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Private Equity and Restaurants

Are restaurant cleanliness, safety, and operations affected when a private equity firm acquires a chain restaurant?

Lundquist College assistant professor of finance Albert Sheen and Shai Bernstein of Stanford University take on the question in “The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry," recently published in the Review of Financial Studies.

In the study, Sheen and Bernstein evaluated health code reports representing 118 chains (about 3,400 individual restaurants) bought by private equity firms. They used “twin" restaurants operated by franchisees as a comparator to stores directly acquired by private equity firms.

The researchers found store-level operational practices tend to improve after private equity buyout, with restaurants becoming cleaner, safer, and better maintained.

Previous research indicates foodborne illness incidents decrease and customer satisfaction increases with better inspection practices, they noted.

“The results suggest that by bringing in industry expertise, private equity firms improve firm operations," the authors wrote.

This is especially true if partners at the private equity firm bring prior restaurant industry experience to the table.