Over the past year, private equity activity has heated up in the restaurant industry. Historically, investors wanted to see proof of concept in multiple markets, minimum revenues, EBITDA, number of units and a good story before they were willing to invest in a restaurant. But as the sector continues to evolve, investors are increasingly setting aside some of their more stringent standards as they seek to take advantage of emerging opportunities. And private equity firms are not the only ones looking to enter the space. Venture capitalists, other restaurant groups and even non-restaurant companies, such as Ford, are looking to enter the game. What has led to this change of heart?
- The cost of money remains low, and new concepts have proliferated. PE firms have more to lend and have subsequently become less risk averse. At the same time, following the wild successes of the fast casual segment, restaurants are exploring new concepts in the hopes of launching the next big thing. As a result, PE firms appear more willing to invest in earlier-stage restaurants, hoping to ride the wave of the sector’s boom in innovation.
- The “healthy” fast casual segment is ripe for investment. Shifting consumer preferences have driven a paradigm shift in the restaurant industry in recent years. Though many diners on the go are looking for speedy, easy service, they are less willing to compromise on the quality and nutrition of their food. In addition, consumers are interested in knowing where their food is coming from, supporting local sourcing and eating organic. This has created significant growth opportunities for fast casual restaurants, and with the trend set to continue for some time, PE firms are eager to enter the market.
- Investors are more willing to share. PE firms typically prefer to seek out deals that allow them to maintain full control—or at least a majority—of the investment. But competition for restaurant deals can be fierce, and PE firms must be nimble in order to quickly jump on opportunities and take advantage of the industry’s growth now. With time at a premium, investors are seriously considering going into an investment with a smaller piece of the pie, or even sharing with other funds.
- Other sectors are not as attractive. Though the overall U.S. economy has improved incrementally over the years, many industries remain stagnant or continue to decline, reducing investment opportunities for PE firms in more traditionally attractive sectors like retail and energy. But the restaurant industry is surging, and with PE sponsors rising and falling on their ability to make a strong return on investment for their Limited Partners, it comes as little surprise that they are funneling dollars toward this growing market.
PE interest, generally speaking, is good news for restaurants looking to grow, scale up or explore new services and concepts. But restaurants being courted by private equity should remain wary, being sure to “date before they marry.” The financials are only one aspect of the relationship between the restaurant and its investors. A shared set of values, goals and vision for the exit is also critical to ensuring that the relationship benefits all parties.
By Dana ZukofskyThis article originally appeared in BDO USA, LLP’s “Real Estate Monitor” newsletter (Winter 2016). Copyright 2016 BDO USA, LL. All rights served. www.bdo.com.