Growth | April 2010 | By Deborah L. Cohen
For Sale by Corporate
If it wasn’t for the publicity, outsiders might not have known that Captain D’s was on the auction block, the result of a decision by private equity owners Sagittarius Brands Inc. to sell the brand late last year.
CEO David Head was working hard to keep the emphasis on day-to-day operations. In early February, he was gearing up to rally the troops for the critical Lent season with a six-week tour of Captain D’s 500-plus restaurant system, where attention was shifting to preparations for an expected increase in sales.
Head, who was recruited in 2006 to run the business, before led a financial restructuring at the Tony Roma’s casual-dining chain. At Captain D’s, he made a decision to limit preparations related to the sale to just a handful of executives, freeing much of senior management to keep concentration on the restaurants.
“The whole thing is to keep the focus on what the focus should be: crew members, guests, the business at hand, and running our operations,” says Head, adding that Captain D’s has drawn interest from several private equity firms. “Purchasing folks have to purchase, marketing folks have to develop advertising and marketing campaigns, and, most importantly, the operators have to operate.”
That’s a good strategy, according to bankers in the mergers and acquisitions arena, where a lack of access to capital stymied deal flow in 2009. Now, with expectations for sluggish recovery in the market, buyers are starting to sniff around for prospects.
“The management team needs to be devoted to the sellers until the transaction takes place,” says David Epstein, principal with Chicago-based investment banking firm J.H. Chapman Group, which specializes in restaurant and food-related deals. “The process takes a lot out of you, but you have to continue to run the business because you don’t know if the transaction is going to close. Keep your eye on the ball and let the investment bankers deal with the transaction as much as you can.”
Many variables affect the sale process, but once an offer is made, the outlook will differ depending on whether a buyer is financial, such as a private equity firm, or strategic, in the form of another company looking to grow an existing category or diversify into a new one, he says. Financial buyers typically seek continuity of operations and management, while corporate buyers could have different plans for the business.
Either way, the CEO’s top priority remains that of being a staunch cheerleader for the company and its mission, despite the weight of additional responsibilities on his time. Those responsibilities include shoring up legal agreements, preparing a marketing presentation, creating a virtual online space with up-to-date financials for prospective buyers, and solidifying relations with operators.
To get it all done, the company chief leans heavily on a team of bankers, attorneys, consultants, and select members of the internal staff such as the CFO and general counsel to ready the house for review.
Before marketing the company can begin, it’s important to get a handle on any operational issues that could taint the sale process, says Amy Forrestal, managing director with the Atlanta-based investment banking firm Brookwood Associates, which focuses on restaurant transactions in the mid-tier market.
“Are there any things that might concern a buyer in a sale?” she says, citing potential issues ranging from sexual harassment litigation to problems with facilities, leases, and vendor relationships. “What are the obstacles and how do I make sure that we’re well positioned to overcome them?”
Bankers such as Forrestal work with the CEO and top management on extensive due diligence that reviews every aspect of the business, uncovering problems before it is shopped to prospective buyers.
In franchised systems, CEOs often contract for a so-called validation process, says Michael Seid, a franchise management consultant who is often brought in to assist with restaurant mergers. The method calls for consultants to seek out the opinions of franchisees throughout a system to get a feeling for its culture and whether or not operators are on board with the company strategy. They then identify measures the CEO must take to resolve any conflicts.
“We’re looking at whether the support of the franchisees is appropriate, whether the economics of the relationship is appropriate, and whether there are issues about liabilities that wouldn’t be uncovered unless you looked at them,” Seid says.
Once a prospect steps forward, the CEO must consider the potential impacts of a sale on the brand, Seid says. One area involves supplier relationships and whether they will be transferable to a new owner of the company. What happens, for instance, if the current company is a Coke vendor, but the buyer is a long-time customer of Pepsi?
“What are the long-term brand implications?” Seid says. “It’s another place to look.”
Perhaps one of the most difficult decisions facing the CEO is determining how to control the flow of information about the sale process to various constituencies within a restaurant system. Working with attorneys, who comb through the franchise agreements and other contracts, the chief decides the best time to disclose information to employees and operators. Depending on circumstances, it could be early in the game or as late as when a letter of intent is signed by the buyer. Experts say the message must be clear and management must remain accessible in order to preserve critical relationships.
“The lessons I’ve learned are that you really need to communicate,” says Dan Rowe, founder and CEO of Fransmart, an Alexandria, Virginia–based franchise-development company that buys and sells emerging quick-serve and fast-casual brands. “Whether you’re selling the entire company or just a portion, you have to do that right.”
That’s one more reason that Head of Captain D’s was making the rounds earlier this year.
“I think it’s a question of focus and making sure people understand this is a new beginning,” he says. “It’s not like there’s B-52 bombers circling the restaurants. What they’re buying is a business they believe they can take from this level to a higher level, and that’s exciting.”
Food & Beverage