Private Markets May Signal More Restaurant M&A

at various banks. Eventually moved to Chicago and joined Bank of Montreal and had the opportunity to work with the restaurants when I was there and just absolutely fell in love with the space. You know, the you know what's not like your your meetings are at restaurants, you're trying new food. I love food, And it was the people around the restaurant space. They're they're hospitable, they're kind, they know the value of a team, and all that just

made it made the work just so much enjoyable. Yeah. You know, during that time at BMO, I landed up working on some pretty landmark transactions in the space, including work we were including the lead left book runner on Kurasushi's IPO back in trade nineteen, which you might recall at that point no restaurants were going public and a difficult, difficult background young company. We successfully achieved a IPO for Kurasushi,

and and you know, the rest is history. That stock has gone through the roof over the last several years now. And the other transaction that that I'm very proud of was Condato Taco is a private company out of Columbus, Ohio that we sold to the Beakman Group in twenty twenty March or twenty twenty in fact, and right before the pandemic, and that business has done an amazing job growing over the last several years. Since that time, my

be more days. I've grown my practice into consumer services as well, some multi union consumer services companies, and I've had the privilege to advise on some of the leading brands such as Velvet, Taco, Imags Studios, Another Broken Egg, Fuzzies, Pinstripes, Houston Hot Chicken and been able to drive results that we believe are the best in class outcomes in the sector.

I started Heddington Park in early twenty twenty three, so we're a little bit over a year over now, and the goal was to provide bulge bracket white gloves service to emerging growth to middle market companies in the restaurant and consumers services space. We felt that needed to support the most but were unable to be served by the larger investment banks, and that was the goal behind Harrington

Park Advisors. So over the last what is it now, fourteen to fifteen months, we've completed four transactions including Pinstripes, Houston Hot Chicken in its studios, and then just this week Untamed Brands.

this year. But if you think about kind of the volume and the velocity of deals, it is not what it was in twenty nineteen, or for that matter, in twenty or twenty twenty one when the entire M and A market was on fire. And but what's happening, I believe behind the scenes is there are assets that are and I'm talking purely about private markets at this point,

there are assets that are coming out. I think it's probably driven by a whole host of factors, including you know, founders needing monetization, people realizing that the gap that invaluations isn't going to come down. But so activity is starting to pick up. More more companies are talking about capital raises or partial or complete sales of the businesses, but it is nowhere near the velocity that we had in prior years.

But you know, if you look at the public markets, the valuations for franchise ors went through the roof, and we saw companies like Jack in the Box, for example, go from I don't know, mid sixties, mid seventies franchise all the way to ninety plus franchise because they're recognized that that the public market investors were rewarding companies that

were asset light prior to the pandemic. That interest was there in franchise ours from the private markets too, from institutional capital, private equity, family offices, but it took a whole new turn during a post pandemic. Currently, the interest in franchised models is at an all time high. If you look at the activity since twenty twenty with you know, whether it's Shipley's Donuts or Tropical Smoothie twice. Now the

investors are all about franchise models. Given the asset light nature of the model, the more predictable nature of cash flows, the ability to get leverage on those cash flows. That that has created a huge gap between interesting franchise models

versus company owned models. Uh. I think the other other part that the company or model is suffering from right now is if you again go back over the last decade or two, uh, there was once a belief that any innovative company owned model can become a national brand. And the post child for that obviously was Chipotle. You know, started from you know, one town into a national phenomena

and continues to be a national phenomena today. And based on that success, a lot of institutional capital started chasing these innovative, younger, fast casual brands. And what has happened over the over the last decade is that a lot of those investments in those companies have not really been

very successful. I think what is what maybe folks did not know but are now realizing, is that, you know, it obviously takes capital, right, unit economics don't typically match, you know, what the home marketing and economics are as you go into new markets, the marketing spend needed to expand into those markets is a significant amount and it

just takes time. You know, when you have a five six seven year old as as private aquity typically does, it is very difficult to take an emerging brand and convert it into a even a regional brand for that matter. You know, we we we We've seen companies like you know, Cafe Rio for example, that you know was owned by a private acquity from Carpriley, but they owned it for almost twelve years and over that time they really grew that business into a super regional West Coast, Mountain West,

you know, Midwest brand. But it took time and oftentimes those windows are not available for most private equity firms. So so those are the factors that are are are on people's minds as they think about franchise growth. Where you can if you have a really good franchise development platform, the right person in that seat, an amazing brand needing economics and cash and cash returns that work for franchisees, you can supercharge growth. Those franchisees are sitting in their

local markets. They are the mom and pop that run that business, they know their community, they're invested in that business, and they're taking care of it day in and day out, as opposed to a regional manager who just runs you know, seven, eight, ten restaurants. And so today, in today's market, franchise concepts have been our hot property and company models have taken a little bit of a backseat compared to the franchise models. But these things come in waves, you know, and things change.

You know, five six years ago, people were talking about why company models are more superior because you can actually maintain the culture of your organization when you own the stores. And in any company that is growing is and you hope to grow it into a super regional or even a national chain. Without culture, you will you cannot succeed having a single mission and and that can be hard in in enfranchised concepts. So look, we're currently in a

wave of where franchise companies are attracting more attention. You know, my expectation is that the the quality of assets in any space or you know, there's a limited finite amount of high quality assets and some of those have already transacted, and then over time, those will those opportunities will diminish. And then you know, private equity firms, family offices will

again start to consider companial models. Look, we're advising on businesses that are company or models right now that are absolutely fantastic, and have advised on companies that have company and models that are absolutely fantastic. And despite the changes in the current em and environment, those businesses in their own are outperforming uh and building into you know, juggernaut.

So these things come in waves, they come and go, and right now we're in a place where franchise modelsm are more attractive, but I expect that to kind of change over time.

to get the right people in place to go find franchises. Eventually, when this franchisees sign up, provide them support on real estate marketing store opening, and then those franchises then have to go successfully open those stores right, and all that takes time. So if you're starting from scratch today, it can take you at least two to three years before

you start seeing a a franchise store open. And then you having a franchise store does not make you a franchise or to really get the value as a franchise or you need to have I would say, you know, about one hundred hundred and twenty units franchise units open, because at that point you really start to leverage your infrastructure, and every new unit you open, the royalties from that

start to trickle trickle down. Also, because you're only taking five six seven percent royalties and not getting the full

EBIT of the store. As a company owned model, it just takes a longer time to scale your business into a larger scale EBITDA business, so to to for for for companies that are seeking the franchise route and to converting them into into franchise ors, it's going to take time to get those stores open, for those stores to show performance, to get scale, to get to one hundred plus units, to really fully achieve that valuation that you're seeking as a franchise or so oftentimes we're speaking to

you know, private equity firms that are that have invested in a brand and are as asking hey, should I go down the franchise route? This seems French franchise Well, and for all the reasons I just stated, Uh, my advice is that unless you plan to hold for the next five to seven to nine years, a franchise route is not really going to drive the valuation that you're seeking.

down from prior to the pandemic. I'm starting starting to see some hope that valuations will get a little bit of a pickup here, and I think that's going to be driven by the fact that there has been a little bit of easying on the credit side, whether it's banks but most likely private lenders are starting to reconsider investing into the restaurant space. Interest rates are starting to, you know, have have come down a little bit. No, not maybe compared to trade nineteen, but but where we

were just about a year and a half ago. And I think that is driving some of the interesting restaurants because I think we're also working against a backdrop where the there has been if if you think about the restaurant space has absorbed over the last four years, it is incredible the fact that we are here still and have and have a restaurant industry. We had a pandemic

where nobody knew what was going on. And I remind people who have who are forgotten, these are the days when we were spraying down Amazon packages before we brought them into our houses. Okay, those are the days. And they figured out how to adjust the models. Not everybody survived, but a lot did. But there to readjust their models there there how they communicate with their consumer and and

and and so that was one. Then uh, you know, they got a lot of support from the government uh in PvP loans and they were you know, that helped a lot a lot of companies stay afloat. And then coming out of it, we had a consumer that had been saving for for during the pandemic. The government was you know, uh providing them uh support during that time

as well. Student debt was taken off the table for a while there, right, and you had a consumer that was flushed with cash, had not been out of their homes in two years, and they were on a vendor.

Interest rates went through the roof, and the consumer eventually exhausted a lot of their savings and had to come back to real life. But you know, living and living and saving for their personal expenses. And what we saw in twenty and by the way, this is all the background of huge inflation in twenty twenty two. But chicken prices, poork prices, beef prices were had had gone through the roof,

and restaurants were taking five price increases. All these things happened all at the same and kind of narrowed in all at the same time into twenty twenty three and we saw a traffic decline in across the board for restaurants. That are only a few restaurants that I can think of at least that we speak to that have had positive traffic in twenty twenty three and now coming into twenty twenty four. And so that's the backdrop too that this m and a ENVI you know, private equity, which

is a big investor in the restaurants space. This is a backdrop that they're trying to understand and invest against. So this impacts you know, obviously this impacts corporate owned models more than franchise models.

strong today. If you're a corporate own business, the lending environment has gotten got really weak during the pandemic and kind of post pandemic, it's starting to get a little bit better. Today. Interest rates are still higher, not maybe at the highest that at the peaks that there were maybe a year and a half ago, but so the interest rate environment is getting better for corporatedome models too. And then look frinanally, there's the franchise ze models themselve els.

Like I'm talking about larger uh blocks of Taco Bell franchisees or dunkin Donuts franchises, and the lending environment for those companies is is really strong. We're talking about leading brands that have been around for a long time. They've got thousands of thousands stores in the US, and there's a real history of success behind these brands, and these franchisees can get access to capital uh pretty pretty easily. Uh, And that's what's actually driving a lot of the interest

from private equity in that franchisee space. You've got you've got you know, from a private private equities perspective, you're buying you know, a block of Taco bells wing stops or dunkin Donuts stores. Right there are one hundred plus stores in this in this one block that you're going to buy and uh, it is stable cash flow, right, and you can you can you can see it. You can look at look at the business over the last several years and see what the business does, so you

know what the cash flows are going to be. Typically, Uh, you've got lending that is available to you. You still have some room for growth by opening new units, and you have the support of you know, multi billion dollar enterprises backing it. Like whether it's you know, whether it's again a dunkin Taco or a Wing Stock marketing dollars

go a lot further, they really do. And these are national brands, but with national marketing campaigns and and and a national impression right on on consumers and you know, and and their value products. And in today's environment where people are worried about uh, the future, where they're worried about their their their wallets, the value plays really help.

So that space, the franchise e space has seen a lot of interest from private equity and from recory investors that were previously buying company on models, branded company own models or franchise ors are now also dipping their toe into the franchise e space.

And I think that is one of the key things. You know, all of all of us and maybe a lot of your listeners are sitting in you know, in in one of those cities today and they go to their local you know, solid chain, and they go to their local you know, eighteen dollar taco chain or eighteen dollars sandwich chain, right, and it's it's fine, that's it's within their price points. It's in the community. The taste profiles work, But does it work in Kansas City, doesn't

work in Oklahoma, doesn't work in Texas? You know? And that's the question can you take to be successful as a brand in New York City or La or San Francisco? You know, in my view, you can probably put up one hundred and fifty two hundred, two hundred fifty units

doing that. But to be a several hundred thousand plus, two thousand plus chain, you have to cater to the masses of this country and the masses of the country do not buy twenty dollars sandwiches twenty dollars salads, right, And so as we think about concepts, it has to be something and if you are if that is what you are selling, that is what you're marketing as a banker that this is a super regional potential for national chain.

You have to demonstrate that the food will actually work and it is a kind of food that folks in all these the middle of the countries we'll want to eat. So you don't want to be too niche. You want to have a generalist kind of food. The food has to be good, the service has to be good. At the end of the day, If your food and your hospitality are not up to mark, you cannot succeed as a restaurant company because if you don't, the other restaurant chain down the street will beat you every time. So

there's a concept portion of it. But then after that, you know, what makes an emerging brand a highly attractive and a highly attractive to institutional capital, I should say, is a couple of things. One concept we talked just talked about. Second, you know, you have to have at least several units in place. You know, it could be five, seven, ten, fifteen, where you can demonstrate that the unit economics are you

can duplicate those unit economics again and again and again. Right, if you have huge variances, you got one unit doing three and a half million or the other ones doing a million a quarter, you don't have a proof of concept yet or nobody knows that what am I underwriting this in these unit economics. So having that is a number of stores that are around the same unit economic model is important. I think in today's market, just having

top line sales is not enough. You have to demonstrate through the P and L that you can drive profitability at each store level, right, and that number is typically at twenty percent eighteen called sometimes can be eighteen percent, but twenty percent is the store level margins that we're looking for. So now you've got the union economic model that works. Then now can you replicate that model not just in your hometown but across other cities and other states.

And now you've shown you've got a unique model that works and it works across multiple states, and now you have portability. Next, I would say, is going to be a management team. It is, and this is this is the tough part when you're a young company and you got five or seven stores, You're not you know, you're You're not going to get Brand Nichols to come run your company, right, You're you're you You only have that

much capital. And the capital that you have that is coming down from your stores into your organization needs to be used for growth as well. So this is where the challenge comes up. How do you get the best people to run this business grow it? And I think you do it through culture. You do you do it

through a mission. If you can get like minded people in the room who believe in the brand, in the mission that and you, they believe that they are providing a service and a product that is needed, uh, and they're in love with that brand, you can get more

out of people. And so that's the tricky part, getting the management right to then take that business, you know, from five units to ten to fifteen units, but set up an organization systems and processes that can manage those company owned stores, that can manage the organization, drive for growth, drive for the best quality hospitality can provide. Together, then that's what makes a restaurant brand highly attractive, emerging restaurant brand highly attractive.

is not transparent. So the part one of the match making process is for me to understand my client their needs, what are they're looking to achieve both short term and long term, and then making sure making and then having the other started side of the coin, a broad network of people who from who I can understand who will be interested in a company like this that we are advising. But the match making process is, you know, for us, is it's a it's a it's bespoke, h it depends.

We've run processes that are your typical investment banking processes. You know, we'd like to think to each everything we do is custom and bespoke and tailored to the situation that the client that we're working with. But the most general view of that is we we work with a client. We pulled together a confidation confidential information presentation. Use the eighty page document. We launched the process. We have two

rounds of bidding. The first round is people putting in broad valuation ranges of where they would transact if you make it through. If if your bid is good enough, then you make it to round two. You co meet with management, get all the diligence, and then finally go to your l o I. We present a single point valuation and from there we pick the winner and you're after the you know, we're off to closing the deal in the next thirty to forty five days. In other situations,

it's it's it's it's very different. We we recently sold a business where the we're working with the founder and the founder said, look, I've got a lot of growth that is coming up in the next year in twenty twenty four, and I'm afraid if I transact today, I'm going to give up a lot of value that I'm going to be building in twenty twenty four. And this was just these conversations were happening at the end of

kind of third fourth quarter or twenty twenty three. But he also understood that with all the growth that is about to come, having the support of a private equity firm that has done it before, has Kale Companies, is going to be instrumental in avoiding pitfalls, right, And so

that acquired a different, unique approach. So for that transaction, we said, hey, look, let's go talk to some of the best in class investors out there, people who have invested in this space, people who know the space, people who know you, and let's see if we can somehow get somebody to give you a valuation for twenty twenty four results today. And in that situation, we don't run

a process. We go have a couple of conversations, see what the interest levels are, and through those conversations telling the story the right way, giving the investors the confidence that trying twenty four results are achievable. They are the companies unique and special and is run by an amazing management team if you can, we provided all their confidence and we're able to achieve at the end of twenty twenty three a result that value the company based on

twenty twenty four numbers. Right, So that's a very different situation than I want to sell my company. But the key to the matchmaking, as you're asking, is it has to be unique to each each client, to each situation. A restaurant company in casual dining versus fast casual versus QSR, franchise over versus franchise versus company owned, all these have to be marketed and different ways. Investor base for those companies are completely different. And then of course we're talking

about different sizes of companies too. The investor base that when we sold Velvet Taco is completely different than the investor base that for a company like Image Studios or Houston Hart Chicken. So it is understanding your client, understanding the investor community, and finding and bringing those people together.

And then look, it's at the end of the day, you're going to get hopefully multiple bids, and then it's a matter of who do you feel the most comfortable with, which institutional partner has given you the most comfort around believing in your business, believing in your vision, backing the management team, hopefully changing things for the better, but not changing things are already working right, because things can go the other way too. Not everything goes is up into

the right. And that's part of our job too, is just knowing these investors for so long at this point, seeing the deals that they're doing, knowing the as people, we can advise the clients on who their best partners are going to be.

with the new partner. If you're but if you are selling your business one hundred percent, uh, then then most people I think op for max cash, but look, everybody's different. There are some people who would say, yeah, I want max cash. But also this is also my legacy, this is mine. My name is attached to this, this company, and I want this to survive, and I want this to thrive, and I want I want the mission and the culture to to is more important than anything else

for me. So there are folks like that who who will pick lower valuations because it's going into the right hands and somebody who's going to respect what the company stands for. But if you are UH rolling a piece of or a chunk of equity into the next deal as a founder, I think it is incredibly important who your partner is you are going to be. You know, somebody asked me a question, Mike. I was in a panel r DC a couple of years ago and somebody my topic to discuss was what what makes it good

UH institutional partner for a business? And I put up ten points which when I read through them and then I disclosed the source, it was marriage dot com. Right, But it is true you have to what you're getting into oftentimes is a five year marriage. You're going to be at the table, discussing a lot of topics and some difficult topics about the company and having that shared vision, that shared goal is instrumental in it being a real

working partnership over the next five, six, seven years. So if you are rolling equity, I would say yes, value obviously is important. Nobody wants to give up millions of dollars and say goodbye to it. But think about the next five years. Who are you working with. What are they going to bring to the table? Are they going to carry on the mission the values of your business, to maintain the culture, take care of its employees while investing in growth. That is the combination that you want.

And if you can find somebody who does that, then hopefully it should be a very successful marriage over the next five to seven years. Cool.

us and saying we want to go public. And my reaction, working at a big, large institution like Bank of Montreal, was deals to small. You know, I don't know if

the restaurant markets open. Just everything that every other banker was saying right that the restaurant market is open, the deals too small, the company is not ready, et cetera, et cetera, And I, you know, I just decided I'm going to get on a flight and go out to a thing with San Francisco and just just uh, actually I think of San Francisco, just meet with the company and see check out the restaurants. And then when we were at the restaurants, I realized there's nothing else out

there like this. Sure in Japan there are you know, the two hundred four hundred Core Sushi and the whole bunch of other you know, revolving sushi chains. But here in the US, the authentic experience, the enjoyable experience that they were delivering was nobody was doing it, and it was you know, there's you know, we've had other companies like Yo Sushi come in with the revolving chains and and others, but this was just so authentic. And the second thing we noticed was, I'll make two other points

about that business. One was technology, and it wasn't technology for the sake of technology, wasn't. It wasn't technology where we have a big marketing list anybody can have that. You know. This was true technology and it wasn't AI or anything of that sort. It was technology that did the two things that I care about and I think

investor should care about. Does this technology improve my guest experience and therefore drive a higher higher sales check second, does this technology reduce my operating costs and drive more profitability? Check right? And Kurusushi was doing both of them. Their kitchen operations with you know, the sushi making machines, the plates coming automatically back into the through the water channels and getting cleaned up the ordering process that the fewer

folks you needed on the floor to take orders. Now they've introduced robots, which I was very fascinated by this this last couple of days ago. That's what the magic is. The magic is that there's it is a highly highly authentic experience without without alienating people. It's it's it's a fun place. It has health uh health and wellness aspects to it given it's you know, uh a lighter calorie food, uh, less baths, seafood and uh it's just a highly enjoyable experience.

Kids can love it because you know, you go, you go when you get your toys, if when you when you eat a certain number of plates. They've since added the buty to just buy a toy on the screen instead of having to eat fifteen places to get a toy. And I think that's that that helps, right, But it's it is that uniqueness, the authenticity without alienating people. Uh, the strong unit economic model that they have built. Uh they're you know, they use technology to monitor their stores.

Instead of having all these area managers, they are able to manage to to watch their stores through camera feeds at the headquarters and make sure stores are being managed properly, they are clean. There's just so many aspects of the business are that are completely different from anything else out here in the US, and they have an exceptional job of executing on their growth.

a huge selection of alcohol for a very reasonable price. Right, but there's no cutting back on quality of the food. If if you are readers have the listeners have not been doing douta Tacos A highly recommend it. It is an amazing experience. Every store is unique with graffiti walls that are unique to eat store. The food is highly

highly innovative. It's it's it's what if if Taco Bell had a fast, casual casual dining baby and and and and wanted to send well alcohol, That's what Conductor Tacos would be, right and you got, You've got an amazing food, very innovative. You can get double decker tacos just like you get a taco bell, right, you can uh uh, there's always something new on the menu. The alcohol is significant portion, uh. But from a consumer perspective perspective, you

can go any time of the day. You can you know, meet up friends after work and go for a drink and some chips and guac. You can go with with your entire family get case as tacos uh and and and have your kind of regular family casual dining meal. Or you can go late night and hang up with your buddies and bachelord parties, bachelor parties. It just fits

a lot of people's lifestyles. And you and you can show up an your little lemon workout gear, right and it's and it's and you're fine, come as you are. Why Candado was was that transaction was so successful was because it did exactly what I talked about earlier what makes a successful organization a successful restaurant brand. Uh. They had thirteen units across I think four or five markets. The unit economics were exactly the same across each of

those different markets. And these are across three different states these markets. At that point, they had an amazing management team. They were doing something that was highly unique, but also very broad in its scope. In terms of attracting guests, it wasn't very uh, it wasn't here's a fifteen dollars taco, right, and only a few people can afford it. These were, i think at that point, like three dollars talkers or something like that, and that business has continued to expand.

I think one of the other key things about the business that was highly attractive was the food service model. They heavily rely on a commissary, which helps keeps operating costs low at the store and really leverage the labor model, and that also helps drive faster check times and get satisfaction.

finally it was achieved end of last year. Look, I think on pin Stripes, our role was we were advising Middleton Partners, which is the the energy behind Banion the spack, and we advised Middleton raised capital to make an investment into Pinstripes that whether the I p O got done or not, the capital would be used by pin Stripe

for further growth. So we helped raise that capital. Our our key job on that was to create the marketing story that was needed to demonstrate to investors that you know eventually be used as part of this pack as well, but to develop that the storyline of why this business is unique, it's special, and it's highly needed in today's environment.

If you if you think about what has happened in the real estate landscape over the last decade and a half, it's it's since basically Amazon's emergence as the dominant retailer in this country. We've seen Seiars go bankrupt, We've seen Macy's, JC Penny's shutting down stores, Laden Taylor, I mean, the list goes on and on and on. And these are all your anchor tenants at your class A malls. And as these stores have shut down, they've left huge gaps in that in that in that retail location. So how

do you fill it? How do you how do you get consumers to come back, guests to come back and shop at your location. So what a lot of these mall operators have been doing is trying to find a way to convert these into lifestyle centers, into destinations in and of themselves. But to convert that, you still have this huge building that remains empty. So you need a large box concept that can go in there, take up

that space, drive traffic. Because the lifestyle entertainment nature of pin Stripes and hopefully that benefits all the other tenants in that location as well. And pin Stripes, given its very family friendly orientation, it's not just bowling, it's not

just bachi. It also has some amazing cuisine. They were uniquely suited to go fill out that that big gap in that in that real estate and drive traffic back in the stores, and you know they're back by obviously a lot of uh mall operator as well, just for that reason. But now Pinstripes finally has access to capital to to really add fuel to the fire and kind of continue that growth that they need. These are not cheap boxes. They cost a pretty penny to build, but

they hopefully generate a lot of profits too. So I think this was the really awesome outcome for Pinstripes to be a public company have actually the capital, because I think that is needed as the regular retail model operators continue to continue to have challenges.