Working Paper | 2013

The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry

by Albert W. Sheen and Shai Bernstein

Abstract

What, if anything, do private equity firms do with businesses they acquire? We find evidence of significant operational changes in 101 restaurant chain buyouts between 2002 and 2012. Analysis of health inspections conducted for over 50,000 stores in Florida shows that food safety and sanitation improve after private equity takeover, especially in areas related to food handling, kitchen maintenance and consumer advising. Supporting a causal interpretation, this effect is stronger in directly owned stores than in franchised locations—"twin restaurants" in the same chain over which private equity owners have limited control. Restaurants also reduce employee headcount and lower menu prices. This evidence suggests private equity firms are not simply financial engineers but rather active operators that improve management practices in the firm. Moreover, efficiency gains do not come at the expense of product quality.

Keywords: Safety; Quality; Private Equity; Food; Management Practices and Processes; Leveraged Buyouts; Performance Efficiency; Retail Industry; Food and Beverage Industry; Florida;

Citation:

Sheen, Albert W., and Shai Bernstein. "The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry." Working Paper, June 2013.