Managing a Turnaround



Castle Dental Centers, Inc.



Managing a Turnaround

Company: Castle Dental Centers, Inc.

Position: Healthcare

Location: Houston, Texas

Date of Investment: May 2003

Exit Date: June 2004

Company Description
At the time of our investment, Castle Dental Centers was a dental practice management company providing support services to dental clinics in Texas, Tennessee, Florida, and California. Castle provided support services to more than 200 affiliated dentists and their staffs in 77 dental clinics. Castle utilized a branded, retail-focused operating model, stressing convenience and high quality dentistry at affordable prices.

Castle was formed in 1981 by Jack H. Castle, D.D.S. as a single location, multi-specialty dental practice. Over the next 15 years, Dr. Castle expanded the company to 10 clinics, all operating in Houston. After an initial public offering in 1997, Castle’s management team pursued an aggressive expansion strategy and opened or acquired more than 60 new dental clinics across four states.

By 2001, Castle had depleted all its cash and incurred substantial indebtedness in executing its growth strategy. Unfortunately, an inability to realize lofty sales and profit projections left Castle unable to service its debt. Faced with rapidly deteriorating financial performance, Castle’s board replaced senior management and attempted to stabilize the business by reducing costs and closing unprofitable locations. In early 2003, having stabilized the business, certain of Castle’s senior lenders were willing to sell their debt at a deep discount. In response, Castle’s new management began a process to seek new equity capital to recapitalize the company. Sentinel prevailed in a limited auction due to its multi-unit retail experience, strong rapport with management, and its long-standing relationship with one of Castle’s lenders. Following Sentinel’s investment, Castle remained a publicly traded company.

The Opportunity

  • To acquire a dental services platform with a recognized brand at a favorable valuation

  • To invest in a recession-resistant industry with a promising growth outlook fueled by favorable demographic trends

  • To acquire a business with the potential to generate strong growth with sustainable unit economics in a sector that was temporarily out of favor with many investors


Right-sized Castle’s Balance Sheet: Sentinel’s investment allowed Castle to reduce its senior debt by approximately 70%, providing management the flexibility to operate and grow the business.

Stabilized the Company: After several years of uncertainty, management turnover, and the presence of turnaround consultants, Sentinel brought stability to Castle, which enabled its employees to focus on operating clinics and providing best-in-class patient care.

Restarted Growth: Following the closing, Sentinel worked closely with management to implement operational initiatives to improve clinic-level performance as well as to launch a new incentive program to better align incentives for both management and clinic-level employees. These initiatives helped Castle return to its historical growth trajectory.

After restructuring Castle’s balance sheet and completing an operational turnaround, Sentinel received several unsolicited inquiries from strategic buyers, who had been closely watching Castle’s progress. In June 2004, Castle was sold to Bright Now! Dental, Inc., in a highly successful transaction for Sentinel, management, and the public shareholders.

Falcon Holdings, LLC

Food / Restaurants; Franchising


Managing a Turnaround

Company: Falcon Holdings, LLC

Position: Food / Restaurants; Franchising

Location: Chicago, Illinois

Date of Investment: December 1999

Exit Date: May 2005

Company Description
Falcon owned and operated 97 Church’s® Chicken restaurants in the Midwest, making it the then largest franchisee in the Church’s system.

Sentinel was introduced to Falcon by a specialty finance company that securitized and sold quick service restaurant loans to institutional investors. The specialty finance company had provided debt financing to Falcon's former owners to purchase 97 Church's Chicken restaurants from the franchisor. Shortly thereafter, Falcon's business performance began to rapidly deteriorate. With a payment default imminent, the finance company foreclosed on the loan.

After foreclosure, the prior CEO was replaced with a turnaround consultant who staunched the cash flow losses. Because the finance company’s primary business was providing debt financing for restaurants, not owning them, with Falcon operating at breakeven, it decided to sell the business. As an ongoing lender, the finance company sought a trustworthy buyer with a proven QSR track record.

The Opportunity 

  • To acquire the largest block of stores in the Church’s system at good value

  • To execute a turnaround that would restore restaurant profitability to levels enjoyed when the franchisor owned the business

  • To build additional Church's Chicken restaurants in existing markets


Successful CEO Transition: Sentinel recruited as CEO the COO of a 48-unit Church's Chicken franchisee, who had an impressive 11-year record in the Church's Chicken system and was considered one of its best operators. He had previously led the purchase of the 48 Church's Chickens out of bankruptcy on behalf of a private investor. Within two years, he had successfully turned around the 48 restaurants. Because he did not own any equity, he was keenly interested in the Falcon opportunity.

Executed Turnaround: Following the closing, Falcon relocated its headquarters to Chicago, close to the majority of its restaurants. Under the leadership of its new CEO, Falcon recruited a new senior management team, replaced most of its store managers, and upgraded its financial and systems capabilities. Under its new hands-on management team, food and labor costs were quickly brought into line, and the customer experience in stores improved dramatically.

Stabilized and Grew Business: Within months of the closing, same-store sales growth turned positive and profitability climbed rapidly. With the business stabilized, Falcon began a capital investment program of reimaging existing restaurants and building new restaurants in existing markets.

After holding the investment for more than five years, Sentinel had accomplished its investment objectives and sold Falcon to its CEO in a recapitalization transaction. He has continued to build Falcon and today the company has more than 175 restaurants.