- PROJECT HELP
- WHITE PAPERS
For companies seeking large returns from the restaurant industry, growth is still the word. Single, multimillion dollar units have always been rare, and that leaves multiunit duplication the most direct route to building a business powerhouse.
But the resources needed to turn one bang-up pizzeria into three are a far cry short of those needed to grow a concept to 20 stores and beyond. The genius behind the company must, in essence, be able to duplicate himself through training and delegation, plus have ready access to major money.
The good news is many private investors are moving into the restaurant segment in search of the next hot concept, a brand in which they can invest for a medium term, grow substantially and then sell to another party.
"There's no question there's a lot of money out there looking for a private transaction," said Alan
Some concepts just have that magic, some kind of fairy dust on them. It's hard to explain.
— Alan Higbee,
Higbee said the days of venture capital groups buying a small restaurant concept, growing it and then executing a public offering of $15 million or $20 million are long gone. The several hundred million dollars pulled in on deals like Domino's Pizza and Chipotle Mexican Grill are required to make going public profitable. But that hasn't reduced the number of investors looking for a restaurant concept through which to grow their money.
Where the real challenge lies is in matching capital to concept. Finding an investor who's willing to pour money into a company isn't terribly difficult, experts say. But that doesn't mean every deep-pocketed investor is a good backer for the long haul. Anyone who invests in a restaurant company, Higbee said, needs to know the restaurant business itself and understand its cycles and potential pitfalls. While it's not uncommon to make loads of dough on restaurants, not everyone is willing to ride the usually rocky road to get to the pot of gold.
"One of things people do the worst job of in venture financings is making sure everyone understands the realistic expectations of the concept," he said. "You can't do that unless you have a financier who understands your business."
Making the match
Whether an operator seeks capital from an investment group or from commercial lenders, neither type will be interested in the investment unless the concept is duplicatable. Higbee said a solid record of success and a well-defined business model are much more important than a lot of units.
"You have to be big enough to convince the financier that your concept isn't a fluke, that it's not overly geographically limited, that it has legs and can travel, and that you can replicate it," he said.
But great restaurateurs aren't always skilled at growing concepts, he added. "You can make a wonderful restaurant and can ride herd over people to make sure your standards are high. But what happens when you can't be there and you've got to turn that over to a manager? Anyone who's going to finance a restaurant expansion wants to know you can put it into the hands of a third party and that you can replicate yourself."
They also expect your business to be buttoned up. Everything from a clear financial history to standardized recipes and training systems are necessary for convincing an investor that yours is a well-run business, said Dave Russell, vice president of sales for GE Capital's restaurant financing division.
"They have to come to us with a clean credit history and financial statements that make sense for this industry," Russell said. "We'd also look at the experience of the operator, for a resume that says they know what they're doing, what they're getting into and that they've got the ability to grow."
Russell said a sharp operator is prepared to showcase his business by pointing out its accomplishments. Simply saying you've got great pizza and that sales are strong is too vague. Investors want to hear about brand mystique and recognition, passionate customers and devoted employees.
If the company is large enough to have a franchise system, Russell said he makes sure all parties are on good terms before a deal is made.
"Where you see a healthy relationship between the franchisee community and the franchisor, you see something happening that's right," he said. "To the extent that you don't, you have to question why it isn't that way."
Both parties also must accept the financier to ensure long-term growth, he added. "We look for a triangular alignment between the franchisor, us and franchisee. The extent to which those three parties are aligned to help the system grow properly is a sign of whether it will succeed or break down."
While some operators may be eager to cash out, retire or start another business, Higbee said concepts that do the best usually keep the founder at the helm. Most venture capital groups prefer to be silent partners that trust the operator's instincts and allow him to focus on customers and staff issues.
As a lender, Russell places a lot of value on an operator's personal investment in the business.
"We will look for the potential borrower to have some skin in the game in the form of an equity injection, collateral that's clear of debt, or cash," he said. "But the amount we require changes on a deal-by-deal basis."
Time to get out
While investors like to remain silent, they won't for long, Higbee said, if the business doesn't perform to expectations. Dips and blips in sales typically don't stir fear in the hearts of experienced investors, but long streaks of negative sales or unit closures will push them to play a larger role in the business.
"They're going to jealously
Keep up-to-date on the latest pizza news.
Sign up for free, twice-weekly e-mail alerts
Typically such measures are last resorts, Higbee said, because venture capital groups are more skilled at managing money than restaurants. A good financier knows when to take drastic action and address problems before they get out of hand, and that's the kind of backer an operator who wants to grow needs to find, Russell said.
"I would look for the kind of lender who can demonstrate a track record in the industry," he said. "It behooves the (operator) to look for someone who's in it for the long term. You'll see companies that come in and out of the industry based on whether it's hot or not."
Neither Russell nor Higbee called any particular restaurant concept hotter than another for investment possibilities. "It's all over the board right now, there's nothing you can point to and say, 'That's the one,'" Higbee said.
A small, low-end steak chain in Florida, he added, just got backing from a financier with plans for big growth. The menu isn't innovative and its facilities are pretty basic. But what makes the chain a dead sexy investment is its successful business model.
Higbee admitted with a laugh that some concepts are hot for unknown reasons.
"You can have restaurant concepts that open next door to each other with folks who are good operators," he began. "One of them is packed to the brim, while the other guy's got people out front with sandwich boards trying to bring people in. Some concepts just have that magic, some kind of fairy dust on them. And that's what I think that steakhouse has, the fairy dust."
© 2015 Networld Media Group All rights reserved.