Franchises
When Burger King Corporation began franchising in 1959, it used a regional model where franchisees purchased the right to open stores within a geographic region. These franchise agreements granted BKC very little oversight control of its franchisees and resulted in issues of product quality control, store image and design, and operational procedures.
During the 1970s, structural deficiencies in Burger King's franchise system became increasingly problematic for Pillsbury. A major example was the relationship between Burger King and Louisiana-based franchisee Chart House, Burger King's largest franchisee group at the time with over 350 locations in the United States. The company's owners, William and James Trotter, made several moves to take over or acquire Burger King during the 1970s, all of which were spurned by Pillsbury. After the failed attempts to acquire the company, the relationship between Chart House and Burger King soured and eventually devolved into a lawsuit. Chart House eventually spun off its Burger King operations in the early 1980s into a holding company called DiversiFoods, which in turn was acquired by Pillsbury in 1984 and absorbed into Burger King's operations.
As part of the franchising reorganization segment of Operation Phoenix, Donald N. Smith initiated a restructuring of future franchising agreements in 1978. Under this new franchise agreement, new owners were disallowed from living more than one hour from their restaurants – restricting the to smaller individuals or ownership groups and preventing large, multi-state corporations from owning franchises. Franchisee were also now prohibited from operating other chains, preventing them from diverting funds away from their Burger King holdings. This new policy effectively limited the size of franchisees and prevented larger franchises from challenging Burger King Corporation as Chart House had. Smith also sought to have BKC be the primary owner of new locations and rent or lease the restaurants to its franchises. This policy would allow the company to take over the operations of failing stores or evict those owners who would not conform to the company guidelines and policies. By 1988, parent company Pillsbury had relaxed many of Smith's changes, scaled back on the construction of new locations which resulted in stalled growth of the brand. Neglect of Burger King by new owner Grand Met and its successor Diageo, further hurt the standing of the brand, causing significant financial damage to BK franchises and straining relations between the parties.
By 2001 and after nearly 18 years of stagnant growth, the state of its franchises was beginning to affect the value of the company. One of the franchises most heavily affected by the lack of growth was the nearly 400-store AmeriKing. By 2001, the franchise owner, which until this point had been struggling under a nearly $300 million (USD) debt load and been shedding stores across the US, was forced to enter Chapter 11 bankruptcy. The failure of AmeriKing deeply affected the value of Burger King, and put negotiations between Diaego and the TPC Capital-lead group on hold. The developments eventually forced Diaego to lower the total selling price of the chain by almost $750 million dollars. After the sale, newly appointed CEO Bradley (Brad) Blum initiated a program to help roughly 20 percent of its franchises, including its four largest, who were in financial distress, bankruptcy or had ceased operations altogether. Partnering with California-based Trinity Capital, LLC, the company established the Franchisee Financial Restructuring Initiative, a program to address the financial issues facing BK's financially distressed franchisees. The initiative was designed to assist franchisees in restructuring their businesses to meet financial obligations, focus on restaurant operational excellence, reinvest in their operations, and return to profitability.
Individual franchisees took advantage of the AmeriKing failure; one of BK's regional owners, Miami-based Al Cabrera, purchased 130 stores located primarily in the Chicago and the upper mid-west region, from the failed company for a price of $16 million, approximately 88 percent of their original value. The new company, which started out as Core Value Partners and eventually became Heartland Foods, also purchased 120 additional stores from distressed owners and revamped them. The resulting purchases made Cabrera the largest minority franchisee of Burger King, and Heartland one of the company's top franchises. By 2006, the company was valued at over $150 million, and was sold to New York–based GSO Capital Partners. Other purchasers included a three way group of NFL athletes Kevin Faulk, Marcus Allen and Michael Strahan who collectively purchased 17 stores in the cities of Norfolk and Richmond, Virginia; and Cincinnati-based franchisee Dave Devoy, who purchased 32 AmeriKing stores. After investing in new decor, equipment and staff retraining, many of the formerly failing stores have shown growth approaching 20 percent.
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