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
  • Restaurants offer relatively predictable cash flow, giving them an allure to an investor. 
  • The value in the industry is that production and payment happen almost simultaneously.
Retail Licensing Opportunities
  • As an example, consumers can sometimes buy their favorite restaurant brands in a retail setting, such as restaurant-branded pizzas or soups that are sold in supermarkets.
Restaurants Are Ahead on the Digital Revolution
  • Opportunities exist to leverage technologies for increased efficiencies and marketing. These may include new delivery options, online or app-based ordering, digital loyalty programs and mobile payment solutions.
Business Models Are Proven
  • Compared to manufacturing or other types of businesses, the risk for investment in a restaurant’s expansion is much lower.
  • Also, cash flow generated by a new restaurant site can be forecasted with a certain degree of confidence, since similar sites have usually been launched and then fine-tuned.

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.


Tim Powell is a Managing Principal of Foodservice IP. Tim serves as a trusted foodservice adviser to management at several food companies.

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