Even though 2020 was forecasted to be a strong year for mergers and acquisitions, the unexpected pandemic slowed down the restaurant investment market and paused deal-making overall. As the year came to an end, however, entrepreneurs were pivoting to a completely different service model. And with that pivot comes hope, for some, of new private equity partnerships.
In the past 3-4 years, private equity groups were primarily only interested in brands that made EBITDA. If you didn’t have an EBITDA track record they wouldn’t even be interested. Nowadays, that has become slightly more blended as venture capitalists and private equity investors are eager to buy brands doing well despite COVID-19, particularly quick-service restaurants.
“Investors are eager to go after something different. For example, someone who has been able to adapt to the market,” says Ben Butler, a long-time restaurant adviser and investor. “From a channel point of view, if you are [quick-service restaurant] with a drive thru or take-out option that includes affordable food, you’re thriving right now. Investors are looking for $2 million–$5 million EBITDA businesses and are willing to pay market rates.”
That’s good news for operators who were able to pivot effectively and who could simplify and amplify the take-out components of their business.
“If a venture capitalist or other investor sees an operator who has been able to successfully do that, that operator is just going to attract more attention,” Butler says. “Also, if there is a technology angle such as order taking, order placing and delivery, VC’s are more interested in buying. If your takeout was 25 percent before and now it’s 70 percent because you figured out a compelling model for curbside, that makes you even more relevant.”
Therefore, if you’re trying to determine whether your brand is right for PE, there are several questions and considerations operators should think through. The first few questions to ask are: “What am I looking for?” and “How is my operation going to work together with the investors we may bring in?”
Often, these questions get overlooked because many operators get lost simply by trying to maximize how much they are going to raise. Some entrepreneurs only think about getting out in five years with twice the money they originally invested. While others have a very different view. Operators should, instead, try defining the full potential of their concept and then move forward from there.
“You don’t want to end up as one of the industry horror stories because you didn’t align with investors to begin with. Think about who your customer is and what does success really mean to you? Develop a blueprint that includes actions, milestones and resources,” Butler says. “In order to carry out your concept, you need to find talent, resources and cash. Try tapping into different money sources. If you’re an operator who has clear metrics, you must show you’ve done it—not just have an idea you’re looking to carry out.”
Cash Out with Care
For those operators who may be desperate for cash or looking for a way out of their business, Butler advises not to make the mistake of selling quickly.
“If sales and profits are down because you have not figured out how to pivot into the new foodservice business model, then simply don’t sell. You would be selling something without an answer, which in return has less value,” he says.
Once operators have figured out their exit strategies, the next few questions then become: Does your operation make you money and do you know why it is or isn’t?
Multiple quick-service brands are trading the same as they were before COVID-19 so it’s not a bad time to sell—unless you want to sell because you can’t afford the time to figure out a transition.
Alternatively, if an operator is worried they may default on bank loans or don’t want to put in more capital, finding friendly money might be the right rescue. This means working with someone who truly believes in you and the concept, and who might be able to help without having to fire sell.
While COVID-19 has presented many challenges; it also has provided opportunities. PE investments are still being made so before you jump in, ensure your operation stands on solid ground. Overall, don’t sell too fast, know what you stand for and make sure it’s the right fit.
Andy Rosenbloom is the Vice President of Marketing for Buyers Edge Platform, the nation's largest restaurant Group Purchasing Network. Andy focuses on crafting messaging and touchpoints that deliver Buyers Edge Platform's cost reduction programs to Tribal operators to help ensure their success and profitability. He frequently writes, speaks and publishes articles on the topic of foodservice supply chain, technology, data, and operational excellence. He has earned a BS in Marketing from Lehigh University and a BS in everything else from Wikipedia.