Private Equity Deal | Restaurant CPA Firm | GBQ Partners
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 1990s as a casual dining concept with a unique twist that spread across the Midwest. In the 1990s, there were no plans by the founders to exit the brand, as the focus was on growth. The company grew rapidly through the 1990s and the early 2000s, 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 the leverage placed on the company during its growth period.

Decision To Exit

In the early 2000s, 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 the market. For most of the decade, the company fine-tuned itself after a decade of growth and success to prepare for its exit.

Taking The Company To Market

In the later part of the 2000s, the decision was made to take the company to market. The unique fact about this transaction was that 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 was 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 a 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 offers 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. To make due diligence go as smoothly as possible, the seller took the following approach:

  1. They came prepared for financial diligence by having audited financial statements in accordance with US GAAP for their franchisor operations and company-owned stores.
  2. 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.
  3. Armed themselves with a strong legal due diligence team that 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 2000s.

Post-Closing

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 said they 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.

Oftentimes, the timelines of brand development and success between an operator and a PE firm may not align. For a PE firm to be committed, it should have its focus on a long-term horizon rather than a quick turnaround. In short, the seller has three main takeaways:

  1. Find a buyer and a post-close management team that aligns with your vision and values.
  2. 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.
  3. If you engage in 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.
Contact GBQ Partners if you have questions about private equity or are considering a private equity deal.