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Though restaurant IPOs have remained elusive in recent years, investment into both restaurant chains and restaurant technology remains on the rise. Funding to the restaurant delivery space, for instance, reveals that there remains plenty of opportunity on the horizon.
Restaurants and restaurant technology companies often turn to private equity and venture capital in their quest for expansion. The biggest restaurant chains (specifically in the franchise market) still rely heavily on commercial lending. And, of course, mergers and acquisitions remain a significant part of the foodservice industry.
Here is a rundown of key terms in the restaurant investment landscape:
Adventure Capitalist: An investor who takes stake early on in a restaurant or businesses with an uncertain chance of success (i.e. Those that are riskier), and often actively participates in their management. These specific types of venture capitalist are often more accessible, but typically without as much funding, as a traditional venture capitalist.
Angel Investor: Affluent individuals who invest in startups or entrepreneurs, providing capital through either a one-time investment or an ongoing injection of fund to support a company in its early stages. Angel Investors are essentially the opposite of Venture Capitalists and often include an entrepreneur’s family and friends.
Commercial Bank: An institution that manages deposits, such as checking and savings accounts, for both businesses and individuals. Use of commercial loan proceeds for restaurants include: refinancing, construction, expansion, the improvement of owner-user commercial real estate, business acquisition, and the purchase or refinancing of machinery and equipment.
Hedge Fund: An alternative investment vehicle available only to sophisticated investors, such as institutions or individuals with significant assets. Like mutual funds, hedge funds are pools of underlying securities. Hedge funds face less regulation than mutual funds and other investment vehicles.
Institutional Investor: A large organization (i.e., bank, pension fund, mutual fund, labor union, or insurance company) that makes substantial investments on the stock exchange. They invest in private equity and venture capital because of its consistent ability to deliver superior long-term returns and outperform other asset classes. Because they’re considered to be more knowledgeable than the average investor, institutional investors are subject to fewer of the Securities and Exchange Commission’s protective regulations.
Investment Bank: An institution that facilitates the buying and selling of stocks, bonds and other investments. Investment banks also assist companies in going public with initial public offerings (IPO), as well as provide advisory services.
Non-Institutional Investor: Anyone who buys and sells debt, equity or other investments through a broker, bank, real estate agent, etc. (i.e., the opposite of institutional investors). Non-institutional investors manage their own money, usually to plan for retirement or to save for large purchases.
Pension Funds: A fund (accumulated from contributions from employers, employees, or both) from which pensions are paid. While historically these funds were limited to investment primarily in government securities, investment-grade bonds, and blue-chip stocks, changing market conditions have resulted in pension plan rules that allow investments in most asset classes.
Private Equity: Individuals and firms that invest into private firms or perform buyouts of public firms with plans to take those firms private. A private equity investment will generally be made by a private equity firm, a venture capital firm, or an angel investor.
Public Equity: The stocks that comprise mutual funds, 401(k)s, and iras. The mechanism for garnering public equity is via an initial public offering.
REIT (Real Estate Investment Trust): A company that owns or finances income-producing real estate. Reits are modeled after mutual funds, and provide investors with regular income streams, diversification, and long-term capital appreciation.
Venture Capital: A form of financing provided to small, early-stage firms that are deemed to have high growth potential. Venture Capitalists (vcs) invest in early-stage ventures in exchange for equity or an ownership stake in the company. Vcs are typically looking for large (5-10x+) returns, and therefore often seek to bring the business to its initial public offering (IPO) stage so that they can sell their shareholdings at a high profit. They often demand 50% or more ownership over the investee’s firm in order to offset their high risk.
Financing Strategies & Deal Types
Acquisition: The process by which one business buys a second (generally smaller) company which is then absorbed into the parent organization or run as a subsidiary. The company acquired is often referred to as the “target.”
Crowdfunding: A form of crowdsourcing and alternative finance; the practice of funding a project or venture by raising monetary contributions from a large number of people. Popular crowdfunding sites include Kickstarter, gofundme, and indiegogo.
Debt Financing: Financing that occurs when a firm raises money for working capital or capital expenditures by selling bonds, bills or notes to individuals and/or institutional investors.
Down Round Funding: Funding that occurs when investors purchase stock or bonds from a company at a lower valuation than the preceding round.
Equity Financing: The process of raising capital through the sale of shares in an enterprise (i.e. The sale of an ownership interest in a company in order to raise funds for the business’ expansion).
Initial Public Offering: Whereby a company begins selling its stock on an exchange; also known as an IPO.
Leveraged Buy-Out: The acquisition of a company using a significant amount of borrowed money. The assets of the company being acquired are often used as collateral for the loan, along with the assets of the acquiring company.
Merger: The process by which two organizations join forces to become a new business, usually with a new name.
Mezzanine Capital: A hybrid of debt and equity financing that has elements of both private equity and investment banking. Mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.
Seed Capital: The initial capital used when starting a restaurant or other business, often coming from the founders’ personal assets or friends and family and used to cover initial operating expenses and to attract venture capitalists. The first round of institutional venture capital to fund growth is called the Series A round (followed by Series B, C, and so forth).
Buy-side Deal Team: The team of investors, advisors, lawyers, and accountants that represents the group making the investment.
Confidential Information Memorandum: A document designed to sell a potential transaction to investors.
Exclusivity Agreement: The sell-side team agrees not to entertain any other offers from investors for a certain period of time, usually 15 to 60 days.
Final Investment Memorandum: The completed offer that the buy-side team will give to the target restaurant. It will include valuation, purchase price, and post-deal agreements, including preliminary post-transaction plans for the managerial team, other key employees, and strategy.
Letter of Intent: How investors let a target restaurant know they are interested. It will include a tentative valuation and purchase price, strategic outlook, and, in some cases, and exclusivity period.
Preliminary Investment Memorandum: The buy-side team presents this document to its firm’s Investment Committee to outline the opportunity and seek approval for the transaction.
Sell-side Deal Team: This team represents the target restaurant throughout the investment process. It typically includes key internal players, an investment banker, lawyer, accountant, and a sell-side advisor with both foodservice and investment experience.
Teaser: A short document the sell-side team circulates to attract interested parties. Without disclosing too much, it highlights the transaction’s potential value.
Broadly, companies can be classified as:
- Small businesses, which are typically privately owned, have fewer than 250 employees (according to US classifications), and an enterprise value (EV) below $25m.
- Middle-market businesses have EVs between $25m and $1b. We can further break this category down to lower middle market ($25m to $100m), core middle market ($100m to $500m), and upper middle market ($500m to $1b).
- Big businesses are the largest category, with over 1,000 employees and evs greater than $1b.
Publicly traded companies can be classified by market capitalization:
- Nano-cap Company: Market cap of less than $50m.
- Micro-cap Company: Market cap between $50m and $300m.
- Small-cap Company: Market cap between $300m and $2b.
- Mid-cap Company: Market cap between $2b and $10b.
- Large-cap Company: Market cap more than $10b.
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 $200 billion in annual sales, span all 6 inhabited continents and 100+ countries, with tens of thousands of locations.