Roark Capital Group: An Organization For Growth

Tim Darnell, Editor

June 1, 2008

N amed after Howard Roark, the protagonist in Ayn Rand's "The Fountainhead," the parent company of Focus Brands has been on a massive buying spree as of late.

Roark Capital Group has acquired 13 franchise/multi-unit brands that collectively have more than 13,000 points of distribution, 2,000 franchisees, and $2.9 billion in system-wide revenues across 50 states and 33 countries. Roark has also acquired four direct marketing companies and three financial services businesses. Business to Business spoke with founder and Managing Partner Neal Aronson about his company:

Business to Business:  You have quite a diverse set of industries represented under your umbrella. What do you look for in making acquisitions?

Neal Aronson:  A good management team and similar values in their approach to business. It starts with people; people whom we'd like to partner with, and those who'd like to partner with us. Then, a good, long history of predictable growing earnings, in a strong and defensible niche, so we can feel good they'll continue to grow over a long period of time.

We also like big stable industries that have similar characteristics, such as a long history of stability and growth prospects. In the case of Batteries Plus, this is a difficult retail environment right now. The consumer is concerned, but Batteries Plus is growing very well because it's involved in battery accessories and services, and those are need-based purchases. If your laptop or hearing aid or cell phone battery dies, that's not a discretionary purchase. You need to get it replaced right away. And with the proliferation of electronics and the accompanying need for batteries, this industry should continue to grow for a long time.

BTB: What was the motivation behind last year's purchase of Moe's Southwest Grill?

Aronson: We liked the overall industry it was in. We think consumers enjoy good Tex Mex. It also participates in the restaurant industry's fast casual segment, in which we're big believers because it provides a lower price point than casual; often times better quality food; and a quicker turnaround, all good consumer propositions. Moe's, as the No. 2 player in its segment behind Chipolte, is a good, solid brand we can grow over time.

BTB: How is Ace Mortgage Funding doing in the current homebuilding climate?

Aronson:  Ace has struggled because of mortgage crisis, and we've struggled along with the industry. But more than 50 percent of the nation's mortgage brokers have gone out of business  in the past 18 months. Ace not only is still in business, but scheduled to be profitable in 2008. Long-term residential mortgages are not going away, and with reduced competition, Ace is positioned to be solid player.

BTB: What happens to the franchising industry when the economy is in a downturn or recession?

Aronson:  Franchising tends to be counter cyclical. In a downturn for those who own a store or franchise, everyone suffers. But also, during a downturn, more people are interested in buying a franchise, because with the layoffs and the like, more people are looking at what to do next. That's the time when franchising, as an industry, continues to grow. The franchising industry is now a $1.5 trillion industry, and it's been growing for a couple of decades. In a downturn, the growth of new franchises often accelerates.

BTB: What motivated you to found Roark?

Aronson: It really combines a lot of my personal passions. I've been in private equity for 20 years, and this was an opportunity to combine all the things I've learned and wrap it into one business. We're proud of how we do business. The results have been OK, as our investors continues to give us money. But we do business in a very straightforward way, with low egos, and doing what we say we're going to do with a high level of ethics. It's been awfully fun to watch the firm grow, and see the personal values you embrace turn into business success.

BTB: Plans for the future?

Aronson:  We're an organization of growth, and we're actively pursuing more. In the past few months we've raised another fund, and raised the assets under management from half a billion dollars to $1.5 billion. So we have $1 billion in equity capital available to us to make more investments. When we started in 2001 we had five people, and now our office has grown to 30.