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Three things chains need before an IPO

As we wrote about earlier this week, more restaurant chains are expected to go public in the coming months, many of them small, upstart growth chains being lured by the promise of attractive valuations. In short, the equity markets are open to restaurant chains at an earlier stage in their life cycle, something we haven't seen for at least a decade.

But what do these growth chains need before considering a public offering? For that answer, we turned to Brad Swanson, managing director of investment banking for KeyBanc Capital Markets and a restaurant IPO veteran who took Buffalo Wild Wings public in 2003. He gave us three recommendations:

New store openings should be more successful. It's not enough to simply be able to add new units. Growth chains, Swanson said, need to prove they're getting better at opening those locations. "They need to show a proven ability to open new stores with returns that are at or above system averages," Swanson said. "That shows they're picking better sites and they're picking better markets."

The concept must attract new customers. Foot traffic must be on the upswing. It's not enough to have positive comps. The improvement has to come in the form of additional customers, Swanson said. Remember: This is an industry that now looks at Chipotle as the gold standard. Chipotle just reported 19.8 percent same-store sales in the third quarter.

A unique position. More successful IPOs come from restaurant chains that can say they have a unique market position. Buffalo Wild Wings was the first chicken wing concept on the public markets. Chipotle boasted big burritos in a fast casual environment. Chuy's gave investors a casual dining Mexican restaurant. Zoe's Kitchen gave the market a healthy, Mediterranean concept. "They've got to have some unique consumer proposition," Swanson said.

All these factors give investors more confidence that the chain will give them what they're looking for: growth. Despite the recent additions of growth names to the public markets like Noodles & Company, Potbelly, Chuy's and Zoe's, there still aren't many of them. So when an emerging growth chain that can fulfill these recommendations goes public, investors will flock to its stock.

 

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