Private Equity Firms and Restaurants: Motivations and Results to date

 

Recently, the press has been full of reports of private equity (PE) firms receiving outsized returns on prior restaurant investments. Examples include the reported Sun Capital 13 times return on its 2003 Bruegger’s investment, Olympus’ Partners reported 8 times return on its  K-Mac predominately Taco Bell franchisee group, Falfurrias selling Bojangles (unit counts up 30% since 2007). CKE Restaurant’s is now working a dividend via new debt for its owners, as did Dunkin Brands in late 2010.

 

We are maintaining a log and count so far 62 separate and distinct chain restaurant brands owned by PE firms, from large to small. That count will soon equal the number of publicly traded restaurants.  And three big chains, Arby’s, Long John Silver’s and A&W were put out for sale in January 2011, and could join the PE ranks.

 

PE Economic Motives: The age-old laws of economics and investing hold here: buy low, sell high. Take money out of the business when you can. Lever up, pay debt down, then lever up again. Try to make improvements in the business. Hold for a 4-7 year timeframe. Think exit strategy from the beginning. Use OPM (other people’s money) if at all possible, hold your cash equity infusion as low as possible so long as the debt isn’t too high.

 

PE firms hope to deliver a 25 % plus annual compounded return on capital invested.

 

The spate of 2010 and 2011 restaurant activity has to do with (1) a general reopening of lending after the 2008-2009 recession, (2) lower corporate debt rates, and (3) PE firms with funds that must be put to use. Larger cash on cash percentage returns seem possible for “older” deals, when the required equity infusion was lower, at 20-30%, versus now. But the returns depend and will change over time.  

 

The private equity firm promotes operational improvement, and synergies via a “buy to sell” mentality to get their investment back and realize a trading profit. With a 4 to 7 year term focus, they utilize both operational value creation and leverage and financial engineering. The balance depends on the PE firm’s own expertise and focus. PE firm ownership doesn’t guarantee success, however.

 

Highly franchised businesses, especially national brands, command a valuation premium since the earnings is thought to be more predictable and there is less (but not no) capital expenditures associated with a franchised system. Multi-unit franchisees are valued a bit less as they have a smaller development universe typically.

 

Is this bad or good for the brands?  We don’t know yet. Not much data is available.

 

In 2010, we looked at 2003-2007 era private equity deals that failed. Since data for privately held restaurants aren’t much accessible, we defined failure to be either Chapter 11 or 7 filing or where unit counts declined. About 30% seemed successful successful, 40% in some mid-state or not determinable yet and about 30% had failed.

 

Interestingly, the success factor seemed to vary based on the brand strength, and position in the marketplace. The purchase price multiple, a proxy for debt, didn’t seem to be greatly associated with the success or failure.    

 

What about the franchisees? 

 

In all of these chains, franchisees do all the customer execution work; bear the expense of the initial investment, ongoing capital expenditures and new unit expansion. They pay the royalties, and borrow the bulk of the funds needed for expansion. They are highly affected by credit market conditions.

 

Franchisees want buy in, dedication, and culture, since they have bought in, often for life. PE firms might be smart to leave competent management in place that can further build the culture and promote franchisor- franchisee coordination and unified accountability.  

 

In relating to the PE firms, franchisees must realize that the PE firm is using both “trader skills” via a so called “buy to sell” mentality as well as business management skills to get a good return. They certainly want to make the business better. But each PE firm is different and has different motives and capabilities.

 

Franchisees should figure that businesses would be held for some time to recover investments but trader, market conditions would rule the timing. The exit plan might not be re-entry to the public markets, but might be sale to another PE firm. As other PE firms raise money, they need to put the funds to work, too.   

 

 

 

Views: 29

Comment

You need to be a member of FohBoh to add comments!

Join FohBoh

Advertisments

 

DEPARTMENTS

Social Wine Club for Craft Wineries

Smartbrief

Report: Consumers want more protein, need more education

A majority of U.S.  -More

California Walnut Beet Carpaccio Flatbread
Jump start their appetites with this fabulous flatbread appetizer topped with beets, goat cheese, arugula and California Walnuts. For this and more great recipes, visit http://www.walnuts.org/food-professionals/trending-recipes/.

Vegetables take over dessert menus

Top pastry chefs in the U.S.  -More

Rising takeout demand drives new Mama Fu's footprint

Austin, Texas-based Mama Fu's Asian House debuted a smaller footprint unit focused on feeding a growing demand for takeout an -More

JOBS & CAREERS

Posting a job or finding a job starts here at FohBoh. Call us about special $25 posting packages to syndicate across all major jobs boards.

National News

Souplantation & Sweet Tomatoes Certified As Nation's Largest 'Green' Restaurant Chain

National Group Salutes Country's Only Large Restaurant Group to be 'Certified Green Restaurants®'

National Restaurant Association and EatStreet Release Online Ordering Guide

The National Restaurant Association and EatStreet have released a free educational guide focusing on online ordering and emerging restaurant technology trends.

Boyd's Coffee Launches Single-Cup Coffees For Retail And Foodservice

The coffees come in a variety of roast levels and include organic and Rainforest Alliance Certified™ options: French No. 6®, Red Wagon® Organic Coffee, Good Morning™, Hi-Rev® (delivers more caffeine), and Lost Lake™ Decaf Organic Coffee.

Arby's Announces Development Deals With New And Existing Franchisees

ARG recently sold 14 company-operated restaurants in Tampa, FL to Mosaic Investments, Inc. (Mosaic), a fully integrated investment firm based in Atlanta. In addition to remodeling existing locations slated to commence at the end of 2014, Mosaic has committed to build 13 new Arby's restaurants in the Tampa area over the next nine years.

Smoothie King Appoints Vice President Of Business Development To Drive Brand's Expansion Across The U.S.

Prior to joining Smoothie King, Bruno served as vice president of retail sales, operations and franchise development for Fannie May Fine Chocolates, a division of 1800Flowers.com, where he oversaw a $69.5 million retail division that included 100 corporate stores and 45 franchised stores.

CROWD FUNDING

If you are looking for capital to start or grow your restaurant, create the next 501c3, develop and launch the next app for the restaurant industry,or want to help your peers in some meaningful way, we want to know about it.

TED TALKS VIDEO

TED: Michel Laberge: How synchronized hammer strikes could generate nuclear fusion - Michel Laberge (2014)

Our energy future depends on nuclear fusion, says Michel Laberge. The plasma physicist runs a small company with a big idea for a new type of nuclear reactor that could produce clean, cheap energy. His secret recipe? High speeds, scorching temperatures and crushing pressure. In this hopeful talk, he explains how nuclear fusion might be just around the corner.

TED: Sarah Lewis: Embrace the near win - Sarah Lewis (2014)

At her first museum job, art historian Sarah Lewis noticed something important about an artist she was studying: Not every artwork was a total masterpiece. She asks us to consider the role of the almost-failure, the near win, in our own lives. In our pursuit of success and mastery, is it actually our near wins that push us forward?

TED: Matthew Carter: My life in typefaces - Matthew Carter (2014)

Pick up a book, magazine or screen, and more than likely you'll come across some typography designed by Matthew Carter. In this charming talk, the man behind typefaces such as Verdana, Georgia and Bell Centennial (designed just for phone books -- remember them?), takes us on a spin through a career focused on the very last pixel of each letter of a font.

TED: Jeremy Kasdin: The flower-shaped starshade that might help us detect Earth-like planets - Jeremy Kasdin (2014)

Astronomers believe that every star in the galaxy has a planet, one fifth of which might harbor life. Only we haven't seen any of them -- yet. Jeremy Kasdin and his team are looking to change that with the design and engineering of an extraordinary piece of equipment: a flower petal-shaped "starshade" positioned 50,000 km from a telescope to enable imaging of planets about distant stars. It is, he says, the "coolest possible science."

© 2014   Created by FohBoh.

Badges  |  Report an Issue  |  Terms of Service