Dennis Monroe
Private equity is back. In the last year there has been significant funding by private equity for the multi-unit concept world (this has been particularly true with restaurants). In fact, the pace of investment has accelerated.
Some of the more notable recent transactions are:
• Falfurrias Capital Partners’ acquisition of Bojangles’ Restaurants (July 2011)
• Goldman Sachs’ investment in American Apple, the largest Applebee’s franchisee with 270 units in 11 states (May 2011)
• Palladium Equity Partners’ acquisition of TB Corporation, parent of the Taco Bueno restaurant chain (July 2011)
• Golden Gate Capital’s acquisition of California Pizza Kitchen (July 2011)
• Roark Capital Group’s acquisition of Corner Bakery Café and Il Fornaio (June 2011) and Arby’s (July 2011).
With all of this activity, concept owners should be asking, "What are private equity groups looking for in an investment?"
A strong, viable concept. The most important aspect of any investment in the franchise industry is to have a unique, strong and viable concept. Even if the target is a multi-unit concept company, it is still important that all existing concepts show strong unit economics with hopefully a store-level operating profit of 15 percent or above. Additionally, the concept must have reasonable build-out costs and significant opportunity for development. In general, the concept must have uniqueness in the market place and a very defendable competitive position.
Management. As to the targeted company’s management, private equity investors ask: Is the existing management operationally strong? Do they have a vision of where the company is going? Have they been able to handle growth? Does the targeted company have a CEO who has handled and managed private equity investments and a CFO who is appreciative of the needs and reporting requirements of a private equity group?
Additionally, it is important the company have a strong, recognized accounting firm that has multi-unit franchise experience and a history of working with private equity. Working for outside investors requires a certain mentality. The management team cannot have a laissez-faire approach and must be able to handle the tight management and planning style that private equity investors dictate.
There should be employment agreements and non-competes so the investor can be assured of retaining the management team. They, in turn need to come up with incentives that will keep them engaged.
Clear Growth Vision. Does the targeted company have a clear vision for growth? Where are they going with the concept? What can they do with the concept? How can they make it more profitable? How can they use the capital effectively? The proforma analysis, growth plan and budgets need to be very consistent with historical performance without any leaps of faith on performance. Additionally, the company needs to have a tight plan for development and a clear understanding of the type of capital necessary to grow. How much money could be borrowed to leverage the capital? Are those sources available? How is mezzanine financing used effectively? How is landlord financing used effectively? In general, the company should have an overall capital growth plan that shows a very efficient use of funding and capital.
Exit Strategy. Since private equity groups always look for their exit, targeted companies need to have a clear understanding of exit strategy. There must be an alignment of the proper time for an exit. The company should have a clear understanding of who the targeted exit buyer may be and whether it is a strategic buyer, a financial buyer, a management team, or another private equity group or potentially an IPO (which is probably unlikely in today’s market but is still a possibility).
Chemistry. There needs to be chemistry between management and the investor: a common view of how the company should be run; growth expectations; and treatment of employees. This may be the most important element.
Dennis L. Monroe is a shareholder and chairman of Monroe Moxness Berg PA, a law firm specializing in multi-unit franchise finance, mergers and acquisitions, and taxation. He can be reached at [email protected]
