For much of the past year, private equity groups haven’t been involved in too many deals. They were still figuring out post-pandemic economics and valuations, which made it difficult to assess investment opportunities. Added to direct concerns related to the pandemic is the inflation of two of the industry’s most important costs: labor – up 13% from last year – and the costs of supply chain, up more than 11%. Some mitigation measures are expected, but the pressures have added to the uncertainty.
The majority of deals we saw in 2021 were owners of existing restaurant concepts acquiring other brands to combine operations and grow. Now, we are seeing COVID-related hesitancy diminish and expect an increase in restaurant deals with private equity investors. Interest is extremely high, which makes mergers and acquisitions much more competitive.
Additionally, we see restaurant initial public offerings (IPOs) at least every two weeks, which makes the market more attractive to private equity firms, as this is the first time in nearly five or six years. Prior to the pandemic, restaurant IPOs had fallen out of favor with investors, but with valuations rising alongside growing foodservice demand for restaurants, investor appetites have changed.
From the 2020 declines, we see sales recovering from the pandemic-caused shutdown as consumers demonstrated how they have adapted to the new way of eating (ultimate convenience), such as online ordering, pick-up curbside or third-party delivery, and return to restaurant meals.
What the future holds and how brands can position themselves to attract an investor as they prepare for 2022 and beyond
Private equity firms and restaurants have a long history together, and in many ways a partnership with private equity is like a marriage, as it lasts for years. At 10 Point Capital, we spend a lot of time before investing getting to know management teams and their goals while sharing what we like to work with and how we define investment success. Some key areas to ensure each party is aligned on are the duration of the investment, what defines success, how key decisions will be made, and who will specifically work on the deal after closing.
One of the most important aspects of taking on a founding partner is understanding that you will be giving up a significant amount of control. This can be difficult for entrepreneurs who are used to being the sole decision-makers. Although you can sometimes retain full control, stock investors will usually have a say in important decisions. Before taking on outside capital, it is also crucial to have solid legal and accounting advice. We constantly find that these areas are underdeveloped when we start to look closely at a business.
Assuming unit economics works, we generally look for a few major things before investing in a concept:
- Most often a founder-led company
- Brands that have proven themselves outside of their immediate home market, where we can accelerate growth through franchising.
- Passionate customers.
- Brands that perform well in secondary and tertiary markets, which means they have the potential to scale.
When is the right time to seek a private equity partner and what are the benefits?
A brand looking to grow rapidly must be able to demonstrate strong unit economics and brand differentiation. There are many benefits to working with a capital firm, as they typically bring a different skill set to a founder-led business.
The key expertise a capital provider will bring is a strong understanding of data-driven decision making, an ability to creatively structure access to capital to grow faster, and experience growing multiple brands. . Capital companies are also going to have deep expertise in developing a brand strategy and ultimately preparing a business for sale.