Time to embrace private equityTime to embrace private equity

Private equity firms have proven to be a major source of financing for early-stage restaurant companies, and with both successes and failures on record it’s no surprise that entrepreneurs look upon these investments with equal amounts excitement and trepidation.

The excitement comes from having private equity firms supply the resources — namely money — for growth. The trepidation comes from fear of ceding control to firms often seen as mercenary Wall Street types only interested in a successful deal.

But restaurant industry entrepreneurs need to become more comfortable with the idea of private equity. For restaurant brands interested in growing to a national or multiregional level, the involvement of private equity should not only be welcomed, but actually sought out. While money is the most obvious reason for attracting an investor, the right private equity firm can bring much more.

A recent conversation with one private equity investor reminded me of what else can be brought to the table: a true partnership between investor and founder or entrepreneur that can work to best structure a company for growth.

As a true partner — either a minority or majority shareholder — a firm will take a long-term view of its investment and seek to work with existing management to build an operationally and financially strong company. It will advise on building the infrastructure necessary to support and manage the development of the restaurant concept, including adding the right team members and systems. It also will help develop a sound growth strategy, incorporating its experience with and observations of other companies.

In addition, private equity firms can tap typically extensive networks to attract valuable and experienced board members. This can be very helpful to restaurant management teams in important areas such as marketing, real estate development and financing strategies. A private equity investor can also help a brand build credibility with the financial community. This can help drive access to additional sources of capital, including debt and public equity, ensuring a brand’s future ability to grow.

With this notion of a true partnership in mind, let’s look at three frequently asked questions:

What can an entrepreneur do to attract a high-quality private equity firm that will become a real partner?

The most important thing is to be disciplined. Restaurant companies seeking investments need to create and prove success with a replicable financial model. There are many aspects of a disciplined approach, including a focus on providing great value to the guest and a controlled expansion strategy.

Being disciplined in terms of value to the guest incorporates product quality, service and menu pricing, as well as marketing and promotional strategies. Being disciplined in terms of expansion involves opening new locations only when unit management is in place, economics of the restaurant are strong, and the build or rebuild is pre-financed. If the restaurant concept can be franchised, those efforts should be undertaken in a way that is consistent with the overall growth strategy — not just viewed as a source of capital based on the collection of fees.

What should a private equity partner look like?

Assuming the entrepreneur is ready and the concept is well-positioned, there are three main criteria to look for in a private equity partner. First: Restaurant entrepreneurs should have good chemistry with the private equity partners. This is critical because there will undoubtedly be disagreements over time, and those disagreements will need to be solved while maintaining mutual trust and respect. Second: The firm should have experience with companies at a similar stage of development. The challenges of an emerging brand are very different from those of a more established concept. Strategies for one may not be appropriate for another. And third: The private equity firm should have restaurant industry experience.

Founders should understand that they are in control of who invests in the company, especially if it is operating well. Just as important is a need for the founder to recognize that valuation — or more specifically, the terms of the actual deal — should be a secondary concern. The value that the right private equity firm brings to a company over the long term is much more important than the valuation at which it invests.

When should an entrepreneur look for an investment partner?

An entrepreneur needs to look inward to determine if he or she is ready to take on a partner. Most companies succeed because of the drive and determination of the founder. In many cases, she is used to making all the decisions and is accountable only to herself.  Bringing on a partner, no matter what that partner’s motivation might be, can be a major shift that may prove very difficult for any founder to handle, from both an organizational and emotional perspective.

I recently spoke with the wife of an entrepreneur who told me that 10 years ago, her husband was not ready to have outside partners invested in his brand. Now, however, he has realized that he needs help so that the company can realize its full potential. Only after the founder understood his strengths and weaknesses did he become ready to bring on an investment partner that would help drive growth and success, and add to the real value of what he had built.

Steve Rockwell has 30 years of experience in the restaurant industry, including as an analyst and finance executive. He is a partner in the Results Thru Strategy consulting firm and can be reached at [email protected].