> To raise enough cash to make the deal happen, Golden Gate sold off Red Lobster's real estate to another entity — in this case, a company called American Realty Capital Properties — and then immediately leased the restaurants back.
So private equity didn't try to make Red Lobster profitable before stripping it of its assets. That was literally their first move.
With that said, the tax code and employee law could be improved so there are stronger guardrails to protect some stakeholders more.
That's not so clear to me. The real estate wouldn't have been worth so much without the existing restaurants having to pay rent.
The above is something people often fail to think of. If you (as is common) have something that could be two independent business with one supplying the other, then you should have your accountants figure out the numbers for each separately. (this is not easy, and eventually not worth it)
Obviously deal terms are important, but that action on its own isn't stripping for the sake of stripping.
What is "stripping for the sake of stripping" of not this?
If you will be there for decades it is worth owning. The land can be paid off and still working for you. Likewise the building is depreciated and paid for (check with an accountant!), but you are still there using it - you still need to remodel and maintain it though. You pay more upfront, but long term it is a better investment.
However many businesses are fad - they do well for a few years and then people move on to the next fad and you should close up. If you only need the real estate for a couple years you should rent/lease: you won't see a payoff from the upfront costs, and you are stuck with the real estate while trying to sell it.
This is so suspiciously MBA-esque: - Owning real estate (and responsibilities associated with it) are not distractions: they are the cost (and responsibilities) associated with running a business. - "a huge cash infusion" followed by [correspondingly] huge rent payments; the business becomes a prisoner.
There certainly are distractions when running a business, but owning the spot of land where it's installed is not one of them.
However it is an accounting distraction. If you own real estate you need to figure out which share of your profits comes from rent of real estate and which from the restaurant. If you cannot make both business profitable that means you should get rid of one. (sometimes that means sell the real estate and rent, sometimes it means close the business and rent the real estate to someone else). If both work out profitable, then keep going as is. (don't forget about intangibles, if real estate is a small loser it might be worth it just because you don't have to move and so can get loyal customers - but you should be intentionalable about accepting this loss)
Quotation needed. Usually they put no or little effort in this. They want to get their profit by destroying the business, either by breaking it down and selling the parts or by turning it into a shitty consumer-hostile money-grabbing version of its former self
What are some well known examples of "private equity turned troubled brand into wild success" where products become better than ever and consumers couldn't be happier? It seems like all I ever hear are stories where a brand is "rescued" only for it to be butchered for parts in a couple years time.
There was a side plot of "PE partners with charismatic former founder", but the main story was PE cost-cutting, layoffs and loading the company up with debt.
They were taken private a few years back, and after a long slow period they're expanding again.
Reducing the friction of starting new business is good. But I don't think it's sufficient to protect consumers. (If it was sufficient, we wouldn't need antitrust law at all, right?) For example, the rolled-up firms might have economies of scale that allow it to undercut new competitors.
i.e. these vet clinics - a PE firm can buy up 40 disparate vet clinics in a large city then raise fees and cut staff. You may be lucky if a few new clinics appear over the next couple years once customers are fed up with the increased price and reduced quality.
It's still a win for the PE firm and a loss for most of the consumers.
And if you have a vet, say, who is near the end of his career, he's already amortized all the training/educational expenses, and so can run out until retirement at relatively low rates compared to a brand new one.
The companies take advantage of this, but the customers also like it, too, because the offices will be fancy and feel new and they can schedule an appointment online.
Same thing that Great Clips et al did to barber shops.
Because they have a connection to their community, which means both (1) they're more vulnerable to backlash, and (2) they don't want to, because it would be taking directly from other members of their community.
Mom-and-pop shops tend to price based on what is fair. PE firms tend to price based on what is profit-maximizing.
If the PE firm raises prices too high, they don't punish themselves at all, because those customers go elsewhere. "Elsewhere" being just another office/practice which they also own. Mom and pop couldn't do that themselves. They didn't have monopoly-like powers to ensure their success.
> Why is there a barrier to entry that prevents some new young doctor or vet
Because the young ones are getting started, and do not have the capital to start a practice (or to buy an existing one). How much does a dental x-ray machine cost? How much do the dental chairs cost? How much does the lawyer that fills out the paperwork to get the permits for that retail space to be a dental office cost, per hour, and how many hours of paperwork?
I'm curious if anyone who has a negative reaction to this article has actually been to a Red Lobster in the last 10 years. They serve poor quality food for similar prices as other sit-down restaurants. You're as likely to get poor service as you are anywhere else (maybe more so), but you'll still have to tip the same amount and spend the same amount of time there. There is no value proposition and certainly no cause for mourning or hagiographies.
Nitpick: You'll have to tip the same amount as another restaurant with bad service. If it's awful enough, that works out to about a 20% discount on the meal.
If it's a normal night and I see our waiter playing with their phone or chatting with the bartender while I unsuccessfully try to wave them down for a drink refill, I'll remember that when I'm paying the bill.
From the article:
> In 2014, amid flagging sales and pressure from investors, Darden sold Red Lobster for $2.1 billion to Golden Gate Capital, a San Francisco private-equity firm.
They usually involve PE taking over firms that were already in financial trouble, which is what made them attractively priced to PE in the first place. The PE firm would also prefer to have a nice profitable business, but if they can't turn it around, they have options like asset stripping or selling the name to a different company.
Here TFA mentions "flagging sales" already in 2014.
The most likely alternative to PE "killing" Red Lobster or Sears or Toys R Us wasn't that the businesses restructured with the same management and business model but 25% fewer stores. It was that they went out of business altogether.
I'm worried by PE buying up successful natural mom-and-pop businesses like dentists and vets and worsening the consumer experience at those. Not so worried about them managing the decline of massive national brands slightly more aggressively than another billionaire owner might.