In previous installments of From Fork to Fund, the fundamentals of taking on a private equity deal were discussed. In this final installment of the series, we tell the story of a restaurant operator who exited to private equity.
Founding of the Brand
The brand was founded in the early 1990’s as a casual dining concept with a unique twist that spread across the Midwest. In the 1990’s there were no plans by the founders to exit the brand as the focus was on growth. The company grew rapidly through the 1990’s and the early 2000’s expanding across the Midwest. After rapid expansion but also laden by debt, the founders began to think about an exit plan. There were two primary goals in an exit: allow the company to continue growth while retaining its vision and values and relieve leverage placed on the company during its growth period.
Decision to Exit
In the early 2000’s the founders began preparing for their exit. Knowing they had to sell a viable concept, a board of advisors was assembled. Each advisor brought a specific expertise to the table to meet the objectives: grow the brand, put the company in a good financial position to exit, create a viable concept, and present the company to market. For most of the decade, the company fine-tuned itself after a decade of growth and success to prepare for exit.
Taking the Company to Market
In the later part of the 2000’s, the decision was made to take the company to market. The unique fact about this transaction was when going to market, the founders did not know what type of seller they wanted to target. Along with their board of advisors, a pitch book was compiled and an investment banking firm engaged. After a successful roadshow, the investment banker was able to bring ten offers to the table to evaluate. These included PE firms, a national restaurant brand, a large franchisee group, and a high-net-worth buyer.
Closing the deal
Originally starting with ten offers, the founders quickly settled on five offers to continue the “dating” process. The final five were invited to meet with the sellers to determine who would be the best fit. It quickly became apparent that there would only be two invited to the final round. With lack of chemistry, vision, and level of perceived seriousness (i.e., confidence to close the deal), three were cut leaving two private equity firms. Ironically, the two firms left had both the highest and lowest offer of the final five.
Of the final two, the PE firm with the lowest offer actually stood out: they were very excited to close a deal and presented a strong vision of what the brand could look like. They wanted the founder to stay on post-transaction (in addition to rolling equity). A strong post-closing leadership team was put in place and had a good relationship with the founder. The team was confident the brand would be in a good position post close.
After a final decision was made on a purchaser, the due diligence phase began. In order to make due diligence go as smoothly as possible, the seller took the following approach:
- They came prepared for financial diligence by having audited financial statements in accordance with US GAAP for its franchisor operations and company owned stores.
- Operated under a “nothing to hide” mentality. They opened the door to the buyer to come in and work side by side with them for a period of three months. The seller wanted the buyer to have access to everything they had access to and the opportunity to form a relationship with their team.
- Armed themselves with a strong legal due-diligence team who knew the restaurant industry and had closed numerous PE deals.
After three long months of diligence, the seller closed on the sale on a Friday afternoon in the late 2000’s.
Post close, the founder was still a key part of management and a board member. However, it was quickly apparent post-close that the management team brought in was not the perfect fit. With a disconnect on the vision of the brand and challenging economic times, a decline in the business began. The founder left the company after a short period of time at which point new management was put in place. At the end of the day, the seller had a good relationship and vision with the PE firm, but not complete alignment with the post-closing management team. The brand was eventually sold.
Looking Back – Would you do it again?
Fifteen years later, the founder would still have done the PE deal, despite the end not being as successful as originally hoped. Coming out of the deal during rough economic times, the deal allowed the company to de-leverage and provide a great liquidity option for the owners.
However, the seller did caution against taking on a private equity deal for a restaurant brand if he were to engage in another transaction. Often times the timelines of brand development and success between an operator and PE firm may not align. For a PE firm to be committed, it should have its focus on a long term horizon versus a quick turn-around.
In short, the seller has three main take-aways:
- Find a buyer and post close management team that aligns with your vision and values.
- Have highly qualified advisors when going through an M&A transaction. Find someone who knows the industry and has dealt with M&A deals in the past.
- If you engage on a deal with PE, ensure your growth timelines are aligned. Working with a PE firm is not a “one size fits all” approach. Find one who knows the industry and its challenges.
In conclusion, we hope From Fork to Fund has provided valuable insight into the private equity markets. Please reach out to GBQ if you have any further questions on pursuing an exit or private equity deal.