Case 5: Burger Chain Private Equity, Ross Original

Problem Statement

•  Our client is a private equity firm. They have come to us for guidance regarding a possible acquisition
of a large fast food burger chain. Should they make the acquisition? What should they think about?
•  We are looking at a 3-year investment period.

Type of Case Interviewer Guidance

§  Industry: PE, Hospitality •  This is an interviewee led case.

•  The case has the concept of franchising included.
§  Difficulty: Medium

§  Format: M&A

§  Concepts Tested: NPV, ROI

Clarifying Information and Case Guidance

Clarifying Information on Request Interviewer Guide to Case and Exhibits

•  Fast food chain is 3rd largest in U.S. (no non-US •  NA

operations)
•  Operate 5,000 locations; corporate owns all the
real estate associated with locations.
•  All locations are franchised.
•  Franchise agreement structure is great to
explore but not relevant for this case.
•  Private equity client’s portfolio consists of
multiple residential/commercial real estate
holdings as well as a portfolio of gas stations
across the U.S.
•  PE firm requires a 15% return on any
investments it makes.
•  Industry outlook has been positive, not many
new players are entering the mature market.
•  Historical financial results of Burger Chain have
been fine.

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Possible Framework

Framework

Market
•  Industry growth
•  Impacting macro trends
Competition
•  New players in the 3 period horizon
Financials
•  Acquisition Price
•  Direct Sales/Franchising Cost Agreement Structure
•  Costs
•  Valuation
Synergies
•  PE Management expertise
•  Synergies with current PE holdings

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Math Question

Math Question 1

•  Let’s brainstorm some of the financial aspects associated with the company structure and what
components go into revenues and costs. How would the PE client receive cash flow?
Burger Chain’s Financial Structure (Give below information only when asked)
•  Average Store Sales: $500,000 (Same across 3 years)
•  Current number of franchises: 5000
•  New franchises: 100/year
•  Revenue from franchised locations:
•  Rent (as a % of sales) : 15%
•  Royalties (as a % of sales): 3%
•  National advertising quota (as a % of sales) : 2 %
•  Initial franchise fee: $100 K for new stores
Costs
•  Franchised locations: operating costs are assumed by franchisee, corporate office – rent for stores
and headquarters, SG&A, labor, insurance, legal etc.

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Math Solution

Math Solution 1

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Math Questions and Solutions

Math Question 2

•  Now assume the PE firm knows it can sell the business for $620M at the start of year 4. Assuming a
zero percent discount rate, does the return on the investment meet the threshold set by our client?
•  Provide purchase price when asked of $550M

Math Solution 2

•  Yes 20% > 15% required by client. It is not necessary for the interviewee to calculate the exact return,
just important that they realize it exceeds the threshold.

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Conclusion

Recommendation Next Steps

Recommendation •  Negotiate with seller for better price

(lowering the initial investment possibly)
•  The client should acquire the burger chain
•  Company has strong cash flows •  Attempt to keep high level managers in
•  Exceeds return requirement of client place post-acquisition (contracts etc.)
•  Doesn’t quite fit with the portfolio however, the real
estate aspects of the deal are a fit •  Identify synergies with portfolio
companies
Risks
•  Risks associated with exit in year 4 (it’s not guaranteed
we can sell), however the annual cash flow figures are
good

Excellent Case Answers

•  A star caser will identify the issues of synergies with existing portfolio companies. He/She would also
identify the issues with exit opportunities.

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