Restaurant investors grapple with the industry’s new realities

The process of evaluating a deal has been complicated by big data, the reliance on technology and the evolving role of founders, experts noted at Restaurant Directions.
Photograph: Restaurant Directions

Peter Romeo

Equity investors are having a tougher time deciding what restaurant concepts to back because foodservice technology is burying the evaluators in data, according to financiers participating in a panel at Restaurant Directions, a conference for emerging restaurant brands.

“There’s this whole new set of metrics that come into play,” said Blythe Jack, managing director of TSG Consumer Partners. “It just got hard to be a restaurant investor.”

That’s not the only dynamic altering the courtship between restaurants and potential equity investors, she and the other panelists observed. Jack noted that the rise of ghost kitchens—remote kitchens that prepare meals for delivery—is also complicating the process by altering the variables that figure into unit economics. 

The investors on the panel said they still value the involvement of a brand’s founder, but the traits they prize in that individual have changed. The participants agreed they’re looking less for a zealous preserver of a brand and more of a steward who can keep it relevant. “A founder tends to be the best keeper of the things that keep a concept fresh and going,” said Jack.  “Founders are absolutely center of the plate for us. Is there one defining characteristic in a founder? The only thing I can say is true grit—they will do anything to make that concept successful.”

Fellow panelists stressed the importance of a founder in cultivating a culture, an intangible that can translate into how much money they’re willing to inject into a brand. “We need concepts and founders who value their people, who value their culture,” said Jeff Brock, managing partner for Hargett Hunter. 

Some of the new variables in choosing an investment candidate have nothing to do with the brand, the panelists noted. “Something that’s not talked about is where we are in the capital markets cycle,” said Brock. “Firms that have made investments of, say, $50 million can’t afford to write smaller checks.” He explained that success with those larger investments shift the criteria and raise the threshold of what sized chain a private equity company is willing to back. 

“I actually feel like the industry is getting squeezed a bit because of the availability of capital,” he said.

Technology was mentioned repeatedly as a key area of scrutiny when doing due diligence on a potential investment. 

“If you’re not employing technology today, you’re going to get left out. Plain and simple,” said Bryon Stephens, co-founder of Pivotal Growth Partners. “We look at the digital ordering platforms, the delivery piece, the social media. The back-of-house technology [also] has to be there.”

The participants also agreed there’s no such thing anymore as a conventional multiple in determining the right price of an equity investment. “That’s a very hard question,” said Brock. “It’s so relative.”

Part of the problem with setting the value of a company is determining how well-positioned a concept might be to weather the challenges of the marketplace, the panelists stressed.

“I always say it’s an art and science evaluation,” said Jack. “Multiples tends to be the same as talking about EBITDA. And there’s not a lot of that out there.” 

The panel presentation, “Where to find money in 2019?”, was moderated by Restaurant Business Executive Editor Jonathan Maze. 

Restaurant Directions, an annual conference specifically for emerging and regional restaurant chains, is presented by Winsight, the parent of Restaurant Business.

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