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Fat Brands, Inc. (FAT) IPO

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Conventional wisdom says; if you want to make a million dollars in the restaurant business, start with two million. The mortality rate for restaurants is staggering. The founders of Fat Brands think they have found a low risk solution. They call it an asset light franchisor model. Here is how it works.

Emphasizing Cash Flow

FAT is a master franchisor. That means they do not own or operate restaurant locations. They generate revenue by charging franchisees an initial franchise fee as well as ongoing royalties. The competitive strength comes from the brands names they franchise.

FAT claims to be a leading multi-brand restaurant franchising company that develops, markets, and acquires predominantly fast casual restaurant concepts around the world.

Their asset light business model provides the opportunity for strong profit margins and an attractive free cash flow profile while minimizing restaurant-operating risks, such as long-term real estate commitments or capital investments.

FAT currently has master franchise agreements with Fatburger, Buffalo’s Cafe and Buffalo’s Express restaurant concepts, with 181 total locations across eight states and 18 countries.

Management claims their scalable platform enables new stores as well as entire restaurant concepts to be added with minimal incremental overhead cost, while taking advantage of significant corporate synergies.

Growth Strategy

Acquisitions are key elements of FAT’s strategy. Their existing footprint covers 32 countries. For each of their current restaurant brands and those they will seek, the ability to expand the overall concept footprint, both domestically and internationally, is a primary acquisition criterion. FAT believes there restaurant concepts have meaningful growth potential that have appeal to a broad base of consumers globally.

Fatburger

Founded in Los Angeles in 1947, Fatburger (The Last Great Hamburger Stand) has, throughout its history, maintained its reputation as an iconic, all-American hamburger restaurant serving a variety of freshly made-to-order, Fatburgers, Turkeyburgers, Chicken Sandwiches, Veggieburgers, French fries, onion rings, soft-drinks and milkshakes. With a legacy spanning over 70 years, Fatburger is one of the fastest growing hamburger restaurant franchises, with 8.2% new store growth in 2016.

Buffalo’s Cafe

Established in 1985, Buffalo’s Cafe (Where Everyone is Family™) is a family-themed casual dining sports bar concept known for its chicken wings and 13 homemade wing sauces, burgers and other classic American.

In 2011, FAT developed and launched Buffalo’s Express, a fast-casual, smaller footprint variant of Buffalo’s Cafe offering a limited version of the full menu with an emphasis on chicken wings, wraps and salads.

Current Buffalo’s Express outlets are co-branded with Fatburger locations. Presently there were 19 franchised Buffalo’s Cafe and 66 co-branded Fatburger / Buffalo’s Express locations globally. Buffalo’s Cafe achieved 10.0% new store growth in 2016.

The Offering

FAT is seeking about $24 million for 20% of the company indicating a $120 million value overall. Net profits are $1.1 million on revenues of $2.4 million. There is $15 million in shareholder equity in the company which goes a long way in explaining the high valuation placed on the company. The initial S-1 was filed September 6.

Proceeds Of Offering To Be Used For Acquisition

FAT’s low risk high cash flow approach to the restaurant business is interesting and creative. There is a lot to admire in CEO Andrew Wiederhorn. But things do get a bit confusing when the company explains the use of proceeds.

Venture firm Fog Cutter Capital Group presently owns FAT. In March 2017, FCCG entered into a definitive agreement to acquire the franchisor of the Ponderosa Steakhouse and Bonanza Steakhouse restaurants. FCCG intends to complete the acquisitions and contribute Ponderosa and Bonanza to FAT, including one company-owned restaurant.

After the equity offering, $10.5 million will go to parent company FCCG to cover the acquisition. The balance is mostly going to FCCG also to pay down debt from Fatburger and Buffalo’s Café.

It helps to understand the FCCG is a venture capital group that focuses on franchising and the restaurant sector.

In the end a valuation of $120 million for a company with only $1million in net profits and $15 million in equity may be a bit on the rich side but in this market, anything is possible.