On Tuesday Levine Leichtman Capital Partners acquired Tropical Smoothie Cafe, a fast casual chain with over 870 units across 44 states, marking the second acquisition of a fast-growing concept this summer. Earlier this year, blank-check investor Opes Acquisition Corp. acquired BurgerFi with plans to take the company public.
While a lot of M&A activity during the pandemic has been of distressed companies, a handful of chains emerged from summer with strong same-store sales, and opportunistic acquisitions may be back on track.
Tropical Smoothie was an attractive target for LLCP because of its top-notch management team, a positive guest experience, happy and profitable franchisees, ample white space and a demonstrated ability to drive same-store sales growth, Matthew Frankel, managing partner at LLCP, said.
"In this case, we particularly liked that Tropical Smoothie Cafe's management was speaking with their wallets by investing a substantial amount of their own capital alongside LLCP in the deal," Frankel said.
During the pandemic, Tropical Smoothie's adaptations included implementing hyper-local marketing initiatives, enhancing order models with curbside and delivery options, and offering 50% royalty relief reductions for eight weeks to support franchisees, according to a press release. The company also restructured its franchise development team to offer best practices and support to guide them through the Paycheck Protection Program, which led to franchise operators securing over $29 million in PPP funds.
"We were particularly impressed that Tropical Smoothie Cafe successfully adapted certain business practices in this environment to gain market share and introduce new customers to the brand," Frankel said. "The results speak for themselves: Tropical Smoothie Cafe reported a 25.5% increase in comp sales in July, and we are seeing similar trends in August and September."
The number of franchisees signed and in various stages of development showed the private equity firm that Tropical Smoothie was poised for future growth, Frankel said.
During the height of the COVID-19 pandemic, LLCP paused its discussions with Tropical Smoothie, which began pre-pandemic, allowing management to focus on their business and their franchisees, but resumed talks once the company was back in a strong growth and profitability position, Frankel said.
Tropical Smoothie said it is currently on pace to hit its pre-COVID-19 sales goal and management is optimistic that the company could even beat it. Lease executions and franchise sales remain on pace with expectations prior to the pandemic, even with its new openings forecast slightly decreased for 2020, Tropical Smoothie said. Its pipeline also remains strong with well over 500 units.
In addition, the company opened 55 new cafes as of July and plans to open over 85 new cafes by the end of the year. As of July 14, the company signed 103 franchise agreements, including 49 since March 1, according to a press release. Of these, 67% are with existing franchisees.
It's not just Tropical Smoothie that is on a growth track within the smoothie segment. Industry research expects the smoothie market to grow at a nearly 7% compound annual growth rate by 2024. Smoothie King has opened 31 domestic and 119 international locations since the beginning of the year, and even as sales dropped 50% in March, systemwide sales increased 14% in July, according to the Dallas Business Journal. It expects to open 80 additional U.S. locations by the end of the year.
But with LLCP, Tropical Smoothie will have even more financial tools to help it grow. The firm offers a structured equity approach in which the company invests a combination of equity and debt and doesn't over leverage the business, Frankel said. This would ensure that Tropical Smoothie has the capital it needs to continue to expand, Frankel said.
LLCP’s extensive franchise experience — which includes previous investments in restaurants like Cicis, Global Franchise Group and Quiznos — will be pivotal in driving further growth at the restaurant chain and supporting franchisees, Tropical Smoothie said. The company will also continue to run with existing management led by CEO Charles Watson.
"In addition, LLCP and management are aligned in the strategies to execute on our long-term vision for the company, which entails aggressively growing the unit count, driving consistent annual same store sales growth and continuing to enhance franchisee profitability," Frankel said.