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Financing

5 things to expect after an equity recapitalization

If a restaurant company opts to fund its growth by selling a piece of the operation to outside investors, be it a private-equity firm or the public, there are some common experiences they should expect, speakers agreed at yesterday’s Restaurant Finance Summit during the NRA Show.

Here are five.

1. Don’t expect to “just step on the gas” and grow, said Russ Bendel, CEO of the The Habit, which completed its initial stock offering in November after being part of the KarpReilly’s PE portfolio.

“Private equity partners, they love you more than you love yourself, and they’re counting on stable, long-term growth,” he explained. They’ll want to see an infrastructure in place to support the growth. When The Habit’s founders sold a stake in 2007 to KarpReilly, the investor wanted the right people in place.

“We were able to make investments that really allowed us, as we brought people in, to spend more time on taking care of our employees and taking care of our customers and less time on manual administration,” Bendel said. He estimated that $2 million was spent to beef up the company’s accounting functions.

2. Whatever the results of an initial public offering may be, getting to them is far from a cakewalk, Bendel said.

“It’s a lot of work, it’s very complicated, and you certainly pay for it all along the way,” he commented. He estimated that about 7 percent of the proceeds will be eaten up by investment banking fees.

3. Management is usually invited to participate in a PE deal.

Roark Capital, the PE parent of Miller’s Ale House, Corner Bakery and about a dozen other restaurant concepts, usually provides 10 percent of the equity to management in the form of stock options, said principal Geoff Hill.  The CEO will likely be entitled to two points of that share.

4. With a public equity deal, “management teams are not going to be rewarded at the IPO.

It’s going to come over the long haul,” said Bendel.

5. Don’t view an IPO as the finish line, he stressed.

“Really, that’s just the starting line,” he explained.  “A private equity [seller], based on success, may do some secondary offerings.” He also noted that a larger PE firm could take the company private, or the public concern could be bought as a strategic investment.  

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