For much of last year, private-equity groups didn’t participate in too many deals. They were still building an understanding of the post-pandemic economy and valuations, making it difficult to evaluate investment opportunities. Adding to direct pandemic-related concerns were the inflation of two of the industry’s largest costs: labor — up 13 percent over the past year — and supply chain costs, up more than 11 percent. Some mitigation is expected, but the pressures added to the uncertainty.
A majority of the deals we saw in 2021 were owners of existing restaurant concepts acquiring other brands to combine operations, and build scale. Now, we see COVID-driven hesitancy decreasing and expect an increase in restaurant transactions with private equity investors. Interest is extremely high, making mergers and acquisitions much more competitive.
Additionally, we are seeing restaurant initial public offerings (IPOs) at least every other week, making the market more attractive for private equity firms, as this is the first time in almost five or six years. Prior to the pandemic, restaurant IPOs had lost favor among investors, but with valuations increasing alongside growth in diner demand for eating out, investor appetites have changed.
Since the declines in 2020, we are seeing sales recover from the shutdown caused by the pandemic as consumers demonstrated how they have adapted to the new way of dining (ultimate convenience), like online ordering, curbside pickup or third-party delivery, and returning to in-restaurant dining.
What the future holds and how brands can position themselves to land an investor as they prepare for 2022 and beyond
Private equity firms and restaurants have a long-shared history, and in many respects a partnership with private equity is like a marriage, as they last for years. At 10 Point Capital, we spend a significant amount of time pre-investment getting to know management teams and their goals while sharing what we are like to work with and how we define success for an investment. Some key areas to ensure each party is aligned on are the length of the investment, what defines success, how key decisions will be made, and who specifically will be working on the deal post-close.
One of the most important aspects of taking an equity partner as a founder is understanding that you will give up a significant amount of control. This can be hard for entrepreneurs who are used to being the sole decision makers. While you can sometimes retain full control, equity investors are typically going to have a say in important decisions. Before taking outside capital, it is also crucial to have strong legal and accounting counsel. We consistently see these areas underdeveloped when we start to look closely at a business.
Assuming the unit economics work, we typically look for a few major items before investing in a concept:
- Most typically, a founder-led business
- Brands that are proven outside their immediate home market, where we can accelerate growth through franchising.
- Passionate customer bases.
- Brands that perform well in secondary and tertiary markets, meaning they have potential to scale.
When is the right time to look for a private equity partner, and what are the benefits?
A brand looking to grow quickly needs to be able to show strong unit economics and brand differentiation. There are a lot of benefits of working with a capital firm, as they typically bring a different skill set to a founder-led business.
Key expertise a capital provider will bring are 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 firms are also going to have deep expertise in working through brand strategy and ultimately preparing a business to be sold.