Even a decade after the Great Recession, restaurant commercial lending remains tight, but there’s still a tremendous amount of eager capital around the globe. Foodservice companies are increasingly turning to different sources to fund their restaurant expansions.
Restaurants have proved particularly intriguing to private equity (PE) firms, and we’ve been approached by $3b–$4b in capital from institutional investors, earmarked for deployment in the global F&B space (particularly in the GCC, European, Indian, and US markets). In short, there’s a lot of interest — the challenge now is for would-be sellers to connect with the right buyers.
Both prestigious private equity firms and institutional investors are looking for concepts growing in the US as well as those planning for cross-border expansion. On average, we’ve seen firms with anywhere from $300m–$800m allocated for restaurant-specific investment funds. While every transaction would be unique, most PE investors are interested in concepts with more than $5m in system-wide EBITDA.
Investors are showing more and more interest in middle-market operations, defined as businesses with between $500m and $1b in enterprise value. In the US, middle-market companies make up 74.1% of all PE-backed company inventory. We’ve also noticed that this inventory is increasingly concentrated in relatively young companies.
The trend toward middle-market deals indicates an overarching move away from investment in only the biggest chains — an incredible opportunity for small concepts.
Here’s how to take advantage.
Private Equity’s Financial & Managerial Firepower Helps Restaurant Expansions Scale Up
A private equity investment doesn’t just pay for expansion — the analytic firepower and managerial expertise that come with the right kind of partnership help chains adapt their organizational infrastructure to meet the complex challenges larger operations face.
Getting expansion right is notoriously difficult: every aspect of the business, from supply chains and industrial engineering to marketing strategies and training modules must scale up with the number of locations.
What sets private equity firms apart is that the buy-side team takes an active role in managing their investments post-transaction, granting restaurateurs access to some of the brightest analytic minds, who will provide clearsighted forecasts of both the operation’s and the industry’s future.
This expertise is particularly useful when embarking on a national or international expansion. The financial modeling and projections (supported by the partnership with CDD experts) will give all partners an deep understanding of the economic forces shaping the industry so that they can make informed decisions about which markets to penetrate.
Private equity firms also bring managerial expertise to the table. When a small restaurant chain begins to expand quickly, how it runs on a day-to-day basis changes character radically, across all functional areas.
Our most common finding when working the middle-market operators is that they are stretched too thin. The systems put in place for marketing, inventory, and training were perfectly sized for ten units, but, now that they’ve reached 25, the underlying infrastructure is no longer equipped to support the operation. Often, the people running those (now expanded) departments don’t have experience within large organizations.
Though few private equity firms specialize in the restaurant industry, they all focus on increasing their investments’ valuation. The most common way to accomplish this goal is to find more efficient ways of doing business. This knowledge is an incredible value-add for a restaurant operation experiencing the growing pains of expansion.
A Sell-side Advisor Will Protect Your Interests
As of June 2017, private equity assets under management reached an all-time high, at an estimated $2.8t. With plenty of capital still looking for a home, hot restaurant concepts will likely have their pick of potential partners.
These investments often produce incredible results. In an ideal world, the two parties come together to create a whole that’s much greater than the sum of its parts. Knowing which offer to take isn’t just a matter of money — restaurant operators should bring in external help to offer unbiased opinions of all comers.
With the right guidance, raising capital can propel an operation forward — so emerging concepts should be sure to have a sell-side advisor that can support their biggest dreams.
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ABOUT AARON ALLEN & ASSOCIATES
Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We help restaurant operators and investors make informed decisions, minimize risk, and maximize sustainable value. With experience on both the buy- and sell-sides of transactions, we have a robust understanding of trends and factors impacting restaurant chains and private equity funds around the world. We help protect, enhance, and unlock value throughout every phase of the investment lifecycle. Collectively, our clients post more than $100 billion in annual sales, span all 6 inhabited continents and 100+ countries, with tens of thousands of locations.