Growth | October 2012 | By John Morell

On the Market

More brands are going public, but determining whether it’s time to jump on the IPO bandwagon can be a lengthy process.

Burger King went public again in 2012 to gain needed financing.
Burger King went public again in 2012 to gain needed financing. Burger King
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Stock market watchers have been observing a curious trend in 2012: the reintroduction of the restaurant IPO.

“With the sagging economy over the past few years, we saw a lot of restaurant and other hospitality companies put their plans to go public on hold,” says Roger Pondel of PondelWilkinson Inc., a Los Angeles–based investor relations firm. “Since the beginning of the year, everyone’s been thinking the same thing: They want to get their plans going and their IPOs out there as the market starts to move back up.”

The quick-serve name that drew the most attention on Wall Street this summer was Burger King, which brought in a nice payday for its private-equity ownership when it relaunched on the New York Stock Exchange in June after 18 months of being privately held by the investment group 3G. Burger King has bounced on and off the stock market over the past decade as various owners have tried to build value in the company. However, management has worked to maintain a strong corporate identity throughout the buying and selling process.

“Going public has not changed the focus or priorities of Burger King Worldwide,” writes spokesman Bryson Thornton in an e-mail to QSR. “We continue to execute on all of the company’s four pillars: menu, image, operations, and marketing communications.”

Executives at CKE, parent company of Carl’s Jr. and Hardee’s, were poised to get their own shot at ringing the bell in August with an IPO of around $15 per share. However, the company pulled out at the last minute before its planned August 10 IPO due to “market conditions.” The company was taken private by Apollo Management in 2010, and, according to previous estimates by CKE, as much as $230 million could have been raised when the first trading day closed.

With all of the potential money available in the stock market and the continuing volatility in business financing, it’s no wonder quick-serve entrepreneurs are increasingly opening up their long-term plans to see if now is the time to go public.

“That’s really the first step—take a look at where you want your business to be a year, five years, 10 years down the line,” says Solomon Choi, owner of 16 Handles, a 24-unit, privately held chain of frozen yogurt shops along the East Coast. Though the brand is private, Choi doesn’t rule out taking the company public in the future.

“It’s possible that maybe the vision for what you want to do with the business has changed since you’ve opened it,” he says, “but it’s worth examining your long-term business plan to see where you’re headed and if that type of expansion is right for you.”

Operators might also ask themselves why going public is the right solution for the future of their business.

“Generally it’s about the need to capitalize the business,” Pondel says. “When an entrepreneur gets his quick-serve concept going, maybe he’s done it with his personal funds or with money from a partnership. But if the business succeeds and there’s a need for money, that’s when you get into the debate about whether to go public.”

There are, of course, other options available to quick serves to raise money. Once the company’s inside funding sources are tapped out or are inadequate to pay for a huge remodeling project or a multiunit expansion, the first stop is often the bank, as bank funds can fulfill certain money needs—but not all of them.

“As a rule, of course, banks are conservative lenders,” says Chad Smith, a Las Vegas businessman who co-owns four Yogurtland franchises and has been involved in several business financing transactions over the years. “They’re going to help you as much as they can, as long as they like your financial statements. But they’re also not going to give someone with one successful outlet the money to open 100 new units. It doesn’t matter how unique the concept is. They don’t take big risks.”

A business that’s showing growth and promise, as well as experienced leadership, can find expansion funding through venture capital groups, which seek out promising companies led by talented entrepreneurs. Venture partners generally stay in the background, investing in the business’s vision without holding a majority stake in the equity.

Sometimes, when brands absolutely need cash for their company (and, of course, they own some significant assets or the business is making money), there’s probably a private-equity lender out there to help them out—for a price.

“The biggest advantage of private-equity funding is it’s there, and it’s there quickly,” Smith says. “You’re ready to start expanding? By the end of the week, you could be signing leases for new stores and making construction plans. The problem is from that point on, your private equity partner is on top of your business, pushing you to grow and maximize their investment quickly.”

Going public is a bit like a mix of these funding channels, combining the good and the bad of each, Pondel says. “It changes the nature of the business, not necessarily in a bad way, but it does alter the way you run things, which is why it should be thought through very carefully,” he says.

Though primarily known for providing money for expansion, going public can also bring the ownership team some flexibility within each of their roles. “It gives you instant liquidity as the owner,” Pondel says. “Let’s say your quick-serve chain has been a success for several years and you still want to run it, but you also want to take some money out of the business. Selling some of your shares gives you that opportunity to take some of the equity and still maintain control of the business your way.”

Becoming a public company means just that—being in the public eye. This is generally good news for restaurants since it puts their names in the news and gets some free publicity when the stock is introduced. Of course, there’s also an inherent risk if the company is hit by crime or other bad news: The stock price could drop.

Pondel, who has worked with numerous restaurant and hospitality businesses entering the stock market, says brands’ unique customer relationships sometimes help when they become public companies. He says one fast-casual client located primarily near retirement communities featured table tents that thanked diners for their patronage and invited them to call and ask about an investor’s kit to learn how to become a shareholder.

“The result was pretty amazing. Many of these retirees had money to invest, they liked the restaurant, and they welcomed becoming shareholders,” he says. “You’re not going to find that kind of affinity with a faceless tech company.”

Although it would be ideal if a company’s primary customers were also their shareholders, that’s unlikely to be the case—at least directly. The biggest stock purchasers are institutional investors, like mutual and hedge funds that buy and sell hundreds of thousands of shares per mouse click. This means most of a restaurant’s shareholders won’t be interested in its new spring menu as much as how much profit it’ll earn by December 31.

Accounting changes should be expected when a company goes public, since everything is geared around the company’s quarterly earning’s report.

“You’re arranging your business so that your quarterlies are at least acceptable,” Smith says. “What’s happening is that you may be making decisions that will show the company in the best light each quarter, rather than taking the long view and doing things that will benefit you years down the road.”

16 Handles’ Choi says this is where trusty counsel comes in.

“Reach out to your mentors and advisors and get their input,” he says. “It may be that this is the kick you need to take your business to the next level, or maybe you need to rethink your goals. Going public is a huge decision.”