Emerging restaurateurs looking for capital to grow their concepts should keep a few things in mind. First, they should have a unique differentiator, which is driving – and has historically driven – some of the most successful concepts in the industry. This is especially true now as consumers become more discerning.
Second, know your financials. Many entrepreneurs start a concept because of the compelling food and hospitality piece, but it’s just as critical to understand your balance sheet and to strengthen your four-wall economics before growing, not vice versa.
Third, don’t be an a*shole. Trust, communication, and honesty are the keys to a successful investor partnership.
Finally, do your homework, know your options, and talk to as many people as you can.
These were the biggest takeaways at last week’s Investment Summit, tied to Nation’s Restaurant News’ CREATE: The Event for Emerging Restaurateurs conference in Nashville, Tenn. The second annual summit was designed to bring together leaders of emerging restaurant brands with the investment community to provide such an environment for networking, education, and exploration of capital growth opportunities.
The Summit included three panels:
- “Are You Ready for Private Equity?” moderated by Savory Fund managing partner and cofounder Andrew K. Smith and featuring Jeff Brock, founder and managing partner of Hargett Hunter, Lauren Fernandez, CEO and founder of Full Course, Anand Gala, founder and managing partner of Gala Capital Partners, Akash Mirchandani, partner of Kitchen Fund, and Perry Leavitt, vice president of Enlightened Hospitality Investments.
- “What are some other financing options available?” moderated by myself and featuring Claire Anderson, partner, Cougar Point Partners, Neha Govindraj, CEO, founder, Bonside, Aaron Kless
CEO and CIO, Andalusian Credit Partners, Gregg Majewski, CEO, Craveworthy Brands, and Alicia Miller, co-founder and managing partner, Emergent Growth Advisors. - “The path to landing your dream deal,” moderated by Restaurant Business editor-in-chief Jonathan Maze and featuring Anne Gannon, CEO, The Largo Group, Rikin Lakhani, practice lead, emerging brands, The Elliot Group, and Andrew Peskoe, chairman, Golenbock.
There were plenty of themes from all three panels, and some disagreements – namely as it pertained to the pros and cons of private equity and franchising. Majewski called all financing options a “necessary evil,” but sharpened his criticism on PE.
“I think PE puts pressure on restaurants to grow at such a fast rate, then they fail and then your time’s up and they get out. That’s sort of why we’re seeing this mass filing of bankruptcies today,” he said. “You need to control your destiny – friends, family, (community facilities).”
However, PE is necessary “at some point,” he added, which is usually when a concept reaches 50 to 100 units.
On the franchising side, many of the panelists said it is a growing option as financing remains expensive and PE stays largely on the sidelines in the hospitality sector. That said, Brock considers operators’ decision to franchise as his company’s biggest competition.
“If you’re going to make that decision, then I hope you’re making it with the largest amount of data that you can. The risk in franchising early on, there’s just a lot of it,” he said. “If you’re fantastic at creating a concept and you’re skilled enough to move forward, that’s fantastic. Franchising is a completely different business.”
“If you have booming unit economics and your business is growing nicely, you don’t need to franchise, but it can be an interesting growth path,” Leavitt added. “But be aware that consumers don’t know that they are eating at a franchised restaurant versus your restaurant and if they have a bad experience, they’re going to think the whole concept is like that.”
Peskoe opened up his participation by reminding the audience that both franchising and private equity are important drivers of the American dream and have fueled much of the restaurant industry’s growth.
“They are not evil,” he said.
Some other key takeaways from the trio of panels:
The pandemic forced more operators to assess and tweak their strategies. Brock said it forced his company to look at qualitative filters more closely, as it’s always done with financial metrics.
“The best part of the restaurant industry is that it’s the people first and you really have to care about the people who worry about your customers,” Leavitt added.
Indeed, Smith asked his panelists why they invest in this industry that is fraught with failure and challenge.
“You can’t take on the risk in this industry if you don’t love it. You’ve got to have the passion,” Gala said.
The topic of debt was prominent throughout the day. Having no debt is tricky, but the unit-level economics have to work for operators to take on such leverage. The pandemic into the current environment, high interest rates included, has forced everyone to slow down and be more disciplined, according to consensus.
“You have to think that debt is good only if you can swallow it in times when there’s a hiccup in the market,” Smith said.
Gala said debt “has a place,” but it has to align with your growth plans and vision. If you’re trying to build a bunch of units, it’s going to be challenging with a load of debt and interest expense every year. He said that is the reason there have been several recent bankruptcies.
“You have to know what the worst-case scenario is and that includes low sales and high interest rates. Never take debt that puts you outside of what you believe is a reasonable payback period. For us, that’s two-to-three years. If I ask the question, ‘why did you take this debt to do X’ and they can’t answer it, that’s a problem. I want to know if they went through a best- and worst-case scenario and people need to take the time to think those things through. If they took the debt when it was cheap and didn’t think about worst case scenarios, that’s a problem,” Fernandez said.
Early missteps from emerging brands
The biggest misstep investors see with emerging brands is weakness in the financials. Second, is not having structures and processes – and documentation for both – in place. Third is not having the right team in place.
“We see a lot of brands that have an amazing CEO and the rest of the team hasn’t been built yet. It’s really important to have a great team around you,” Leavitt said, adding that an operations person, financial person, and marketing person to carry the culture are priority hires for her consideration.
The final misstep is that some brands don’t know who their customers are.
“If you’ve caught lightening in a bottle in your home market but you don’t really get why, you really haven't done analytics on that? That’s a challenge because when you try to extrapolate out into other markets it fails miserably because you don’t understand demographics and who your customer is,” Fernandez said.
Alternative options
For emerging operators, there are alternative options outside of private equity and franchising, but there is a barrier in finding the time to explore what those options are and what might best fit for you.
“Restaurateurs are some of the busiest people that you’ll ever meet, so taking the time to understand what’s out there, meet with partners and form a relationship with somebody in the market is important,” Anderson said.
Miller added that it takes time to think through a long-time plan and where operators are going to need capital in the future.
“A lot of folks will rush into franchising and not take the time to be thoughtful about all the options. There are lots of places to get money from investors, but it’s harder to do it under time pressure when you’ve got to make payroll. There’s a lot of information out there, but you need time,” she said.
Govindraj said that in addition to operators finding the time, there also needs to be normalization of these alternative sources of financing and understanding what questions need to be asked to find the right source. She added that more such conversations have taken place since the pandemic. Kless said higher interest rates have also accelerated the conversation.
“The reality is up until a few years ago money has been basically for free. You have a lot of investors from wealthy individuals and family offices up to pension funds, including institutions looking for sources of return, that’s really helped the alternative investment space,” he said.
Miller said it’s important to continue accelerating the conversation, adding that only about 20% of emerging brands have taken on some sort of private equity funding.
“We have to build through alternatives and normalize it,” she said. “Think creatively. Then look for alternatives until you’re large enough to attract traditional financing or PE.”
And, be patient.
“It’s so much harder today than it was 15 years ago. You’ve got to be willing to get kicked in the face a few times before you get your first check,” Majewski said.
It is a hard market, but it’s not impossible, Peskoe added, because of the growing interest from alternative financing sources.
“We have left a period of FOMO – a fear of missing out, where investors were afraid they weren’t in the right deal. We are now in a period of FOFU – fear of f*cking up, where you could be blamed for decisions later. You’ve got to be patient as an operator,” he said.
Peskoe said his company is unequivocally focused on cash flow, while Lakhani said Elliot Group focuses on culture.
“Turnover can be the most distracting, disruptive thing. You can have the right real estate, food, you can be organized, but where is the company in terms of its leadership? Are they aligned as a team?” Lakhani said.
Team alignment typically leads to stronger alignment with an investor.
“The biggest thing is that expectation gap. In any big deal, you know both sides are coming to you for a reason. The owner needs that capital to grow, but they have to make sure everyone understands what that’s going to look like on the other side, that visions are aligned, goals are aligned, and everybody works well together,” Gannon said.
The Investment Summit was supported by Gold Sponsors Savory Fund and inKind Capital; Strategic Alliance partners The Elliot Group; and additional Sponsors Landed, The Largo Group, and Golenbock, Eiseman, Assor, Bell & Peskoe.
Contact Alicia Kelso at [email protected]
