‘Hot Chicken’ Is On The Menu With Dave’s Billion Dollar Buyout

Dave’s Hot Chicken has signed a deal with Roark Capital to sell its trendy fried chicken franchise to the Atlanta-based private equity firm for a cool $1 billion.

Dave’s is a fast-casual restaurant chain with a colorful, artsy, graffiti aesthetic that started as a pop-up in Los Angeles in 2017 and has grown like wildfire (too soon?) with nearly 300 locations around the country and annual sales reaching $1 billion.

Roark Capital, a private equity fund with $37 billion in assets under management, is no stranger to food and franchises, and owns iconic brands such as Dunkin’ Donuts, Baskin Robbins, Subway, Buffalo Wild Wings, Jimmy John’s, Jamba Juice, Auntie Anne’s Pretzels, Cinnabon, Moe’s Southwest Grill and Sonic (among others).

Let’s unpack why hot chicken is next on the firm’s menu, given this billion dollar buyout.

The Roots of Nashville’s Famous Fried Chicken

First, you may be thinking, what exactly is “hot chicken” and why is it so popular? It is a style of spicy fried chicken that originated in Nashville, Tennessee. It’s known for its crispy, deep-fried exterior and intense heat, which comes from a spicy oil-based rub made from paprika, cayenne pepper, onion or garlic powder, black pepper and brown sugar, applied after frying.

As history tells it, hot chicken was invented by African American entrepreneur Thornton Prince, who founded Prince’s Hot Chicken Shack in the 1940s. Prince was known for his charismatic personality and was quite the ladies man. According to family accounts, one night he came home “with a faint hint of perfume or a smudge of lipstick on his collar,” and the next morning out of revenge, his scorned lover served him a plate of homemade fried chicken with a “devilish amount of peppers and spices.” Turns out, Prince loved the spicy twist, asked for seconds, and the concept of hot chicken was born.

Prince’s restaurant was originally situated at the intersection of Jefferson Street and 28th Avenue, a vibrant area in Nashville that was a hub for African American music and culture, hosting numerous musicians like Jimi Hendrix, Etta James, and Ray Charles. And for decades, hot chicken flourished, mainly served in Black communities, as this was during the time of segregation.

Over time, hot chicken became a local tradition of particular pride across all of Nashville, with festivals and competitions dedicated to the culinary specialty.

Understanding Dave’s Viral Growth

Dave’s Hot Chicken did not originate in Nashville, but it mastered the formula for viral growth. The franchise was founded by Armenian-American chef Dave Kopushyan along with his childhood friends Arman Oganesyan, Tommy Rubenyan and Gary Rubenyan.

Dave’s started with humble beginnings. The original location was a small street food stand in a parking lot in East Hollywood, Los Angeles, with a portable fryer, a few picnic tables, and a limited menu. Since then, Dave’s revenue has been consistently doubling year over year, and its growth trajectory boils down to three elements – an exceptional product, management expertise, and the “cool factor,” as amplified by celebrities and influencers on social media.

An Exceptional Product

First, the chicken is quite literally, finger-lickin’ good. It’s true. I tried the location in Midtown Manhattan. The tenders are extremely juicy with just the right amount of crispiness, spice and sweetness. And the customer reviews confirm as much.

Management Expertise

Second, a year after launching, when they hit $5 million in sales, Dave’s sold 50% of the company and the franchising rights to an investor group which included John Davis, the Hollywood producer and fast-food financier behind Wetzel’s Pretzels and Blaze Pizza. Davis quickly installed Bill Phelps, as CEO of Dave’s (previously cofounder and CEO of Wetzel’s Pretzels). Phelps was able to fuel expansion primarily through a franchised model, focusing on multi-unit, experienced franchisees. And one of the interesting strategies Phelps deployed was, bringing franchisees into the C-Suite, to make the corporate team “hyper aware of the impact of operational changes” on the ground.

The “Cool Factor”

Third, following a similar strategy with Blaze Pizza, which recruited basketball legend Lebron James as a spokesperson and franchisee, Davis heavily leveraged celebrity investors like rapper Drake, to drum up interest in the restaurant. As an annual tradition, since 2022, Drake has given away free chicken sandwiches on his birthday, and announces the giveaway to his approximately 144 million followers on Instagram. Fueled by influencers on social media, Dave’s has experienced viral word of mouth marketing without having to put much into paid advertising. More recently, popular R&B star Usher has launched his own franchises in his hometown of Atlanta, Georgia.

Why this Billion Dollar Buyout is Interesting

A billion-dollar buyout opportunity less than 10 years from a company’s founding is remarkable, but this deal is particularly interesting because M&A activity in the restaurant industry has been muted in recent years, according to Bank of America’s State of the Restaurant Industry Report (2024).

Over the past five years, quick-service restaurant (QSR) operators have faced unprecedented challenges, including the global pandemic which drove consumers away from in-person gatherings, high interest rates, and rising food and employee costs. And while the pandemic is over (for now) and interest rates are coming down, rising food and labor costs persist.

Food and labor account for nearly 70% of restaurant expenses, leaving little room for margin. In 2024, twenty-two states raised the minimum wage for restaurant employees, led by California’s increase to $20 an hour, which is nearly three times the federal minimum of $7.25, further squeezing margins at restaurants. These costs explain why eating out has become so expensive, as rising COGS, or cost of goods sold, is pushed down to consumers in menu price increases.

Despite all of this downside, a certain category of restaurant has remained attractive to private equity – QSR franchises, which are driven by the potential for scalable growth and consistent revenue streams. QSRs have a smaller geographic footprint and lower labor costs due to the use of drive-through and take-out, and the use of technology (i.e., mobile apps for ordering ahead, self-serve kiosks, and artificial intelligence) is further streamlining costs. Moreover, franchised models allow for explosive growth with minimal capital expenditure.

Recent blockbuster private equity deals in this space include:

• Roark Capital’s acquisition of Dunkin’ Brands (Dunkin’ Donuts and Baskin-Robbins) via its portfolio company Inspire Brands, in December 2020 for $11.3 billion
• Roark Capital’s acquisition of Subway in April 2024 for $9.6 billion
• Burger King Owner – Restaurant Brands International (RBI)’s acquisition of Carrols Restaurant Group, the largest Burger King franchisee, in May 2024 for $1 billion
• Blackstone’s acquisition of Tropical Smoothie Cafe in June 2024 (terms not disclosed)
• Sycamore Partners’ acquisition of Playa Bowls in September 2024 (terms not disclosed)
• Blackstone’s acquisition of a majority stake in Jersey Mike’s Subs for approximately $8 billion (expected to close in early 2025)

Of particular note and part of the preference for franchised businesses in private equity, is the unique financing strategy available for these sorts of buyouts, through whole business securitization, or WBS. WBS is a method of financing available to businesses that have recurring and predictable revenue like franchise royalties.

The company transfers the royalties into a legally separate, bankruptcy-remote special purpose vehicle or SPV, which then issues debt securities to investors, as a specialized form of asset-backed bonds. The bonds issued by the SPV will have a lower interest rate and longer maturity date, than traditional corporate debt and the company uses ongoing revenue from the business operations and royalty payments to make interest and principal payments.

Roark Capital utilized over $5 billion in WBS bonds across two offerings ($3.35 billion and $2.34 billion) in its $9.6 billion Subway deal, representing one of the largest WBS ever completed, and it’s likely to be used in the Dave’s Hot Chicken deal as well.

What’s the Hot Take on Hot Chicken

Dave’s isn’t the only fast-casual or QSR selling delicious fried chicken, and it has quite a bit of competition in this space. Firstly, there are the three big players in the QSR chicken segment: Chick-fil-A (~ $21.5 billion in US sales and 45.5% market share in 2023); Popeyes (~ $5.5 billion in US sales and 11.9% market share in 2023); and KFC (~ $5 billion in US sales and 10.9% market share in 2023). But perhaps more interesting are newcomers like Bonchon, a Korean fried chicken franchise with approximately 150 locations nationwide and approximately $300M in annual revenue.

In addition, an honorable mention should go to Hattie B’s – a restaurant chain specializing in Nashville-style hot chicken. Though it hasn’t franchised or grown as quickly, it is often compared to Dave’s and has 13 locations, mostly in the South, and continues to grow steadily.

Even if Dave’s continues to take market share away from its competition, there is a potential threat on the horizon facing the entire industry, with the avian flu. Admittedly, the price of chicken hasn’t been affected in the same way as the price of eggs, because it’s mostly the egg-laying chickens which have been impacted by the avian flu (versus the broiler chickens which are bred for meat). But there have been reports that some broiler flocks are being affected by the avian flu, and the country’s frozen chicken storage is down 8% year over year.

Finally, while Dave’s consistently receives positive reviews of its specialty chicken, it is also pretty consistently noted by customers as being overpriced. For context: A typical meal could range from $15 – 20. Given consumer price sensitivities, and especially as the cost of food and other commodities continue to rise (Egg prices have climbed 53% since 2024 and household paper products have increased 30% since 2020, for instance), there may be less of an appetite to pay a premium for what feels like a fast-food fried chicken meal, despite its tastiness.

So what’s the hot take on hot chicken and Roark Capital’s billion dollar buyout? Dave’s Hot Chicken’s growth story is undeniable and the buzz behind the brand in this case, is deserving. Whether the growth will be enduring as the franchise continues to scale both nationally and globally…time will tell.