Multiples are soaring.
Restaurant chains are looking for equity investors willing to pay a sky-high earnings multiple, a fallout of high-profile deals like JAB Holding Company’s acquisition of Panera Bread Co. A multiple in the teens was once regarded as nosebleed-level. Luxembourg-based JAB ponied up 46 times Panera’s fiscal 2017 earnings. The asks are particularly high for franchisors, says John Gordon of Pacific Management Consulting Group.
Smaller operations are looking better.
With ample capital in hand and less-risky ventures looking for stratospheric multiples, some PE firms are broadening their investment parameters to include smaller concepts. “As the environment becomes more challenging, where they might not have gone down to a four- or two-unit chain in the past, now they’re taking a look,” says Jim Balis, CEO of Norms Restaurants and a partner in the CapitalSpring PE firm. A case in point: L Catterton’s investment in five-unit Velvet Taco.
PE companies are holding on longer.
The old rule of exiting an investment in five or seven years is no longer a given. A fund may have to be liquidated on that schedule, but more firms are converting and holding onto investments with solid franchising opportunities that promise a long-term payoff. The upshot for restaurants: stable ownership and a longer-term view. The classic example is Roark Capital, which has only liquidated one such investment, now-public Wingstop.
Operational experience is a big plus.
Having experienced restaurant operators on the investment team is proving a benefit to PE companies and investees alike. With good deals harder to find, vets may hear of an attractive opportunity before the upstart even starts sniffing for capital. Meanwhile, a seasoned chain leader-turned-PE partner can be a valuable source of advice and guidance for young executives rolling out a chain in the firm’s portfolio.