venture

5 Time Tested Ways to Land a Private Equity Investment

The trick to growing a successful restaurant business is having enough cash when an opportunity for growth presents itself.

However, convincing investors to spend their money on restaurants can be difficult. That’s the void private equity firms fill.

A report by private equity (PE) firm Bain & Co. found that investment companies are holding over $2 trillion in capital as of December 2019. Combined with low interest rates, these firms are primed to spend lucratively, with the restaurant industry being a prime target.

So, if your business is searching for a PE investment, here are five tips to help you land an investor.

  1. Prove that traditional bank lending is not a better way to grow

One of the best benefits of using PE versus bank loans is that PE firms have no right to charge interest on their investments. They simply make their money when an investment succeeds. This is key for restauranteurs who often need the flexibility of an investment without the burden of paying interest on a loan.

For example, Just Salad, a sustainability-focused salad shop from New York, is at a crossroads because of its rapid growth. The company could either go for an Initial Public Offering (IPO), allowing the company to scale based on the performance of its stock, or utilize PE to achieve the same goal. The company has said its leaning toward PE, but will take up to two years to make a final decision.

Another benefit of going PE is they often streamline the process of putting money into a business. Whereas banks generally have thousands of hoops to jump through before releasing funds, private equity firms can release funds rather quickly. This allows the investment to being working much faster than a loan.

Earlier this year, Wild Wing Café took an investment from CrowdOut, a crowd-sourced private equity fund that allows its users to invest in corporate loans, in order to expand its corporate-owned and franchise locations. If Wild Wing Café had gone through a bank, securing the loan could have taken months and at a much higher cost than going to a private equity firm. CrowdOut was able to reduce lending costs by streamlining the underwriting process and drastically reducing fees which is in stark contrast to financial institutions and other non-bank lenders, according to Yahoo Finance.

PE firms are also keen on financing mergers and acquisitions because it allows them to craft strong, experienced executive teams to lead a company into the future.

Case and point: Chopt Creative Salad Co. recently acquired Dos Toros Taqueria with the help of private equity firm L Catterton. The new group is called Founders Table Restaurant Group and will be headed by Chopt’s CEO, Nick Marsh. Marsh started his restaurant career by founding Xando Coffee and Bar in New York in 1994. Since then, he has operated dozens of restaurants and mentored eager restaurant entrepreneurs.

L Catterton’s venture is very similar to one undertaken by Inspire Brands with the help of Roark Capital. Inspire currently holds stake in Arby’s, Buffalo Wild Wings, Sonic Drive-In and Jimmy John’s, among others. Roark has also invested in concepts ranging from fast food like Culvers to sweets and treats like Cinnabon Bakery.

 

  1. Show that your business is innovative

66 percent of private equity investments result in a company buyout, according to Aaron Allen and Associates. To that end, there’s nothing private equity investors like more than innovation because innovation usually equals big returns on investment.

Sweetgreen, a fast-casual salad concept, recently secured a $200 million investment from Fidelity Investments by focusing on innovation. The restaurant plans to use the cash infusion to develop software to improve customer experience and further develop its use of blockchain to improve its transparent supply chain. The company already has a million users on its web platform, where users place over 500,000 orders annually.

Similarly, Bojangles, who pioneered a Cajun fast food concept, was bought for $584 million by Durational Capital Investment and The Jordan Company in 2018. Jordan has a history of investing in foodservice products, but Bojangles is the firm’s first venture into the restaurant industry.

2018 was a busy year for private equity firm investments in innovative restaurant concepts altogether. Arby’s parent company, Inspire Brands, bought Sonic Drive-In for $2.3 billion while Cava Capital bought fast-casual Zoe’s Kitchen, who popularized their southern-middle eastern cuisine concept, for $300 million. Meanwhile, Rhone Group bought all-you-can-eat Brazilian steakhouse concept Fogo de Chao for $560 million.

 

  1. Be willing to merge with another similar company

The restaurant industry has seen a recent surge in private equity investment funding driven by the investor’s desire to merge multiple concepts.

After missing several quarterly projections while continuing to open new stores, the sports bar-cade Dave & Busters recently took a $77.7 million investment from KKR & Co, Inc. under the premise of exploring a merger with another company. Neither company has announced who Dave & Busters will be merging with, but the merger is expected to happen by the end of 2020.

Cooper’s Hawk, an Illinois based winery and restaurant, recently fetched $800 million in a deal with Ares Management that will help the restaurant expand its locations. While it may not sound like a traditional merger, Cooper’s has worked deals with local restaurants to allow their nearly 400,000 members to bring a bottle of Cooper’s wine into other restaurants. This allows Cooper’s wine club members to act as pseudo-salespeople, getting Cooper’s brand inside more businesses than traditional sales methods.

Even the large-scale restaurant companies such as Inspire Brands, backed by Roark Capital, have been bit by the merger and acquisition bug. In September 2019, Inspire bought Jimmy Johns for an undisclosed amount. Inspire is now the fourth-largest restaurant company in the U.S. following the merger with over $14 billion in sales annually.

There are several other mergers that are expected to be finalized in 2020. One worth mentioning here is TGI Friday’s is going public with the help of Allegro Merger Corp., who agreed to help alleviate some of the restaurant’s debt concerns which currently sit at $350 million.

 

  1. Have an exceptional leader, or a group of them

There are few aspects of a business that excite private equity firms more than having a stellar executive leader or leadership team.

I recently mentioned how Inspire Brands acquired Jimmy Johns to create the fourth-largest restaurant company in the U.S. Inspire is led by Chief Executive Paul Brown, whose resume boasts experiences like being a Partner with consulting behemoth McKinney & Associates and working as the CEO of Arby’s before Inspire purchased the company, according to his LinkedIn profile.

When 3G Capital bought Burger King for $3.3 billion in 2010, what sealed the deal was the restaurant’s stellar executive team. The business is currently led by Jose Cil, an Ivy Cil was named CEO in January 2019 because he has a clear goal—to close the gap between Burger King and McDonald’s—and had the experience to execute it as well.

The same approach helped 3G secure a $50 billion acquisition and merger of Kraft Foods and Heinz to create Kraft Heinz. Kraft Heinz is currently led by Chief Executive Miguel Patricio and Chief Growth Officer Nina Barton. Patricio is a veteran of Anheuser Busch, Coca-Cola, and Johnson & Johnson, while Barton’s previous experience at Proctor & Gamble, L’Oréal, and Kraft Foods helped secure her place in the executive wing following the acquisition.

 

  1. Work for the greater good

Sustainability is a driving factor in private equity funding right now. Firms are eager to get a grip on the next company who can propel the field into the future.

One example is Revolution Plastics, a recycling company that cleans and processes 150 million pounds of discarded plastics annually, who recently partnered with Chipotle to help the restaurant brand up-cycle its trash. Revolution also works with businesses such as Chick-fil-A, McDonald’s, and Wendy’s. These partnership helped Revolution spurn an investment from Arsenal Capital Partners in July 2019.

FormulaFolios Investments and BlackRock Inc., increased their stakes in Yum! Brands as the restaurant group expands its Corporate Social Responsibility commitments and environmental sustainability priorities. According to the group’s 2017 Global Citizen & Sustainability Report, the company built 38 percent of its new franchises to the green building standards while requiring their suppliers to minimize use of antimicrobials important to human medicine.

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