This is the third in a series of seven stories exploring the growth cycles of some of the industry’s hottest concepts. Each story will look at a different facet of the evolution of an emerging chain, from conception to financing to moving into new territories. Future stories also will investigate pitfalls to avoid, ways to stay hot and The Next Big Thing.
Financing a growing restaurant concept, especially given today’s slumped economy and tightened credit markets, takes as much creativity as menu development and as much upkeep as building maintenance, experts and operators say.
While many of the traditional forms of financing are available—such as debt, equity, mezzanine, small-business lending, private-equity groups and venture capital—operators today are forced to think outside the box and create a financing plan as unique as a signature dish.
“In this market it is about flexibility,” says Dean Zuccarello, president and chief executive of boutique investment bank The Cypress Group. “Anytime you have a challenging market condition, you need to be flexible.”
Zuccarello says operators still will find funding, especially when they represent a brand perceived to have growth potential, but that the funding may be made up of a variety of options. For example, operators will need to look at using both debt and equity. In addition, they will need to focus not only on interest rates, but also on amortization or prepayment options. Given the current variability in the financing markets, operators should look at funding from a short-term perspective, as refinancing once the marketplace normalizes is an option, he added.
Despite the ups and downs of today’s economy, the key to growth financing still lies in finding that perfect match. For instance, some entrepreneurs are not ready to sell equity in their creations and therefore should seek debt financing. Other operators may have reached a point in the growth of their concepts where they need to seek access to the capital markets through initial public offerings.
A financing plan should be as unique as the brand itself, investment experts say.
“Every year or so [a brand] should internally look at financing and growth plans and review its position to see if it meets current market conditions,” Zuccarello says. “Ask, ‘Is this facility or is this lender able to grow with me?’”
Steele Platt, founder and chief executive of Irvine, Calif.-based Yard House Restaurants, the 20-unit upscale casual-dining chain, made certain his financing deal with a private-equity firm last year was all about the perfect partnership.
“The responsibility was on our shoulders,” he says, referring to the company’s decision to sell a 70-percent stake in the private company last year. “We had over 100 investors, so the return needed to be there, but more importantly, we have 3,300 employees, and any deal affects their lives.”
Yard House typically features more than 100 menu items and between 100 and 250 beers on tap. Its sales this year are expected to reach $170 million, and with five new restaurants planned for next year, the company expects to post sales “well over” $200 million, Platt says.
About three years ago last month, Platt recalls, Yard House hit “the magic number” in terms of size and sales and went looking for a financing partner to help it grow to the next level. At that time, with the financing market at its height and private-equity firms clamoring for restaurant assets, Yard House decided a private-equity deal was the right move. After two years of searching for the right partner, Yard House closed last year on a sale of a 70-percent stake in its business to TSG Consumer Partners LLC.
About 80 of Yard House’s 100 investors cashed out, and Platt reduced his stake from 22 percent to 10 percent. Terms of the deal were not disclosed. It was TSG’s first restaurant investment.
“We actually didn’t want restaurant experience,” Platt says, referring to TSG’s inexperience in the restaurant industry.
“We were real confident [about] our culture, how we ran restaurants and what Yard House means. We weren’t seeking assistance, we were seeking someone that could value what we did and utilize us down the road.”
And Platt is not done. Just as he plans to grow the brand, menu and beers, he also will continue to explore financing options.
“That was just stage one of a three-stage process,” Platt says. “We still have some chips on the table, we were able to make some profit for shareholders, acquire a little nest egg, but also to offer an incentive transaction so that employees and partners still have a carrot to get them to stage two, and then there is stage three.”
Platt says future acquisitions of additional brands or an initial public offering are options on the table.
At Wayzata, Minn.-based Redstone American Grill, growth capital for the four-unit chain was garnered last year through both a rights offering to existing shareholders that netted about $10 million and a debt deal with GE Capital for $16.5 million. The funds will be used for expansion, company officials have said, and reports indicate that founder Dean Vlahos, who also founded the Champps chain, plans to then sell Redstone or take it public once sales hit the $100 million mark.
The chain’s newest chief executive, David Goronkin, who left Famous Dave’s of America Inc. in late 2007 to join Redstone, has said that the upscale, high-volume Redstone could grow to as many as 300 locations nationwide.
At Dallas-based Genghis Grill, expansion will come through both corporate restaurant growth and franchised development, the company has said. New locations are planned for Texas, Oklahoma and Kansas, including eight new corporate locations and 17 franchised units to be opened during the next three years.
The use of franchising as a growth strategy has been popular given the slowed economy, as preopening, development and building costs are passed onto individual franchisees. Just this month Jamba Juice, a now-struggling, former Hot Concepts! winner, said it would shift its growth focus from corporate development to franchised expansion. The move would free up much-needed cash to firm up the company’s financing plan, officials said.