizza, from the same recipe used since the first Giordano’s opened on the south side of Chicago in 1974, that drew the interest of private equity firm Victory Park Capital. The firm invested $51.5 million in November 2011, plucking the chain of 43 locations from a messy bankruptcy and turning over management of the company to a veteran in the restaurant business.

“It’s a Chicago icon,” says Chad Peterson, a principal with Victory Park and the lead investor on the Giordano’s acquisition. “It was in restructuring, the balance sheet was challenged, but the brand, and just the concept itself, we thought had really good bones to it—we knew there was a reason for it to exist,” he adds. “We thought there was a lot of value that could be unlocked.” And with comparable year-on-year sales as well as company-wide revenue on the rise and further expansion in the works, Victory Park is proving its hunch was right.

“WE WANT TO BE IDENTIFIED WITH CHICAGO INSTITUTIONS BECAUSE WE CONSIDER OURSELVES KIND OF AN INSTITUTION AS WELL.” Chad Peterson Principal, Victory Park Capital

‘THE COMPANY IS RUN BY YORGO’ Giordano’s had been a Chicago staple for decades. It was founded by two brothers from an Italian immigrant family, using the recipe from their grandmother, known as “Mama Giordano” from Torino, who would make the double-crusted, cheese-stuffed pie every year for Easter. The restaurant chain has been through the wringer, but this classic recipe remains unchanged. In 1988, after explosive growth in sales sparked in part by a Chicago Magazine cover story about the restaurant chain, the founders, who were growing older and facing health issues, sold Giordano’s to a franchisee. The husband and wife team led the company to even more growth, but they leveraged that success to get involved in non-core real estate deals, including a development in Florida, that were tied into Giordano’s. Their involvement came just as the bottom fell out of the real estate market, leading to immense financial losses. “(They) had a great pizza restaurant business and had really kind of leveraged that to get into things that were not core to the pizza business, and unfortunately they were all tangled together,” Peterson explains.

It was a prolonged, messy bankruptcy; the trustee spent a year just paying bills and managing to keep the company operating. “They needed an adult to supervise a company that was in shambles,” says Yorgo Koutsogiorgas, the restaurant industry veteran whom Victory Park immediately tapped to run Giordano’s. Hiring Koutsogiorgas was Victory Park’s first step. Despite his native Greek roots, he co-led another Chicago-based Italian eatery giant, Maggiano’s Little Italy, to skyrocketing growth. Koutsogiorgas became a partner in restaurant conglomerate Lettuce Entertain You Enterprises Inc. before the Maggiano’s chain was sold to publicly traded Brinker International in 1995. He stayed there for about 10 years. Before taking over Giordano’s, he was working on the West Coast. Koutsogiorgas, who says he came in dealing with “scorched earth,” had plenty of ideas of his own to update every aspect of the Giordano’s business, but he says the first thing he did was talk with all the franchisees, more than a dozen of them, one by one, to ask for their trust. During the bankruptcy auction, a group of franchisees had bid on the overall company but lost out to Victory Park, and he wanted to make sure he had them on board for the changes to come. Once convinced, Koutsogiorgas and Victory Park made plans to plow a significant amount of money and resources to freshen up all aspects while staying true to the pizza at the restaurant’s heart. “The company is run by Yorgo,” he adds with a smile.

“WE HAVE MADE THIS AN UNQUESTIONABLY PROFITABLE ENTERPRISE—THEY TALK ABOUT GIORDANO’S WITH RESPECT TODAY.” Yorgo Koutsogiorgas CEO, Giordano’s

GROWN-UP PIZZA For all his enthusiasm and confidence, Koutsogiorgas knew the task at hand was not going to be easy. “There was a lot of change, but (it was) done in a very surgical manner,” he quips. The U.S. pizza market is mature. According to PMQ Pizza Magazine’s 2015 annual state-of-the-industry report, U.S. pizza sales rose just over 3 percent in the year ended Sept. 30, 2014, to $38.5 billion (the magazine crunches data from food industry information provider CHD Expert). That growth rate is slightly lower than the 3.6 percent posted by the overall restaurant industry in 2014, according to research and consulting firm Technomic. The latest trends in pizza seem to be fresh, artisanal, local ingredients (think root vegetables), served up by fast casual chains similar to the Mexican-style model of Chipotle, according to both PMQ and Technomic. But Giordano’s is staying true to its sit-down, fullservice, special-occasion history. In fact, the most common complaint on Yelp is that the pizza takes too long to bake. “In any case, a 45-minute wait is DEFINITELY worth it for this,” one reviewer adds. “EVEN THOUGH IT’S A CHICAGO CONCEPT, IT RESONATES WITH PEOPLE.” Chad Peterson Principal, Victory Park Capital

‘A TYPICAL FAMILY BUSINESS’ Apparently the wait doesn’t keep pizza eaters from coming back. The restaurant chain was cash flow positive when acquired by Victory Park, according to Peterson, but is now posting double-digit sales gains, significantly outperforming the industry.

Koutsogiorgas says his new team undertook an “enormous amount of work” in 12 months, which led to the sales gains. In addition to top-line growth of 10 to 12 percent annually, he cites annual system-wide comparable store sales increases in the double digits, compared with a best-case scenario of 6 to 8 percent for the pizza industry as a whole. “It’s been a solid run,” Peterson says. Giordano’s also changed the balance of company-owned and franchised restaurants. In November 2011, there were 11 company-owned restaurants and 32 franchises, while today there are 23 company restaurants and 34 franchises. Koutsogiorgas says this shows confidence in the brand—and it’s quite a bit more profitable as well, he adds. He built his team from scratch, bringing in financial and operations specialists, as well as culinary experts. The changes in processes were crucial. “It was run like a typical family business,” Peterson says of Giordano’s before Victory Park’s involvement. “It was run out of the till.”

TO GO// Giordano’s also offers frozen pizzas for customers to bake at home.

At the same time, the menu was actually pared down, with fewer but better alternative entree choices, essentially re-centering around the pizza (which comprises 65 to 70 percent of sales) but with more modernized sides and appetizers. Salads, for example, include a Harvest selection, with pear, candied walnuts and blue cheese. “We’ve got killer appetizers, killer salads and killer sandwiches,” Koutsogiorgas says. “And any that you choose are as good as the pizza experience.” Finally, there were significant capital expenditures on the corporateowned stores to freshen and renovate their look. According to Technomic, while restaurant ambiance is intangible, “a strong majority of consumers at all segments measured agree that a welcoming, comfortable ambiance and a pleasant atmosphere inside the restaurant affect their decision to visit a particular concept.” For casual dining restaurants, more than 90 percent of consumers cite atmosphere for their restaurant choice. Giordano’s restaurant floors were refinished, awnings and tables were changed, signs were added and the red-checked tablecloths became a mainstay, preserving the original culture.

“We invested money in hopes that it would happen,” Koutosgiorgas says, “and it did work.”

VEGAS, BABY For now, Giordano’s (with 44 of its stores in Chicago and a handful in Florida, left over from the previous owner) will dabble more in other Midwest cities, such as Minneapolis and Indianapolis, where the company opened restaurants earlier this year. In fact, the complaint was that demand was too high, what Peterson calls “a high-class problem.” “Even though it’s a Chicago concept, it resonates with people,” Peterson says. “It has validated for us that this brand is exportable.” Peterson chalks up the success to Koutsogiorgas and his team. Victory Park typically holds investments for about five years, but “anything is for sale at the right price,” he says, adding that “we are not paid to sit on investments forever.” Peterson is joined on the Giordano’s board of directors by Victory Park founder Richard Levy, but the aim of the PE directors is to maintain an advisory role.

MIDWEST ROOTS // Giordano’s began in Chicago, but expansion plans are underway.

“I sit on the board and engage with the management team regularly— we want to be involved as little or as much as management wants us to be,” Peterson says. Independently, both Peterson and Koutsogiorgas call their relationship “very positive.” “As investors, we would be doing ourselves a disservice if we were constantly meddling in every aspect of the business,” Peterson says. The Giordano’s investment was Victory Park’s first controlling interest in a restaurant, and there is another underway on the West Coast. This time the firm will take an existing chain, and change and build the brand from scratch. “We like taking things that are dinged or dented and try to clean them up,” Peterson says, calling the firm “opportunistic,” regardless of the industry. Again, Victory Park puts its team in place and assists as needed. For Giordano’s, the Midwest is still the main focus area. The brand, for example, is the exclusive pizza at Chicago Cubs baseball games at Wrigley Field.

“We want to be identified with Chicago institutions because we consider ourselves kind of an institution as well,” Peterson says, calling the Cubs deal “priceless.” But Koutsogiorgas mentions a possible deal for a restaurant on the Las Vegas strip, which he is notably excited about. A presence in Vegas, he says, means national credibility and access to millions of people—even if just a tiny percentage of the traffic is captured. “We have made this an unquestionably profitable enterprise—they talk about Giordano’s with respect today,” he says, adding that the “noise” of the bankruptcy is behind them. “Now that we brought that stability, we are looking for growth.” And lucky for pizza eaters, that stability will always include Mama Giordano’s original stuffed pizza recipe. Susan Nadeau is a business writer who splits her time between Hartford, Wisconsin, and Thessaloniki, Greece.

BY MYRA THOMAS

Michael Layman VP of Regulatory Affairs, International Franchise Association

The National Labor Relations Board’s 3-2 decision last summer in the case involving Browning-Ferris Industries of California broadened a longstanding definition of “joint employer.” In turn, many more companies are potentially subject to federal labor laws and collective bargaining. The ruling changes a decades-old standard under the National Labor Relations Act, effectively expanding the responsibility of companies to their franchisees’ employees, as well as contingent staff. The Aug. 27 NLRB ruling has left many franchisers, as well as companies that use contract workers, worried about the economic implications of dealing with labor disputes and collective bargaining for a group of workers with whom they’ve traditionally had a hands-off relationship. The NLRB wouldn’t respond to requests for comment. However, in a press release, the agency cited “changes in the workplace and economic circumstances” as well as a growing contingent workforce in the United States as its motivations for modifying the joint-employer status. The previous standard required a company to show significant operational and supervisory control over a franchisee’s employees or its contract workers in order to be considered a joint employer. The new ruling expands the definition, and joint-employer status could be determined for a company with direct, indirect or potential control over the working conditions of its franchisee’s employees, along with the company’s contract staff. In its recent decision, the NLRB found that Browning-Ferris, a waste management company, had “indirect and direct control” over contract workers who were cleaning and sorting recyclable materials.

THE RUNDOWN Franchisers and franchisees are certainly worried about the unknowns when it comes to the new standard, says Michael Layman, vice president of regulatory affairs for the International Franchise Association and executive director of the Coalition to Save Local Businesses. “Franchisers will have to look closely at the employment practices of their franchisees to limit this new liability,” Layman argues. “They might let franchise contracts expire over time and look to rewrite them.” More than anything, Layman believes the recent ruling is forcing the hand of franchisers to take a much more “corporate-run approach” when it comes to their franchisees. “Franchisers are going to further distance themselves from their franchisees,” he says. “That means more independent small businesses with less support and resources than they signed up for. This changes the rules in the middle of the game.”

FOR THEMSELVES, NOT BY THEMSELVES For franchisers such as Raleigh, North Carolina-based Golden Corral, it’s all about putting policies and procedures in place to maintain a clear separation between the franchise and the franchisee’s employees. Bob McDevitt, senior vice president of franchise development for the family-style restaurant chain, says the company’s franchising peers understand that, and he doesn’t expect they will be affected by the recent ruling. Still, McDevitt fears Browning-Ferris could open the door for additional cases that may significantly increase franchisers’ liability for labor, wage and Occupational Safety and Health Administration workplace safety violations. “Our biggest concern is if this sort of ruling happens again and becomes standard practice,” he says. “We could see franchisers stepping back from franchisees, becoming less involved in the franchise relationship; or the franchiser could be forced to take a more direct management role over the franchisees’ people.”

“FRANCHISEES WANT TO BE IN BUSINESS FOR THEMSELVES, BUT NOT BY THEMSELVES, AND THE RELATIONSHIP WILL FUNDAMENTALLY CHANGE IF THIS (RULING) IS UPHELD.” Bob McDevitt Senior VP of Franchise Development, Golden Corral

“IT CHANGES THE RISK RATIO AND TEMPLATE FOR DOING BUSINESS.” Dave Gronewoller Golden Corral Franchisee

Either way, the party most affected is the franchisee, McDevitt says. “Franchisees want to be in business for themselves, but not by themselves, and the relationship will fundamentally change if this (ruling) is upheld. Everything is still up in the air, of course. The short-term problem is the uncertainty.” Dave Gronewoller, a Golden Corral franchisee owner, echoes that sentiment. He currently owns 12 franchise locations in North Carolina, South Carolina and Florida, and he sees the NLRB ruling as an intrusion. “It changes the risk ratio and template for doing business,” he says. “I like being a franchisee because you have access to others’ opinions as far as how to better operate the business, and that’s what the franchiser and other franchisees can give you.”

SWEEPING IMPLICATIONS Matthew Austin, a labor lawyer at Roetzel & Andress LLP, believes the pendulum at the NLRB has swung in favor of labor-friendly rulings. According to Austin, the BrowningFerris decision is very likely to upset the longstanding relationships between franchisers and their franchisees. “It’s about failing to respect the contracts that already exist,” he contends. The recent case gives more sway to pending labor complaints against corporations, including a set of high-profile cases against McDonald’s, says Amber Landis, vice president of public policy for the Association for Corporate Growth. In hundreds of worker complaints alleging wage and labor violations against the fast-food giant filed between 2012 and 2014, the NLRB found that the corporate entity could be considered a joint employer in several complaints filed by employees at the franchisee level. Landis says the Browning-Ferris decision is sure to impact companies beyond McDonald’s and other franchisers, including businesses with a range of contracted and subcontracted workers, as well as those with a variety of contractual business-to-business relationships. These businesses may be liable for labor violations they wouldn’t have been a party

to in the past. “It’s unclear how it will apply, and so a lot of businesses are taking a wait-and-see approach while they do their due diligence as far as their contractual relationships,” she says. There’s also concern from private equity firms about the growing liabilities of their portfolio companies, whether over potentially costly labor violations or collective bargaining at the franchisee level. Landis says that if the PE community is worried, middle-market companies seem to be particularly vulnerable to the loss of PE investment. Industry experts, like Layman, say the ripple effect may result in industry consolidation in the franchiser community.

A DISSENTING OPINION Michael C. Harper, a law professor at Boston University School of Law, says business leaders are sounding the alarm too quickly. Franchisers may see the NLRB’s decision as a slippery slope for labor-friendly decisions, but the uproar in the business community isn’t yet warranted, he says. “The Browning-Ferris case is about a situation where there is a bargaining arrangement, and the NLRB showed (the) involvement of Browning-Ferris to establish pay and the pace of work,” he says. “They were very involved in setting the conditions of the work.” Harper contends that franchisers simply need to keep a “hands-off ” relationship with their franchisees’ employees. “Historically, franchisers have not had direct control over franchisee employees,” he says. “They’re involved in the pricing of products and the nature of the product, but that doesn’t make them a joint employer.” The problem arises if a franchiser is looking to control work schedules, overtime or compensation in some way, even if the information from the top trickles down through the franchisee to the franchisee’s employee. “If the franchiser controls the franchisee’s employees indirectly through direction to the franchisee, then they become a joint employer,” he says.

“IF THE FRANCHISER CONTROLS THE FRANCHISEE’S EMPLOYEES INDIRECTLY THROUGH DIRECTION TO THE FRANCHISEE, THEN THEY BECOME A JOINT EMPLOYER.” Michael C. Harper Law Professor, Boston University School of Law

PREDICTING THE OUTCOMES

“WE’RE SIMPLY NOT FINISHED.” Matthew Austin Labor Lawyer, Roetzel & Andress LLP

Austin, the labor lawyer, believes it may not be that simple. There are, he says, test cases, such as the ones pending against McDonald’s, coming down the road that may push the boundaries of the joint-employer standard further. “We’re simply not finished,” he says. The political winds will also likely affect the outcomes, he says, adding that future members of the NLRB will ultimately be appointed by the next party in the White House. A pushback on the ruling is already brewing in Congress, where a group of legislators has introduced two identical bills in the House and Senate—H.R. 3459 and S. 2015—looking to reinstate the “direct control” standard, as opposed to “potential control,” for joint employers. In September, Sen. Lamar Alexander, R-Tenn. and chairman of the Senate Committee on Health, Education, Labor and Pensions, and Rep. John Kline, R-Minn. and chairman of the House Education and the Workforce Committee, introduced the Protecting Local Business Opportunity Act. For now, franchisers and companies that use contract or contingent employees are busy trying to figure out how to read the new joint-employer standard. The true interpretation will only come once the new rules are tested with an enforcement proceeding. “We simply don’t know what the true impact will be” Austin says, “and that’s the big problem.” // Myra Thomas is a freelance writer based in northern New Jersey.

P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .ÂŽ F r o m c o n s u l t a n t s t o C PA s a n d a h o s t o f o t h e r a d v i s e r s a n d specialists, ACG Global Partners guide the success of more than 90,000 professionals in the middle market worldwide.

QUICK TAKES GARY MORTENSEN // President, Stoller Family Estate

ach year thousands of branded wines in the United States compete for American palates. So when Bill Stoller, co-founder of the national temporary

employment agency Express Personnel Services, decided to

make his independent foray into the world of winemaking two decades ago, he set himself apart by laying claim to land that has been in his family for nearly 75 years. That move—and his early commitment to sustainability—made him a rarity in Oregon’s Willamette Valley region, where winery owners are typically transplants. “We are authentically Oregon,” says Stoller Family Estate President Gary Mortensen, echoing the company’s tagline. “We always want to have a sense of place.”

BIO // Gary Mortensen is president of Stoller Family Estate. He has extensive prior leadership experience in the Oregon wine industry, as well as with technology startups. An award-winning documentary filmmaker with a passion for history, Mortensen also serves on the board of ACG Portland.

Stoller, who was born on the property, purchased the 373-acre former turkey farm from a cousin in 1993. He was confident the rocky terrain and low-yielding soil could be transformed into a world-class vineyard, nurtured by Oregon’s mild climate. “This is home for him,” says Mortensen, a board member with ACG Portland. “He worked a combine in those fields.” Mortensen, a Silicon Valley entrepreneur and documentary filmmaker who has run wineries since the late ’80s, was brought on board in 2012 to help scale the business. The challenge was to boost production while maintaining the strict ecological standards that earned the winery at Stoller Estate the first-ever LEED Gold certification for a winemaking facility. Stoller Estate’s sustainable practices include the “gravity flow” method of winemaking, which conserves energy. A 46 kW solar electric system generates about 50 percent of the winery’s electric power. “We really believe in creating as much of an ecosystem as possible,” Mortensen says, noting the property is home to one of the largest private preserved oak savannahs. The winery is working with conservationists to maintain it. Combining Mortensen’s entrepreneurial acumen with Bill Stoller’s protocols for quality, such as only producing estate wines—which are made from grapes exclusively grown on the vineyard—appears to be working. In 2014, Dayton, Oregon-based Stoller was selected by Wine Press Northwest as Pacific Northwest Winery of the Year. Several of its Continued on next page

QUICK TAKES GARY MORTENSEN // President, Stoller Family Estate

Clockwise from top left: The tasting room; solar panels that provide power; and wine barrels. labels have earned accolades from Wine Spectator. “We have 100 percent control over the entire process,” Mortensen says, adding: “We’re looking to grow within the confines of our vineyard.” Stoller Family Estates has grown to be the largest continuous planting vineyard in the Dundee Hills region, with a target of producing 41,000 cases of its Chardonnay, Pinot Noir, Syrah and Riesling this year, up from 14,000 just three years ago. Mortensen, who says the business’s revenue is on par with a lower middle-market company, credits growth in part to a strong winemaking team, including longtime winemaker Melissa Burr, who recently added two additional winemakers from highly rated wineries. The marketing function has been brought in-house, and the business just built a second 32,000-square-foot winery on the property to increase capacity. Part of the winery’s strategy, Mortensen says, is to produce “wine that

“IT REALLY COMES DOWN TO HOW WELL YOU CAN DELIVER ON A GREAT PRODUCT AT A REALLY GOOD PRICE.” Gary Mortensen President, Stoller Family Estate

everybody can afford,” with many selections priced below $35 per bottle. And it also helps that Bill Stoller’s original inclinations toward environmentally friendly production are now essential themes in the national dialogue among restaurants and food producers at all levels of the food chain. Says Mortensen: “It really comes down to how well you can deliver on a great product at a really good price.” // —DLC

A QUALIFIED OPINION DAN ROWE // Founder & CEO, Fransmart

BIO //

s founder and CEO of Fransmart, Dan Rowe has turned dozens of emerging restaurant concepts into national and global chains. Rowe is a franchisee, master franchisee, franchiser, consultant, strategist and private equity investor. He has published several expert opinion articles and spoken at numerous restaurant and franchise industry conferences. Rowe is also a guest blogger for CNBC through his membership in YPO—Young Presidents’ Organization.

WHAT IS FRANSMART? “WE APPROACH HIGHQUALITY EMERGING RESTAURANT BRANDS AND FORTIFY THE CONCEPTS TO HELP TURN THEM INTO STRONG RESTAURANT COMPANIES.”

ransmart is a franchise development company. We approach high-quality, emerging restaurant brands and fortify the concepts to help turn them into strong restaurant companies. We also have our own capital to invest and will serve as an investment vehicle to unique brands we find have the clear potential to become leaders in their segment. When we approached Five Guys Burgers and Fries to launch their franchise program, they had opened only four company stores over 10 years. I put together a partnership to become one of the first franchisees, and then Fransmart helped solidify the brand by walking them through the legal process, building Version 1 of their systems and selling the first few hundred franchises. We eventually were bought out, releasing a few key executives from their non-compete agreements so they could enjoy a lucrative career with Five Guys, which now has more than 1,500 locations worldwide.

A QUALIFIED OPINION DAN ROWE // Founder & CEO, Fransmart

MOST OF YOUR CONCEPTS ARE IN THE FASTCASUAL SECTOR. WHY IS THIS SEGMENT OF THE RESTAURANT MARKET SO ATTRACTIVE?

or more than a decade, fast casual has been the sweet spot in the restaurant industry. Some customers are trading up from fast food, others are willing to trade down from casual dining, and concepts in the fast-casual segment are able to do high volumes in small spaces. It’s much easier for a fast-casual concept to scale up or down depending on location (airports, universities, urban, late night) than casual dining concepts. Customers don’t typically give quick-service restaurant concepts credit for ingredients or a premium experience, but fast casual enjoys all these benefits. Nowadays many fast-casual concepts are doing more sales than Chili’s, TGI Fridays, IHOP, Denny’s, etc. at a fraction of the investment. It is also easier to get employees: Assume Five Guys pays the same wages as Denny’s—where do you think employees would rather work?

WHICH INTERNATIONAL MARKETS DO YOU LIKE AND WHY?

he Middle East and Southeast Asia—both are big, growing markets and have tremendous interest in U.S. brands. We have sold more than 40 multi-unit and master franchises throughout the Middle East and have not had one failure. The market is solid—great access to real estate, strong labor markets, liquid franchisees and a huge appetite for “Americana.” Southeast Asia is enormous, rapidly growing and has relatively little organized competition.

“ASSUME FIVE GUYS PAYS THE SAME WAGES AS DENNY’S—WHERE DO YOU THINK EMPLOYEES WOULD RATHER WORK?”

A QUALIFIED OPINION DAN ROWE // Founder & CEO, Fransmart Both markets have friendly business climates, including smart, highly educated, well-read customers and franchisees with social media savvy, which are in touch with the hottest trends in the United States. Both have an entrepreneurial culture with a focus on building food and beverage companies, and even large private and publicly traded companies are focused on this space. Having said that, the same concepts that struggle here in the United States also struggle in the Middle East. All too often the competition is so tough to secure great U.S. brands that several franchisees buy weak U.S. concepts, but when they open in the Middle East and customers check the social reviews, the brand is just as doomed in the Middle East as it is in the United States. Bennigan’s, for example, couldn’t even survive in Dubai Mall, which is one of the world’s largest shopping malls.

“IT IS ONE THING FOR FRANCHISERS TO GET LOTS OF PRESS FOR SELLING FRANCHISE DEALS ALL OVER THE WORLD BUT ANOTHER THING ALTOGETHER WHEN FRANCHISEES ACTUALLY OPEN PER THEIR DEVELOPMENT SCHEDULE.”

FOR PE FIRMS WISHING TO INVEST IN MIDDLE-MARKET RESTAURANT FRANCHISE CONCEPTS, WHAT ARE SOME DUE DILIGENCE RED FLAGS?

umbers don’t lie. Customers vote with their wallets, so unless the customer counts are growing each year and customers support the brand even with rising menu prices, move on. There are several solid examples of concepts with increasing customer counts, revenues and margins. A concept with declining or even flat sales should be ignored, as should a concept with a high franchisee failure rate. To the extent a franchiser has already sold franchises, check the development agreements to see the integrity of the development schedule. It is one thing for franchisers to get lots of press for selling franchise deals all over the world but another thing altogether when franchisees actually open per their development schedule. The concept has to have soul. Strong management is important but can also be assembled with the right incentives.

A QUALIFIED OPINION DAN ROWE // Founder & CEO, Fransmart

Customers have to love the concept to the point where they continue coming back even when the company raises its prices. Restaurant concepts must raise their menu prices by at least 5 percent across the board every year just to keep up with rising costs, so if customers won’t keep supporting a concept with these prices, then they aren’t finding the price/ value relationship sustainable. Another red flag is poor unit economics—restaurants must be able to generate attractive margins. We prefer concepts with 30-50 percent ROI ($500,000 total opening costs and $250,000/year EBITDA).

THE NLRB RECENTLY EXPANDED THE DEFINITION OF “JOINT EMPLOYER,” MAKING MORE OPERATING COMPANIES RESPONSIBLE FOR LABOR DISPUTES AT THE LOCAL LEVEL. HOW DO YOU SEE THIS ISSUE SHAKING OUT?

ranchisers should be—and must be—changing their agreements with their franchisees to make this very, very clear. The same way franchisees are bound to paying royalties, operating within company standards, etc., the franchisee must also keep very tight human resources controls on this issue. Attorneys can easily insert the necessary documentation. Just as franchisers inspect files now for various reasons, they must make this another important part of the review. The relationship between a franchiser and its franchisees has to become more black and white; the franchiser should seek solid legal counsel to ensure franchisees operate as independent businesses and provide proof that franchisees are acting appropriately. I see lots of new language being added to franchise agreements and other agreements between franchiser/franchisee and franchisee/ employee clarifying this point. //

“CUSTOMERS HAVE TO LOVE THE CONCEPT TO THE POINT WHERE THEY CONTINUE COMING BACK EVEN WHEN THE COMPANY RAISES ITS PRICES.”

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ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

LOS ANGELES

PHILADELPHIA RICHMOND

TAP CITIES TO NAVIGATE TO ARTICLE

ACG LOS ANGELES

ACG LA Event Maintains Star Appeal Celebrity video messaging using the likes of Virgin CEO Richard Branson and Lakers’ star Kobe Bryant. High-end food trucks. Live entertainment from Latin fusion band Ozomatli—even an event-focused Spotify playlist. These enticements plus an A-list speaker lineup led by former GE CEO Jack Welch brought more than 1,000 attendees to Los Angeles’ famed Beverly Hilton hotel for the 18th annual ACG LA Business Conference on Oct. 6-7. “This conference has grown to be one of the most prominent deal flow conferences in the country,” James Freedman, chairman of Intrepid Investment Bankers and conference host co-chair, told attendees at the opening reception. Attendees chose from wide-ranging educational sessions addressing topics such as the state of M&A in the middle market; dealmaking in the consumer market; and an update on ACG Global’s public policy initiatives, among others. Continued on next page

READ ONLINE // Learn about other ACG events on the MMG website.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE Carey Lohrenz, the first female pilot of the Navy’s F-14 fighter jet, gave the opening keynote, drawing comparisons between the complex, high-risk environment of flying a $45 million combat aircraft and the world of private equity investing. A pilot spends much time “planning, executing and debriefing really complex decisions” while “learning how to deal with budgets, very limited budgets,” said Lohrenz, the author of “Fearless Leadership: High Performance Lessons from the Flight Deck,” adding: “Having a negative attitude, that kills your ability to adapt in rapidly changing situations. It’s all about your culture and your level of engagement in your organization.” Rounding out the speaker list were Dr. Peter Diamandis, the Greek-American engineer and entrepreneur known for founding the nonprofit technology catalyst X Prize Foundation and co-founding Singularity University, a Silicon Valley think tank; and media tycoon Robert Johnson, founder of Black Entertainment Television, which was sold to Viacom in 2001. Welch closed the two-day event with a Q&A session where he shared candid views on everything from his dislike for doing business in Brazil and Russia to his simple solution to countering activist shareholders: “Get your act together and perform.” “Don’t be afraid of winning; winning is the game,” Welch said. “Empty wagons don’t produce good product.” //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG RICHMOND

Richmond Conference Quenches Thirst for Networking The 15th annual Virginia Capital Conference held last September featured a variety of networking events designed to introduce attendees to each other and to showcase private equity firms and investment banks. Participants made connections and discussed deal flow, and many enjoyed a beverage or two along the way. Approximately 350 attendees from the corporate and financial sectors came to the event, hosted by ACG Richmond at the historic Jefferson Hotel. Thirty-five middle-market private equity firms participated in the conferenceâ&#x20AC;&#x2122;s Private Equity Marketplace; meanwhile, pre-reserved private deal rooms were available for one-on-one meetings between capital providers and intermediaries. A cafĂŠ theme gave participants the opportunity to network while sipping coffee, smoothies, or something a little stronger from the Bloody Mary bars. Continued on next page

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

For the Investment Banking Reverse Marketplace reception on the conference’s opening day, the traditional PE showcase was flipped as investment bankers hosted tables. Attendees sampled offerings of local craft beer while comparing notes on the capital markets and deal flow. Craft beer was front and center again during the conference’s keynote address. Craig Spitz, CFO of California-based Stone Brewing Co., discussed the state of the beer industry and shared his company’s national and international growth strategy. Steve Corns, partner with RSM and conference chair, described the event’s appeal. “The Virginia Capital Conference consistently has repeat attendees from the middle market who see the value of quality networking in a truly unique setting,” he said. //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG PHILADELPHIA

M&A East Sets the Pace for Networking More than 1,200 deal-makers flocked to the 13th annual M&A East conference in Philadelphia to connect with senior-level industry leaders, source deals, secure financing and learn about the latest market trends. The conferenceâ&#x20AC;&#x2122;s ACG DealSource brought together investment banks, private equity firms and limited partners for more than 1,050 brief one-on-one private meetings over two days. M&A East was presented by ACG Philadelphia and co-hosted by the Wharton Private Equity & Venture Capital Alumni Association on Oct. 13-14, 2015. While most attendees focused on networking and sourcing deals, the conference also included educational sessions and industry updates. This year M&A East introduced roundtable discussions led by CEOs, private equity professionals and investment bankers. Discussion topics included education, packaging, third-party logistics, health care and restaurants. Continued on next page

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

A golf outing and a new Dealmakers’ Dinner hosted at the historic Reading Terminal Market with the theme “A Taste of Philly” were among the conference’s activities. One attendee, Ray Weldon, managing director at Brookside Equity Partners, noted the high quality of the conference. “M&A East is the pacesetter” for national networking events, he said. The annual conference will be held again this fall in Philadelphia on Sept. 27-28. //

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THE PORTFOLIO INSIGHT FROM THE EXPERTS

MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS

IN THIS ISSUE MID-MARKET TRENDS Corporate interest deductibility is getting more attention as the 2016 presidential candidates discuss tax reform, but the negative economic implications of eliminating it deserve thoughtful consideration.

MID-MARKET TRENDS

Private equity firms with dry powder to invest should consider franchise businesses, which are often low-risk investments and require minimal capital expenditure.

COMING SOON Check out the Portfolio section of the March/April issue for more on the latest middle-market trends, written exclusively by our team of expert ACG Global featured firms. To learn more about contributing to this section, please contact Maggie Endres, (312) 957-4257. These articles are brought to you by ACGâ&#x20AC;&#x2122;s Global Partners.

THE PORTFOLIO MID-MARKET TRENDS // Matthew Morris, Partner, RGL Forensics MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS

The Danger to Valuation of Eliminating Corporate Interest Deductibility

“T

A thoughtful look at the economic implications of changing the tax code is essential.

he road to hell is paved with good intentions,” as the saying goes. Will the same be said of eliminating the tax deductibility of corporate interest expense? The need for corporate tax reform is broadly accepted and the debate includes a focus on revisions to the tax code relating to corporate interest expense. However, the discussion should be tempered with a careful examination of the broader impact of a change to this part of the tax code and the implications for corporate value. The 2016 presidential election is bringing

ing taxation of equity and debt investments

a flurry of issues to the attention of the

equally; and 2) achieving revenue neutrality

American public as candidates develop

in a politically polarized landscape.

and refine their positions and proposals on resonant issues, such as tax reform. A key feature in the discussion of tax

How it Works In the middle market, the first line of

reform is the future of corporate interest

financing for many companies is bank debt,

deductibility. This debate should be tem-

as equity financing can be expensive or

pered with education, understanding and

hard to access. For more than a century, the

a full examination of the greater economic

interest on corporate debt has been viewed

implications of changing the tax code.

as a business expense and therefore fully deductible under the tax code. The ability

Tax Reform Debates— The Search for Symmetry

to deduct interest expense makes bank debt

The discussion of corporate interest de-

operations and capital investments.

ductibility in the tax code is not limited to a

an obvious option for businesses to finance Proponents claim that the

single candidate or party but encompasses

deductibility of interest promotes the

a wide-reaching debate that crosses party

sustainability of corporate growth by

lines, and it could have a significant impact

making funding options attractive to

on the future of many American companies.

companies. Detractors assert that interest

The debate over changing corporate taxation tends to center on two issues: 1) treat-

deductibility provides a perverse tax incentive to incur debt to fund growth,

THE PORTFOLIO MID-MARKET TRENDS // Matthew Morris, Partner, RGL Forensics

MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS which could lead to companies becoming

valuation and the U.S. economy. As such,

overleveraged and risking bankruptcy.

any discussion about changes to the tax deductibility of interest expense cannot

Matthew Morris

The Impact on Valuation

stop at whether such changes are revenue

What is missing in the current debate is

neutral at the corporate or personal levels

recognition of the great impact that chang-

because that only addresses the cash flow

ing the tax code will have on corporations.

aspect of the impact to companies.

Beyond a revenue neutral change and shift

What also must be addressed is whether

to symmetry in how investments are treat-

such proposals will affect the cost of capi-

ed, the reduction or elimination of interest

tal for middle-market companies or their

expense deductibility will affect more than

ability to generate growth. Both of these

just a company’s cash flow.

factors play an incredibly important role

Let’s bring it back to basic financial

in corporate valuation, and in many

principles. The value of a company is

instances a more important role than a

a function of three elements: cash flow,

company’s earnings.

growth rate and cost of capital. Perhaps this formula is familiar: Cash Flow (CF)

Firm Value (V) = Cost of Capital (k) – Growth Rate (g)

A comprehensive study is underway to identify the likely effects of the change in interest deductibility on middle-market companies. The goal of the study is to promote a fully informed discussion

This foundational relationship should be a rallying point for education in the debate over the deductibility of interest expense. Corporate interest deductibility impacts not only the available cash flow for a company—because it affects earnings—but also the cost of capital and likely the growth rate as well. Many of the presidential candidates use reassuring phrases like “revenue neutral” to describe their proposals; however, the impact could be more far-reaching with long-term implications for corporate

around the issue and the potential impact on business valuation. Watch for the forthcoming results of the study, conducted by ACG and RGL. // Matthew Morris, partner of RGL Forensics and managing director of the firm’s brokerdealer, RGL Advisors LLC, is a veteran investment banker with more than 15 years of experience advising corporate clients and shareholders in transactions. He has advised on more than two-dozen transactions with an aggregate value in excess of $2 billion.

THE PORTFOLIO MID-MARKET TRENDS // Dexter Manning, Partner, Audit Services, Grant Thornton LLP

MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS

Franchises Make Good PE Investments

T Low risk and ongoing royalty streams are among franchises’ attractive qualities.

he private equity market has been booming for the past couple of years and many private equity investors are starting to wonder if we’ve reached, or are close to, the top of the market. What’s more, private equity investors still have plenty of dry powder they need to invest, regardless of macroeconomic conditions that may come into play. With this as a backdrop, franchises as an investment opportunity are becoming increasingly popular. Franchises are attractive to PE firms

popping up everywhere—even in major cit-

for a number of reasons. The franchise

ies, which historically tend to have more

concept makes a lot of sense for inves-

independent brands.

tors looking for less risky places to invest.

Once a franchise brand has been

Investors don’t have to reinvent the wheel

successful, it’s clear that success can be

with a franchise. Instead, they can take

replicated with some customization to

advantage of the trial and error of others

make it more palatable by region. Private

who have done it first. The ongoing royalty

equity firm Roark Capital Group is a leader

stream can service financing obligations.

in the franchise space. The firm owns

In addition, capital expenditures for equip-

franchises that include Carl’s Jr., Hardee’s,

ping locations are the franchisee’s obliga-

Carvel and Auntie Anne’s, among others.

tions; these expenditures are just about nil

The Atlanta-based firm owns more than

for the PE firm.

16 restaurant brands with more than $10

Some popular sectors within franchising today include health, fitness and education. Food and beverage franchises, which

billion in system-wide sales. Neal Aronson, the firm’s founder, notes that the franchising method makes it a

have also been popular, have become even

smart business for both franchisees and

more attractive to private equity firms,

franchisers. “If you work your tail off and

mainly because franchise restaurants

follow the rules, you can be successful …

dominate the dining landscape today. From

65 percent of the job growth for 15 years

quick-service restaurants such as McDon-

leading up to the recession came from

ald’s to casual dining chains like Apple-

those people who built a store, then a

bee’s to higher-end restaurants such as

second store, then a third,” Aronson told

Ruth’s Chris Steak House, franchises are

QSR magazine in 2014.

THE PORTFOLIO MID-MARKET TRENDS // Dexter Manning, Partner, Audit Services, Grant Thornton LLP

MID-MARKET TRENDS TAP BUTTONS TO NAVIGATE COLUMNS The strategy is obviously one favored by limited partners as well. Roark was able to close Roark Capital Partners IV with $2.5 billion of investment—a $1 billion increase from its previous fund. Dexter Manning

Roark isn’t the only private equity firm that works with franchises—although they aren’t all necessarily in the food sector. Private equity firms such as Argonne Capital Group, Bain Capital, Brightwood Capital Advisors, Exaltare Capital Partners, FPG Capital, Sun Capital Partners, The Carlyle Group and The Riverside Company have all bought or sold franchises recently. In

SOME PAST AND PRESENT FRANCHISES OWNED BY PRIVATE EQUITY FIRMS: Auntie Anne’s Boston Market Captain D’s Seafood Kitchen Cinnabon Chuck E. Cheese’s Dunkin’ Brands Gymboree Hertz Johnny Rockets Massage Envy Moe’s Southwest Grill Planet Fitness Quiznos TGI Fridays

fact, just last month Ridgemont Equity Partners bought Unishippers Global Logistics, a shipping and logistics company servicing more than 50,000 small and midsize businesses through a network of nearly 300 franchise locations.

Room for Growth Additionally, the franchising model is becoming popular in places like India and China—creating even more opportunity for franchise owners. Franchises may have to develop their brands slightly differently, but there is room for success. For example, a hamburger concept will not play well in India. However, Ohio-based chain Marco’s Pizza entered the Indian market in October and plans to open 400 stores within the next five years. American franchises have been flourishing in China for years. KFC has more

chains in China than it does in the United States. Yum! Brands, the parent company of KFC, Taco Bell, and Pizza Hut, expects the consuming class in China to double to more than 600 million people by 2020. Meanwhile, McDonald’s is expanding in China at the rate of 10 new restaurants per week. There’s no question that the growth opportunity is there; private equity firms should prepare to take advantage of it. // Dexter Manning is an audit services partner at Grant Thornton and national practice leader for food and beverage. He has more than 20 years of experience in financial accounting and advisory services specializing in the food industry, including eight years as CFO of a regional beverage distributor.

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B-SIDE MICHAEL KORNMAN // Managing Partner, NCK Capital

ORIGIN STORY… “We had traditionally built businesses from the ground up. A few years back we decided we were going to pursue a buy-and-build strategy, and NCK Capital is the manifestation of that.”

“THESE DAYS RESTAURANTS HAVE TO DRIVE MARGIN AS MUCH AS POSSIBLE.”

FINDING A NICHE… “(NCK portfolio company) QuickFire Restaurants has really focused on secondary and tertiary markets—smaller markets where the real estate costs are lower, and the cost of entry and doing business are a little bit lower.”

MICHAEL KORNMAN // Kornman, a member of ACG Dallas/Fort Worth, has founded and run companies in a wide range of industries, including restaurant businesses. Today he is a managing partner with Dallas-based private equity firm NCK Capital, whose diverse portfolio includes QuickFire Restaurants, which serves smaller restaurant markets.

“WHEN YOU’RE TALKING ABOUT RESTAURANTS, WE LIKE CONCEPTS THAT HAVE A REALLY STRONG NICHE AND A BIT OF A CULT FOLLOWING.”

OUT TO EAT… “I love the American steakhouse format. Being here in Dallas, that’s a big part of our dining scene, and one that I personally enjoy a great deal.”

COMMUNITY TIES… “When you’re in these communities, particularly smaller communities, you really just have to be a part of them and you have to give back. It’s good business and it’s something we believe strongly in.”

BEYOND DINING… “We really like food safety; we think that’s going to be an explosive sector. And specialty food manufacturing—there are just all sorts of opportunities there.”

CHANGE ON THE MENU… “I think restaurant labor costs will continue to rise and a big part of that is managing retention. There’s going to be some real innovation in that area in the next few years.”

C RAC K IN G T H E C O MP L IANCE CO DE Become a Member of ACG’s Private Equity Regulatory Task Force

ACG’s Private Equity Regulatory Task Force (PERT) gathers together CFOs, CCOs and in-house legal counsel of middlemarket private equity firms nationwide. Together, they interpret and navigate the often complex compliance and regulatory issues affecting the industry. As a member of PERT, your firm will join a national network focused on shaping compliance best practices alongside federal regulators.

THE LADDER ACG MEMBERS ON THE MOVE

Frank Longobardi

Frank Longobardi has assumed

John Marquardt, a member of

the role of chief executive officer

ACG Chicago, was promoted

at CohnReznick, an accounting,

to executive vice president by

tax and advisory firm. He was

commercial real estate firm

previously a member of the

Transwestern in its tenant

executive board and regional

John Marquardt

advisory services group.

managing partner for New

Based in the firm’s Chicago

England. Longobardi also served

office, Marquardt develops real

on the firm’s go-to-market

estate strategies and manages

committee, which oversaw the

transactions for a wide range of

strategic planning for industry

clients, including in the private

and service specialization after

equity sector. He has been with

CohnReznick was formed in

the firm for 10 years.

2012 through a merger. Ron Rolighed has joined asset Matthew Drake has joined

management firm Victory Park

Oakbrook Terrace, Illinois-based

Capital as a principal in the

investment bank Prairie Capital

firm’s Chicago office. Rolighed

Advisors as vice president.

will oversee new business

Drake will advise middle-market Matthew Drake

Ron Rolighed

development, investor relations

companies on valuation, ESOPs,

and client services. Other recent

mergers and acquisitions,

hires include Karrie Truglia, a

and other investment banking

vice president in New York City,

advisory services.

along with four new associates and two operations personnel in

Dianne Dubois was named

Chicago. Victory Park’s portfolio

managing partner of Hardesty

company Giordano’s is profiled

LLC, a national executive

in the cover story of this issue.

services firm focused on the office of the CFO, in the firm’s Dianne Dubois

San Francisco office. In her new role, she will assume day-today management duties and will contribute to expanding the firm’s northern California business. Dubois is a member of ACG San Francisco and a former president of the chapter.

THE LADDER ACG MEMBERS ON THE MOVE

James Torkelson

James Torkelson, a member

Larry Guthrie of ACG Global

of ACG Chicago, has joined

was promoted to director,

First Merchants Corporation as

communications and marketing.

manager, structured finance.

Guthrie joined ACG in 2013,

In his new role, Torkelson is

with more than 17 years of

responsible for expanding the

Larry Guthrie

marketing, communications and

bank’s marketing efforts for

event management experience.

leveraged lending to private

He helps lead marketing efforts

equity firms in Chicago and

to promote core ACG Global

building an asset-based

events, including InterGrowth

lending group.

and EuroGrowth. He also authors It’s the Small Things in Middle

Loura Cooper of ACG Global

Market Growth and serves as a

was promoted to senior director,

marketing resource for ACG’s 57

finance. Since joining the

chapters worldwide.

association in 2012, Cooper’s Loura Cooper

key role has been to develop

Cleric Costes has joined ACG

the association’s financial

Global as manager, chapter

infrastructure and staff after

and membership services

ACG brought its accounting

after having worked for the

functions in-house, having

association on a contract basis

previously used a third-party’s

Cleric Costes

since January 2014. Costes

services. She is responsible

provides services to ACG

for overseeing all accounting

chapters through ACG Global’s

operations, planning and

back office administration

analysis for ACG Global and its

program, assisting with event

three foreign subsidiaries.

setup and other chapter functions. He also serves as a resource to ACG’s 14,500 members by providing information on membership benefits, billing assistance and other support.

To submit your promotions, job changes and other accomplishments, please send details and a high-resolution color photo to Associate Editor Kathryn Mulligan at kmulligan@acg.org.

IT’S THE SMALL THINGS RESTAURANT & LEISURE TRENDS // Chew on This!

GRATUITIES REACH A TIPPING POINT

NO LONGER A GLUTEN FOR PUNISHMENT

Joe’s Crab Shack is the first national full-service chain restaurant to test a no-tipping policy. The company joins a growing number of restaurants across the United States that are changing their gratuity policies in lieu of inclusive service fees or price increases.

With total gluten-free food sales estimated to have reached $8.8 billion in 2014—a 63% increase over the two-year period beginning in 2012—more and more restaurants are making gluten-free menus available to diners.

IT’S THE YEAST YOU CAN DO

THE PERILS AND PEARLS OF THE RESTAURANT INDUSTRY

The bakery industry is made up of almost 3,000 independent bakeries with combined annual revenue of $30 million, along with 6,000 retail bakeries that bring in an additional $3 billion. The industry is highly fragmented: On the retail side, the top 50 companies generate only 15% of the total revenue.

According to most studies, 9 out of 10 restaurants fail during their first year of operation, even in a good economy. But some have stood the test of time, including Boston’s 190-year-old Union Oyster House, America’s oldest continuously run establishment.

PRIVATE EQUITY FEASTING ON RESTAURANT VALUATIONS

Restaurant valuations were at historic highs heading into 2015. Quick-service restaurants, for instance, are currently valued at approximately 14 times EBITDA.

CHAIN TAKES ITS SLICE OF THE PIE … AND THEN SOME

The award for fastestgrowing restaurant chain in America goes to Pieology. Sales for the eatery, which offers customizable pies with toppings like pineapple, pepperoni and cilantro, grew a whopping 230% in 2014 to $44.6 million.

—Larry Guthrie, director, communications & marketing, ACG Global

THE LEADERSHIP ACG DIRECTORS ACG BOARD OF DIRECTORS //

CHAPTER REPRESENTATIVE DIRECTORS //

DIRECTORS AT LARGE //

Chairman Richard Jaffe* Duane Morris LLP ACG Philadelphia Term expires 8/31/2016

Brent Baxter Clayton Capital Partners ACG St. Louis Term expires 8/31/2017

Jason Byrd Charter Capital Partners ACG Western Michigan Term expires 8/31/2017

Robert Brighton Shutts & Bowen LLP ACG South Florida Term expires 8/31/2017

Ramsey Goodrich Carter Morse & Mathias ACG Connecticut Term expires 8/31/2016

Steve Castino Vestal & Wiler CPAs ACG Orlando Term expires 8/31/2018

Mark Hollis Centerfield Capital Partners ACG Indiana Term expires 8/31/2016

Karen Grexa KeyBank Business Capital ACG New Jersey Term expires 8/31/2017

Jay Jester Audax Group ACG Boston Term expires 8/31/2018

Jay Hansen O2 Investment Partners ACG Detroit Term expires 8/31/2017

Scott Linch Dixon Hughes Goodman ACG Charlotte Term expires 8/31/2018

Karin Kovacic Alcentra Capital ACG Connecticut Term expires 8/31/2018

Don Lipari McGladrey ACG New York Term expires 8/31/2017

Mark Lehman Parsons Behle & Latimer ACG Utah Term expires 8/31/2018

Cassandra Mott Thompson & Knight LLP ACG Houston Term expires 8/31/2016

Mike McVey Hylant Group ACG Columbus Term expires 8/31/2018

Martin Okner SHM Corporate Navigators ACG New York Term expires 8/31/2018

Walter Oâ&#x20AC;&#x2122;Haire Valuation Research ACG San Francisco Term expires 8/31/2017

Gretchen Perkins Huron Capital Partners ACG Detroit Term expires 8/31/2016

Titus Schurink HPE Growth Capital ACG Holland Term expires 8/31/2018

Karen Tuleta Morgenthaler ACG Cleveland Term expires 8/31/2017

Mitch Woolery Kutak Rock LLP ACG Kansas City Term expires 8/31/2018

Thomas Turmell TMT Capital Partners LLC ACG Chicago Term expires 8/31/2018

Vice Chairman Jason Brown* Victory Park Capital ACG Los Angeles Term expires 8/31/2016 President & Chief Executive Officer Gary A. LaBranche, FASAE, CAE* ACG Global Chairman of Finance Angie MacPhee* RGL Forensics ACG Denver Term expires 8/31/2016 Secretary J.B. Dollison* Crutchfield Capital Corporation ACG Houston Term expires 8/31/2016 Immediate Past Chairman Doug Tatum* Newport Board Group ACG Atlanta Term expires 8/31/2016

ACG HONORARY DIRECTORS // Robert G. Coffey Alan B. Gelband *denotes member of Executive Committee

ACG NEAR YOU ACG CHAPTERS ACG 101 Corridor acg.org/101

ACG Detroit acg.org/detroit

ACG Orlando acg.org/orlando

ACG Arizona acg.org/arizona

ACG Edmonton acg.org/edmonton

ACG Philadelphia acg.org/philadelphia

ACG Atlanta acg.org/atlanta

ACG France acg.org/paris

ACG Pittsburgh acg.org/pittsburgh

ACG Austria acg.org/austria

ACG Germany acg.org/germany

ACG Portland acg.org/portland

ACG Barcelona acg.org/barcelona

ACG Holland acg.org/holland

ACG Raleigh Durham acg.org/raleighdurham

ACG Boston acgboston.org

ACG Houston acg.org/houston

ACG Richmond acg.org/richmond

ACG Brasil acg.org/brazil

ACG Indiana acg.org/indiana

ACG San Diego acg.org/sandiego

ACG British Columbia acg.org/bc

ACG Kansas City acg.org/kc

ACG San Francisco acg.org/sanfrancisco

ACG Calgary acg.org/calgary

ACG Kentucky acg.org/kentucky

ACG Seattle acg.org/seattle

ACG Central Texas acg.org/centraltexas

ACG Los Angeles acgla.org

ACG Silicon Valley acg.org/sv

ACG Charlotte acg.org/charlotte

ACG Louisiana acg.org/louisiana

ACG South Florida acg.org/southflorida

ACG Chicago acgchicago.com

ACG Maryland acg.org/maryland

ACG St. Louis acg.org/stlouis

ACG China acg.org/china

ACG Minnesota acg.org/minnesota

ACG Tampa Bay acg.org/tampabay

ACG Cincinnati acg.org/cincinnati

ACG National Capital acgcapital.org

ACG Tennessee acg.org/tennessee

ACG Cleveland acg.org/cleveland

ACG Nebraska acg.org/nebraska

ACG Toronto acg.org/toronto

ACG Columbus acg.org/columbus

ACG New Jersey acg.org/newjersey

ACG UK acg.org/uk

ACG Connecticut acg.org/connecticut

ACG New York acg.org/nyc

ACG Utah acg.org/utah

ACG Dallas/Fort Worth acg.org/dfw

ACG North Florida acg.org/northflorida

ACG Western Michigan acg.org/wmich

ACG Denver acg.org/denver

ACG Orange County acg.org/occ

ACG Wisconsin acg.org/wisconsin

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DOWNLOAD MEDIA KIT Contact Maggie Endres at mendres@acg.org // 312-957-4257

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