Rod Guinn

What was your first important lesson?

The single biggest one was that no matter how good your due diligence was or your plan, it all came down to the management.

How did that lesson come about?

About 20 years ago, Tennessee Restaurant Co. bought Friendly's Ice Cream. It was then the biggest restaurant deal in the private-equity world. They bought Friendly's because—and see if this sounds familiar—in addition to other attributes, it owned a tremendous amount of real estate. The plan over the next 18 months was to recapitalize the chain on back of that real estate.

But things went haywire, as I recall.

Six months later the capital markets turned almost upside down. The owners were intending to take advantage of one type of financial engineering and suddenly they can't. And they can't get rid of debt because they can't refinance the real estate. Plus, operations were slipping, and the country was heading into a recession.

Where does management come in?

Despite all of that, 10 years later Friendly's went public, raising enough capital to pay out its balance-sheet debt whole. And the reason for that was a management team came in and knuckled down. They took it upon themselves to make things work, to stay up late and work weekends.

Just like that?

It's not a home-run story. But management demonstrated they could survive amid adversity. Don't forget, it took 10 years to get to the IPO.

How do you identify such a management team?

Past experience is important. But I have seen the flip side, too: management teams that do a turnaround and then can't do another one. Past experience isn't a 100 percent predictor, but it sure is better than nothing.

Given what you've learned, how would you advise management of a young, fast-growing concept?

There should be flexibility. If I were on the board of a fast-growing, young concept, I wouldn't think about a permanent capital structure right now. I'd think about how it's better to use a little extra equity to lock up growth without putting undue pressure on operators. When the capital markets come back to whatever normal is, then put a capital structure on it.

But if management intends on growing through franchising, what then?

If you are a brand that has decided that's the way to grow, realize the franchisee faces a higher capital cost for every new store and the expected return will be lower because operating costs are higher. So the franchisee needs a better deal to get the same return as they would have 18 to 20 months ago. Or he or she needs to be in a stronger position to cope with a smaller return and still make money.