Many of us at Foodservice IP have been involved in the “final mile” of due diligence for private equity (PE) firms looking to acquire restaurant concepts. Our consultants have assisted with the “soft analysis” – or patron general likes and dislikes – of foodservice entities including Aramark, Tilted Kilt, GrubHub among others.
Business Insider recently described how one of our management consultants assisted Roark Capital with Miller’s Ale House in 2013.
Covid-19 Has Only Paused PE Activity
Over the past decade, private equity accelerated the industry’s growth, and its own acquisition spree resulted in PE firms holding stakes in at least 40 percent of the largest restaurant franchisees in the U.S. (This was all prior to Covid-19 in March 2020.)
Along the way, however, PE pursuit of growth and increased margins (operating margins of 4-percent to 5-percent are typical) saw the industry take on debt at a historically high clip.
Exacerbating the issue is that an already crowded and competitive market became saturated, with growth suffering, while leverage rose and bank debt became pricier and harder to secure.
Why Are Restaurants So Attractive to PE Firms?
At first glance, the restaurant industry may not seem particularly attractive for investment, considering ever-increasing labor, food and real estate costs. But changes in consumer purchasing behavior and demographics are positive for the industry’s long-term outlook.
Factors That Attract Private Equity to Restaurant Brands
|Factors Attractive to PE||Comments|
|Restaurants Have Cash||
|Retail Licensing Opportunities||
|Restaurants Are Ahead on the Digital Revolution||
|Business Models Are Proven||
Sources: FSR Magazine, June 2018, Foodservice IP, Business Insider Feb. 2021
The Bottom Line
As suppliers to restaurants know well, from day one, PE restaurant “customers” are working with the PE investors toward exit. Private equity firms typically have no intention of keeping a business long term, as the typical lifetime of an investment is 3–5 years.
Knowing how to handle PE firms and offering market and industry information, strategic industry education, trends, etc., fosters a trusting and beneficial relationship – even if it is short term.
If you are looking for a fresh strategy, please see our services for Covid-19 planning.
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