Quick-service operators looking for external financial support often find an attractive option in private equity firms. But finding the right partner takes effort, research, and a little bit of soul searching.
Colleagues and industry contacts are good places to start when considering private equity firms, says MOD Pizza cofounder and CEO Scott Svenson. When the Seattle-based brand was ready for growth, Svenson used his investment experience to identify potential partners.
“For us, it started by reaching out to those firms that we knew were active in the industry and starting a dialogue,” he says.
The MOD team wanted a partner who understood and shared its vision of building the company. “We’re a very culture-centric business that is very motivated by the purpose behind our business,” Svenson says. “Not every decision we make is going to be driven by the bottom line.” Any private equity firm that partnered with MOD needed to support that strategy. The MOD team also wanted to work with people whose presence they enjoyed. Earlier this year, brand executives decided on PWP Growth Equity, which Svenson says had all the pluses the brand was seeking.
Dean Simon, cofounder and CEO of gourmet waffle concept Bruxie, based in Anaheim, California, suggests looking at a firm’s portfolio to determine if it might be a good fit. “You want to understand the kind of support they can offer you from an internal basis,” he says. Deep financial expertise is not always an asset that brands have readily available, he adds; the right private equity firm should be able to complement a brand’s knowledge. “You can call them up on the phone and get some pretty interesting financial support and analysis.”
Knowing which types of brands have already partnered with a private equity group may also provide a leadership team with insight into how well a partnership will work over time.
“When you look at each firm, you can see what kind of companies they either still have in their portfolio or [those] they may have taken and grown and then had a liquidity event,” Simon says.
Bruxie selected Catterton Partners as a private equity partner in 2013 after reviewing the firm’s experience and focus. “I had a lot of respect for their portfolio. They had a great track record, and most of all, I think they’re passionate,” Simon says. Catterton also demonstrated strong success within the fast-casual space, and some of the other brands the firm had in its portfolio were what Simon considered to be industry leaders.
It’s also critical for operators to understand the perspective of the private equity investor. Steve Romaniello, managing director at powerhouse investment firm Roark Capital Group in Atlanta—which boasts Carl’s Jr./Hardee’s, Arby’s, Cinnabon, and others among its portfolio—says investors are looking for more than just a solid business plan.
“For us, we are looking for folks who we believe we can align with, not only from a business perspective, but also in a general approach to life and an approach to business,” Romaniello says.
The two sides should evaluate their views on the business’s goals and what philosophies will guide it to those goals, he adds.
Romaniello says a series of core values drives his team. “One of them says that we’re good partners in good times, and we’re great partners in bad times,” he says. It’s a value that illustrates a key point brands should keep at the forefront as they evaluate potential institutional partners. “You can’t be great partners in bad times if there isn’t a foundation of mutual respect and trust, and that’s why we spend an awful lot of time on that,” Romaniello says.
Simon encourages brands to evaluate more than one potential equity partner, even if the list is not exhaustive. For example, some investors may have a history of implementing strategies that aren’t a good fit for the brand.
“If certain equity firms have a track record of wanting a liquidity deal after a certain period of time, that needs to be known going in,” Simon says. When operators and investors do not see the brand unfolding the same way, the relationship could sour over time.
Equity investments are usually about more than just money. Beyond discussing financing options and dollar figures, a sophisticated private equity firm can bring other assets to the relationship.
“They’re going to have a lot of experience evaluating, structuring, and underwriting transactions,” Svenson says. MOD Pizza, for example, was considering growing the business in several different ways, including international expansion, and its partnership with PWP Growth Equity helped Svenson’s team think through the economic tradeoffs involved in global growth.
Before any brand gets too deep in the search for an equity partner, it’s important to pull together a number of internal strategies, Romaniello says. For example, potential investors may have a very different schedule in mind for implementing operational changes or launching growth plans.
“There are different levels of comfort with different levels of debt, so that’s something we typically spend an awful lot of time talking about and making sure we’re aligned on,” he says.
Part 2 of our Private Equity series will appear in August.