Forging the Playbook: Lessons from West Hill Ranch and Our Enduring Commitment to DPI and Controls

At Lunchline Partners, our journey is one of continuous learning and refinement. "The Lunchline Way" is built on a foundation of identifying potential in the lower middle market (LMM), executing strategic "Build-Ups," and transforming businesses through a hands-on approach emphasizing strong Systems and Culture. Our early initiative, West Hill Ranch (WHR), an ambitious venture into the convenience store (C-store) space, perfectly illustrates this ethos—both in its strategic alignment and in the invaluable lessons learned, particularly concerning realized investor returns (DPI) and the critical importance of strategic controls.

The C-Store Allure: Why It Aligned with "The Lunchline Way"

The C-store industry presented many attributes that resonate deeply with our investment philosophy:

• A Fragmented Landscape Ripe for Consolidation: The U.S. C-store market is highly fragmented, with single-store operators accounting for a significant majority (around 60%). This creates a prime environment for aggregation, offering multiple arbitrage opportunities by professionalizing and scaling operations. Small operators were often willing to transact at attractive single digit multiples.

• Essential, Resilient Businesses: C-stores are fundamentally retail businesses that have demonstrated unique resilience to economic downturns and the rise of e-commerce. This non-discretionary demand characteristic is a key element we seek.

• Untapped Operational Potential: We saw a clear opportunity to "unleash untapped value"  by applying a systematic operational playbook to what were often "mom & pop run operations". This involved implementing best-in-class merchandising, site refurbishment, robust revenue partnerships, and professional management.

• Systems and Technology Implementation: A core tenet of "The Lunchline Way" is the deployment of modern tech stacks and robust systems. With WHR, we implemented an enterprise management system using Petrosoft software and KPMG’s Spark platform, viewing these tools as crucial for managing the business and as significant value-drivers upon exit.

• Strategic "Build-Up" Approach: Our strategy for WHR was a clear "Build-Up." We started by acquiring a "starter-system" of underperforming or mothballed sites with a "capital-lite"  or "cheapest-to-create" approach. The plan was to develop a replicable playbook  and scale the platform, targeting approximately 30 stores within three years and potentially 50-100 stores in the longer term.

The West Hill Ranch Journey: Execution and a Critical Juncture

With WHR, we evaluated over 50 sites, ultimately acquiring an initial portfolio in Orlando. We made significant progress in developing corporate infrastructure, hiring key operational personnel, and refining our integration playbook for acquisitions. This hands-on approach, building from the ground up, is fundamental to our philosophy of being active partners.

To accelerate growth and scale more rapidly, WHR entered into a strategic sale to Mountain Express Oil (MEX), a large fuel distributor. Under this arrangement, WHR sold its growing portfolio and operational expertise into the MEX platform.

The Key Learning: Paper Returns vs. Realized DPI and the Imperative of Control

The transaction with MEX created a significant "paper return" for our initial WHR investors, reflecting the value built in our starter system and the potential of the combined platform. However, this structure, where WHR was effectively rolled into MEX for an equity stake in the larger entity, presented a critical learning moment. We transitioned from majority owner-operators of WHR to influential, but ultimately minority, stakeholders within the MEX organization.

This shift, combined with subsequent challenges within the MEX organization and an eventual dissolution of the working relationship between us and the new majority shareholders, highlighted a crucial takeaway: a strong valuation on paper does not equate to cash in investors' pockets (DPI). This experience was identified as the biggest "mission challenge" of the WHR investment.

Sharpening Our Focus: Prioritizing DPI and Strategic Controls

The West Hill Ranch experience has been instrumental in further refining "The Lunchline Way," particularly our approach to structuring investments and ensuring alignment with our LPs' interests. It reinforced principles that are now even more deeply embedded in our philosophy:

• Unyielding Focus on DPI: While we always aim for compelling overall returns, the WHR experience underscored the absolute importance of proactively driving Distributions to Paid-in Capital for our investors. "The Lunchline Way" now more explicitly details strategies for achieving this, such as strategic recapitalizations, once a business has been stabilized and its earnings power is consistent. Protecting capital and driving meaningful DPI are foundational pillars of our return philosophy.

• Enhanced Emphasis on Controls and Governance: When we are not in a control position, or when transitioning ownership, the need for robust protective provisions and clear governance structures is paramount. This includes ensuring strong board-level representation, implementing rigorous systems and processes for transparency and compliance, and defining clear pathways for decision-making and dispute resolution. Our commitment to installing systematic operational playbooks, data-driven KPI tracking, and a culture of accountability serves as a critical control mechanism.

Building Forward, Wiser

Every investment provides lessons, and our journey with West Hill Ranch was rich with them. It validated our ability to identify opportunities in fragmented LMM sectors and to build operational value from the ground up. More importantly, it provided a stark reminder of the complexities of exits and partnerships, sharpening our resolve to prioritize tangible cash returns for our investors and to ensure that our strategic influence is protected through robust governance and controls, regardless of the specific ownership structure.

"The Lunchline Way" is an evolving methodology, strengthened by experience. We remain committed to our hands-on approach, to fostering great cultures and systems, and to delivering exceptional outcomes – now with an even keener focus on ensuring those outcomes translate into timely, realized value for our partners.