Private equity firm Roark Capital invests in fast-growing restaurant chain Dave's Hot Chicken

Private equity firm Roark Capital has bought a majority stake in Dave's Hot Chicken, the company announced on Monday.

Financial terms were not disclosed, but Dave's CEO Bill Phelps said on CNBC's "Squawk Box" that the reported $1 billion valuation for the deal is "pretty close."

Since its founding in a Los Angeles parking lot in 2017, the fast-growing chicken chain has expanded to more than 300 locations by franchising its restaurants. Dave's U.S. sales soared 57% last year and surpassed $600 million, according to data from market research firm Technomic.

Roark's investment follows a boom for chicken-focused restaurants, fueled by the so-called "Chicken Sandwich Wars" sparked by Popeyes in 2019. A wave of quickly expanding upstarts, like Dave's and Raising Cane's, have challenged legacy chains like Yum Brands' KFC, further boosting the category's growth.

Dave's success also comes as younger consumers seek more heat in their food. The chain offers a diverse range for the chicken's "hotness" — from no spice to "Reaper," which requires the orderer to waive liability. The Reaper has sent at least one customer to the hospital; co-founder and Chief Business Officer Arman Oganesyan said the diner who signed the waiver offered a bite to her boyfriend, who couldn't handle the heat.

But the restaurant's menu overall is small and focused on its oversized chicken tenders, which can also be inserted into a bun to make sliders. According to Oganesyan, its sliders are the perfect size to eat with one hand, leaving the other free to scroll on a phone.

Phelps, who previously led Wetzel's Pretzels for 25 years, joined Dave's in 2019, less than two years after its founding.

Co-founders Oganesyan, Dave Kopushyan and brothers Tommy and Gary Rubenyan have stuck around and plan to continue in their roles after the deal closes. Along with Phelps, they're also holding onto their equity as minority stakeholders.

"The timing was absolutely right," Phelps said. "We were at an inflection point where we could get an incredible valuation, and yet there was still significant upside for Roark, so that's the perfect place to be.

"Roark has the ability to use their international supply chain to reduce the costs. And it's a better deal for the franchisees, but they also have the international ability to grow with all of their franchisees around the world, so we have an opportunity to blow this thing up very quickly," he added.

Looking ahead, Dave's could reach up to 4,000 locations worldwide over the next 10 years, Phelps said.

So far, Dave's has resisted conforming to industry practices, like focusing on speed of service, switching to cheaper ingredients or expanding its short menu. Sticking to many of its founders' original practices allowed the chain to keep the quality of its signature chicken high even as it opens new restaurants every day, Dave's COO and President Jim Bitticks said.

Executives don't expect that to change under Roark's ownership either.

"How did we get to that billion-dollar brand status? We leaned into what they created, rather than adjusting it or changing it based on conventional wisdom," Bitticks said.

The deal marks Roark's first restaurant deal since the firm's blockbuster purchase of Subway for a reported $9.6 billion in 2023. Roark's portfolio also includes two holding companies, Inspire Brands and GoTo Foods, that collectively own more than a dozen restaurant brands, like Arby's, Dunkin' and Cinnabon.

Roark has been keeping an eye on Dave's since the early days.

"They came to our 15-store grand opening," Oganesyan said. "We'd see them at conferences all the time. They understood the potential of the brand. ... When the time came where we needed that new investor to come in, they were some of the only people on our minds.

Early Dave's investors aren't the only ones making money from the deal. Masterminded by Phelps, the company plans to give dozens of its employees, from its support center team to restaurant assistant managers, significant bonuses.

"He literally made 20 millionaires," Oganesyan said.