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    11 Things Investors Consider When Buying a Fast Casual

  • With private equity surging into the fast-casual space, here are 11 things operators should have in place when looking for a deal.

    Captain D’s
    Sentinel Capital Partners acquired Captain D’s last year—a move that will help the seafood chain’s unit growth.

    Captain D’s CEO Phil Greifeld has a plan—and now a new partner to help him execute it.

    In December, private-equity firm Sentinel Capital Partners acquired the 530-unit, Nashville, Tennessee–based brand. Greifeld calls Sentinel’s investment a nod to Captain D’s track record and, more important, its future prospects, especially with a proven equity partner in tow.

    “We’re opening 35 new units this year and aiming to grow same-store sales 3 percent while achieving double-digit earnings growth,” Greifeld says with a mixture of enthusiasm and confidence.

    Leveraging Sentinel’s deep experience in the restaurant industry—the firm’s portfolio also includes the likes of Newk’s Eatery and Fazoli’s—Captain D’s will look to ratchet up unit growth year after year and solidify its spot as the nation’s premier fast-casual seafood chain.

    “We’re on our way,” Greifeld says.

    In what’s becoming a growing industry norm, private equity and venture capital money is flowing to fast casuals of all shapes and sizes across the U.S. In the last two years alone, a collection of fast-casual concepts have signed private-equity deals, from Dos Toros’ with GrowthPoint Partners (led by Chopt Creative Salad Company CEO Nick Marsh) to Blaze Pizza’s with Brentwood Associates (which had previously invested in Veggie Grill).

    For many investors, fast-casual brands present a compelling opportunity. Many concepts boast heightened marketplace relevance, strong unit-level economics, and, most importantly, appealing ROI potential.

    “We love the fast-casual space because scalable processes can be put in place to help businesses grow and capture returns,” says Greg Golkin, managing partner at Kitchen Fund, a New York–based firm that has inked six restaurant deals over the last two years, including investments in The Hummus & Pita Co. and The Pie Hole.

    And though fast casuals represent a rather new segment for institutional investors, the category’s appeal has generated escalating competition.

    “We’re seeing larger firms come down-market to invest and seeing some people pay pretty significant multiples for upstart companies,” says Jason Morgan, a managing partner with Hargett Hunter Capital Partners, which invested in the Phoenix-based Original ChopShop and Houston’s Bellagreen, formerly Ruggles Green, in 2016.

    Though every private-equity or venture-capital firm maintains its own investment philosophy, ideals, objectives, and strategy—some bring capital, while others bring capital and an operator’s mentality—there are some universal elements virtually all savvy investors want to see—and it’s on the shoulders of capital-seeking fast casuals to deliver.

    Strong unit-level economics

    Susan Beth, chief operating officer at Atlanta-based NRD Capital, which invested in Fuzzy’s Taco Shop in early 2016, says robust unit-level economics and profitability at the franchisee level are top priorities in any potential deal.

    “As we saw Fuzzy’s franchisees building more stores, it was a sign to us that the ROI was there,” says Beth, noting that Fuzzy’s has nearly doubled its unit count over the last two years to 135 stores.

    Strong unit-level economics are critical, Morgan adds, because it fosters expansion while keeping debt in line. Hargett Hunter was motivated to cut deals with the Original ChopShop and Bellagreen because both claimed cash-on-cash returns north of 50 percent.

    “The numbers always have to work,” says Morgan, the former chief financial officer at Zoës Kitchen.

    Clean financials

    Before landing a deal with Murfey Ventures in 2016, 800 Degrees Pizza founder Anthony Carron had never navigated the waters of such a complex financial arrangement.

    “I was a chef,” Carron acknowledges. “I never did a deal like this.”

    As he went through the process with Murfey, however, Carron quickly understood the critical importance of financial transparency. He urges any fast-casual concept, particularly an upstart one looking to land an investment, to focus on clean financials. This includes maintaining organized digital files containing contracts, leases, and the like, as well as having financial statements reviewed by a certified public accountant, if not audited.

    “When the numbers are clean, it’s easier to get through the mechanics of the deal, which saves time and emotional energy for both parties,” Carron says.

    A concept that resonates

    In earning the deal with Sentinel, Captain D’s Greifeld says the private-equity firm saw a unique, defensible market position.

    “We had successfully democratized quality seafood for the masses, and that allowed us to stand out in a competitive marketplace,” Greifeld says.

    An on-point concept is key to securing any deal, particularly because private equity will want to see growth. Does the concept have a defined point of differentiation? Does it offer a unique value proposition to consumers? Is it on trend with menu and service?

    Bellagreen and Original ChopShop proved attractive to Hargett Hunter, Morgan says, because both concepts featured scratch kitchens and the approachable, made-to-order food desired by many of today’s consumers.

    The ultimate telling point, however, is volume.

    “Customers vote with their wallets, so you can learn a lot about how a concept resonates when you look at volume,” says Golkin, adding that Kitchen Fund seeks concepts with an identifiable core idea from the product and experience perspective.

    Some track record of success

    While deals are possible in the very early stages of a company’s history— Silicon Valley chicken chain Starbird and Miami-based Sliderz both landed venture-capital investments with but one unit to their names—most private-equity investors, even the ambitious, risk-tolerant ones, prefer to see a lengthier track record. For some investors, that might mean five to 10 high-performing units in a given market. For others, it might mean dozens of units across multiple markets and actively engaged franchisees.

    The Kitchen Fund, for instance, seeks early success across a few units. Thereafter, the firm can help the concept build the scalable infrastructure necessary for growth. NRD, meanwhile, favors concepts between 20 and 150 units and wants to see three years of operating history as a franchisor.

    “This way,” Beth says, “they’re out of proof-of-concept mode and in go-grow mode.”

    A willingness to grow

    Almost always, private-equity and venture-capital money comes with one directive: Grow to score returns. That means a concept must be willing to expand, demonstrate an earnest passion to bring their food and experience to more people, and show a willingness to address existing gaps throughout the operation.

    “We’ll help them figure out the right speed and cadence to growth, but the willingness and open mind has to be there to evolve or it’s not a good match,” says Golkin, whose Kitchen Fund partner is Fransmart founder and CEO Dan Rowe.

    Greifeld says both Captain D’s and Sentinel’s embrace of the same vision—to fill in geographic territories as well as capture new guests—made a deal that much easier to complete.

    “They saw these growth opportunities in front of us just as we do,” Greifeld says.

    Replicable and scalable

    With growth on the mind, private equity is then interested in concepts that can be replicated, scaled, and translated into different markets. If the company does not have processes and operations manuals in place, then, Golkin says, it must move to complete those tasks with detail and fidelity.

    “Everything can’t be in the founder’s head,” Golkin says. “If you’re growing a concept, there’s a point where it has to be handed off to other employees and franchisees, and they need to know the game plan so they can execute.”

    Foundational brand elements in place

    Too often, Morgan has been intrigued by a concept only to visit its other stores and encounter a vastly different experience. Such inconsistencies in service, food, and design elements from store to store, he says, threaten a prospective deal.

    “A lot of concepts just get the doors open, but we want something more polished and put-together,” he says.

    From the logo to the signature elements of the store, whether that’s reclaimed wood on the interior walls or blue umbrellas on the patio, Morgan wants to see a concept thoughtfully arranged.

    “With the foundational brand elements in place, that’s something you can build off pretty easily and begin stamping out restaurants,” he says.

    Strategic and prudent direction

    Soon after opening his first 800 Degrees eatery in January 2012, Carron realized the concept needed a defensible market position. Leveraging his fine-dining background, Carron aimed to position 800 Degrees at the top of the market with a super-intense focus on quality. From service to ingredients to interior materials, all subsequent decisions can be traced to that vision.

    “We staked out our own corner,” Carron says.

    Having such a clear, thoughtful vision for the brand and executing on that to the best of one’s ability is central to landing a deal. Beth and her team at NRD, for example, want to see a brand growing strategically and thoughtfully. That means adding people at the right time and opening units in a disciplined fashion to protect brand standards and seize efficiencies in areas such as marketing and supply chain.

    “Whether you’re a startup of 10 units seeking private equity or a 1,000-unit chain, you must have your eyes on the brand and where it’s going,” Captain D’s Greifeld says.

    A plan in place

    While many private-equity investors do not expect a brand to have everything figured out, developing as much of a plan as possible makes any investment conversation more digestible.

    “When the brand can explain who they are, why they are unique, and why they want to take investment now with as many specifics as possible, then that makes the conversation much easier,” Golkin says.

    It also helps, Morgan adds, when a brand is already executing some valuable first steps, such as employing a public relations firm to broadcast the concept’s story or developing a relationship with bankers familiar with restaurant industry deals.

    Brands should also be mindful of addressing how they plan to deliver a return to investors and how the firm can add value. Some investors, after all, focus on franchising, while others bring corporate strategies to spur later-stage growth.

    “Brands need to know what they’re hungry for and how the right partner can help them grow in smart, strategic ways, and that’s why having elements of a greater plan in place is so important,” Golkin says.

    An energized team

    The Kitchen Fund favors entrepreneurs passionate and excited about what they are building, a mindset akin to the social-impact entrepreneur.

    “We want the key stakeholders believing they are providing better food, creating jobs, and building better communities,” Golkin says, adding that both he and Rowe spend significant time with a concept’s founders attempting to gauge their true purpose. “The restaurant industry is a difficult business, so why go through with it? We try to get at the root of their inspiration and motivation,” he adds.

    Morgan assesses frontline workers, too.

    “I like to see team members enjoying their work and being engaged with the brand and with what’s happening in the restaurants,” he says. “That culture of service provides confidence that the brand has something special.”

    And, as always, a little luck

    Timing, serendipity, or luck, whatever one chooses to call it, always plays some role in private-equity deals. A concept, after all, must be prepared to receive an investment and the right partner prepared to make an investment.

    Murfey, for instance, initially approached Carron interested in franchising 800 Degrees units in the Midwest. While the timing wasn’t right for that effort, Carron mentioned his interest in equity at the parent level.

    Murfey leaders were intrigued, and their subsequent investment has helped 800 Degrees professionalize its processes and develop an executive team that now has the brand positioned for future growth, primarily through franchising and licensing. This year, the concept is opening in New York and Miami.

    “We reached a point where we couldn’t do any more with what we had, and we needed help to move forward. As luck would have it, that’s when Murfey appeared,” Carron says. “There’s always a bit of luck and timing to these things, and you never know when you might connect with people who believe in the business.”