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03/01/2017
Growth through Private Equity Investment: Six Ideas to Become More Attractive to Investors
“Good restaurant companies will continue to attract investor attention in 2017, and more private equity firms seem willing to acquire a restaurant company as a new platform,” says Gary Levy, CohnReznick’s Hospitality Industry Practice Leader. He adds, “There are some broken brands out there that could certainly use the financial and intellectual resources of a good private equity partner. As we continue into 2017, we should see some recognizable brands try to reinvent themselves with the help of a private equity partner.”
PE Firms Put Opportunity Ahead of Uncertainty
Private equity interest in the restaurant industry was solid in 2016. Pitchbook reports that 47 U.S. restaurant deals closed with corresponding capital invested of $1.8 billion—an 18% increase in the number of deals closed in 2015 and a 74% increase in capital invested year over year. So, even as the restaurant industry faces numerous challenges related to increasing labor and real estate costs, slowing same store sales, decreasing margins, and overcapacity, private equity investors appear relatively unscathed and continue to demonstrate their confidence in the future of the industry.
Broadly speaking, private equity investors are facing numerous challenges of their own. There is fierce competition for deals with corporate buyers and even venture capital investors. And while there is strong demand for quality assets, there is also a shrinking supply. The larger number of buyers, which include those corporate and venture capital investors, has contributed to more lofty valuations. In 2016, corporate investors closed 18 U.S. restaurant deals with capital invested of $341 million and venture capital investors closed 55 U.S. restaurant deals with capital invested of $312 million.
Attracting PE Investment: Six Steps for Success
“The heightened level of interest by restaurant investors is good news for restaurant companies that need capital to either implement growth strategies, re-capitalize, or exit.” says Cindy McLoughlin, a partner in CohnReznick’s Hospitality Industry Practice. But restaurant companies still need to implement the growth-focused financial and business strategies to attract interest from an investment community replete with capital.
Here are some recommendations.
- Create a scalable business model. Generally speaking, there are three phases to each private equity investment: acquisition, value creation, and exit. A private equity investor will see and appreciate a scalable business model as it will serve to enhance the value creation phase of the investment life cycle.
- Build your brand. Your brand is so much more than a logo and a slogan. Rather, it is the end result of the value you create when your business engages with guests, employees, and stakeholders. A strong, differentiated brand will be your company’s greatest asset.
- Strengthen your management team. Hire the right people, put them in the right positions, and give them the assistance they need to grow. A great team will lend support through the transaction process and will prove to be invaluable in contributing to the continued growth of the business.
- Invest in technology. From online ordering and mobile payments to guest loyalty programs and inventory control, installing and utilizing the right technology will support the operations and growth of your restaurant. The latest technology can keep you one step ahead of changing consumer demands.
- Know your financials. Create financial processes and procedures that accurately measure results and help make well-thought business decisions. Emphasizing the finance function is a commitment to sustainable growth.
- Create a culture of innovation. Too often, restaurateurs think that innovation only applies to the food and drinks they serve. Sure, innovative menus are important, but developing an overall culture of innovation that permeates throughout your operations is a differentiator. A true culture of innovation will greatly improve the guest experience, create a “stickier” relationship with your customers, help retain valuable employees, and improve back of house operations. All of this drives revenue.
If a relationship with a private equity firm is part of your strategic growth or exit plan, strengthen those components of your business where private equity investors place the greatest value. And remember, the best private equity partner is not always the one who is willing to cut you the biggest check. Instead, look for a private equity partner that can support their financial commitment with the deep restaurant industry experience that you can trust. You will find a partner you can depend on and work with to continue the growth of your business.
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Subject matter expertise
Gary Levy
CPA, Chief Strategy and Growth Officer
Cindy McLoughlin
CPA, Managing Partner, Consumer, Hospitality, and Manufacturing Practice
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