Capital-hunting restaurant concepts should counter potential investors’ barrage of questions with a few queries of their own, starting with a simple one: “What’s your favorite item on our menu?”
That was the advice offered this week at the Restaurant Directions conference by Rahul Ketkar, vice president of the private-equity firm H.I.G. Capital and a participant in a keynote session on restaurant financing. The panel presentation, which featured an operator and two financiers, provided the emerging concepts in attendance with a practical guide to finding the right partner and negotiating the best investment terms. It’s a process, they suggested, where an entrepreneur seeking capital needs to be as assertive in protecting his or her concept as the financier is about shielding its money from risk.
Asking potential investment partners to show their familiarity with a brand’s menu is a surefire way to see if the lender or equity backer has an understanding of the concept, explained Ketkar. Spreadsheets and financial statements aren’t going to provide the same rounded picture that they might for, say, a software developer looking for capital.
“That’s not the restaurant business. The restaurant business is an experience,” said Ketkar. If a prospective lender hasn’t sampled that experience, and hence doesn’t have a clear picture of the business, keep looking for a partner, he suggested.
Ketkar was joined on the panel by Andy Pforzheimer, who recently agreed to sell his Bartaco and Barcelona casual-dining chains to Del Frisco’s for $325 million, and Greg Golkin, founder and managing partner of the Kitchen Fund, an investment fund focused on the restaurant industry. They offered these bits of advice to operators who are looking for capital:
Ask who’ll be your overseers.
Among the questions an operator should be sure to ask prospective backers is who will be minding their investment, said Pforzheimer. “Who’ll be on my board? Who’s the actual person I’m going to be dealing with?” The people doing the due diligence may not be the same ones interacting with their investment day in and day out, he explained. “They have front guys and back guys.”
Pinpoint the lender’s expectations
“Where do the investors see themselves in five years?” explained Golkin. “Ask them, ‘Where do you want us to be, if things go well?’”
“‘Let me see your five-year growth plan for me,’” Pforzheimer suggested operators ask. “They probably have one. If it’s unrealistic, be careful.”
Gut-check the reasons you’re selling a piece of the company
If you’re talking to private-equity firms just because you’re looking for money, “That’s a terrible strategy,” said Pforzheimer. The drivers should be all the other benefits that an equity partner brings, from access to veterans with the know-how you lack, to the sheer discipline of having a board, regular investor meetings and financial accountability.
“You get the discipline of having a plan, where you don’t have a really detailed plan. You get a board. You have regular quarterly meetings,” he said. “That’s why you deal with a PE company, not because you’re short on money for next year.”
Check references
Pforzheimer recounted how he’d checked with the other restaurant concepts in the portfolio of Bruckmann, Rosser, Sherrill & Co. before turning to the private-equity firm for an initial round of institutional financing.
“I would ask to speak with other portfolio companies,” agreed Golkin. “Even if they’re trying to be supportive of the investor, you’re going to learn things—the truth will come out.
“And if they don’t want to give you those referrals, that’s an issue.”
Have a labor strategy
With labor emerging as a potential curb on growth, investors are focusing today on prospective investees’ strategy for coping. “It is beyond a doubt a component of the investment decision,” said Ketkar. “Six years ago, it was more about food inflation.”
In current times, concerns have changed. “Part of growing is finding real estate, and part of growing is finding the talent to run restaurants,” he said. “Having a strategy for both is critical.”
Be careful about setting the price
Higher isn’t always better for the entrepreneur seeking an equity partner, agreed several panelists.
“It is really important for the founder not to reach,” said Golkin. “If you set the pricing too high, it becomes very difficult to find more financing. If I need to go back to the capital market, I need to be able to say, ‘Those guys who invested last time made a lot of money.’
“You want to be aggressive, but you don’t want to be unreasonable,” he said.
Understand it won’t be business as usual
“PE firms don’t invest in your restaurant because they like your sliders,” said Pforzheimer. “They’re in the business of taking one dollar and turning it into three dollars. When you take their money, you’ve made a commitment to triple it. For most restaurants, that means you need to grow.”
So if you don’t like constantly being on the road, or hunting for sites, an equity investment may not be the best financing choice, he and others on the panel agreed.
“Now you have to run the business like a business,” said Golkin.
Restaurant Directions, a conference specifically for emerging chains, was held Monday through Wednesday at the Gaylord Opryland Resort & Convention Center in Nashville. The meeting was hosted by Restaurant Business.
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