Demystifying Private Equity for Growth Restaurant Concepts

Faculty:

Chris Reilly, KarpReilly LLC, Co-Founder, http://www.karpreilly.com/
Jon Owsley, Catterton Partners, Partner, http://www.cpequity.com/
Laird Koldyke, Winona Capital Management, Managing Partner, http://www.winonacapital.com/index.htm
Mark Saltzgaber, http://www.marksaltzgaber.com/index.php
Russ Bendel, Habit Restaurants LLC, CEO, http://www.habitburger.com/no-substitute-for-quality/
Greg Dollarhyde, Veggie Grill, Inc., CEO, http://veggiegrill.com/

Session Purpose:

Not surprisingly, growth financing for emerging restaurant concepts has been challenging to obtain the past several years. With banks not lending, restaurateurs have by and large been resigned to self-financing or going to friends and family/high net worth route. While these options suit many growing businesses just fine, private equity continues to be an increasingly viable option for development stage restaurant concepts. There are a select number of groups that have long-financed earlier concepts and a number of others that have entered the space. For this session, we were fortunate to have several talented and seasoned industry experts from both the financing and operations sides. They lent their vast experience and knowledge to help our session audience, which consisted largely of growth stage brands, to better understand how private equity works – and what to look for (and avoid) in a prospective financial partner.

Key Take Aways:

• Not all private equity is alike. One of the most significant misimpressions that we see with a number of our emerging clients is the belief that all private capital is roughly the same. It’s not. Although all are looking for a return on investment, investment philosophies, restaurant investment experience, deal criteria, risk tolerance, and a variety of other factors differ from group to group. It is the people behind the capital that matter most, and any restaurateur considering private equity investment should dedicate a considerable amount of time to getting acquainted with the potential investment partner. Correspondingly, you will find that the most serious private equity investors will thoroughly evaluate you and your business prior to making an investment. As noted in the “red flags” below, any group that would invest in your concept without doing their homework is probably not worth doing business with. As an entrepreneur, you will want to fully understand how the post-investment relationship will work in practice, and this is best accomplished by candid discussions with the investment group about these items prior to making any commitment.
• Private equity is a business and is not right for everyone. Private equity groups are accountable to their investors who have investment return expectations. This differs from other deals, such as those with friends/family or high net worth individuals, who may have their own expectations, but with no obligation to anyone else. Accordingly, private equity investors, even in minority investment situations, will need to insist on certain provisions (e.g., veto rights, redemption rights, voting rights, etc.) that are difficult for some emerging entrepreneurs to accept. As some of our panelists commented, a private equity relationship is like a marriage. Both parties have a lot on the line, and the restaurateur can expect the investment partner to be actively involved in the monitoring of the business. In many cases, active involvement is of great benefit to the restaurateur, especially when the financial partner has significant experience with restaurant growth and development. That said, a restaurateur that would prefer a “silent” partner should pursue other financing options.
• There are many posers out there – watch out for red flags. Nothing can destroy a business faster than a bad partnership and far too often restaurateurs jump into bed with financial partners without seeing obvious – and not so obvious – warning signs. First, the absence of any restaurant investment/operations experience on the investment team is an immediate point of concern. Restaurants are a very different investment than some other businesses which can only be fully appreciated with some form of prior restaurant experience. If the investment group does not have it, they hopefully add someone who does, whether in a consulting role or something else. Also, if the prospective investor has to go out and find the money after reaching terms, it is not a professional private equity deal. This is not to say that a “cat herding” approach is never successful – we have seen situations where it is. However, this process is inefficient and uncertain. One must also be wary of prospective investors with unrealistic expectations, especially wanting/promising to scale a concept faster than reasonably possible. This often involves plans to engage in aggressive franchising before a concept is proven/ready or other revenue generation plans that are not necessarily in the best interest of the brand. Another red flag is the investor who wants to opine on matters beyond their scope of expertise. This can come in a number of forms, but is frequently seen as an investor that wants to meddle in everything, including menu development and other day-to-day operating details where input is not desired or solicited.
• The right financial partner can be a business’ greatest asset. With all of the skepticism surrounding private equity, the reality is that an exceptional financial partner can be the decisive factor in the success of a restaurant concept.