Restaurant Deals on the Rise for Some Private Equity Firms
November 08, 2013
Friday Morning Dealmakers Column
Middle-market private equity transaction activity has continued at an increased pace through the second half of the year. The combination of readily accessible leverage with favorable terms and a marked improvement in the quality of companies on the market has put private equity back in the buying mood. And, as competition for good deals heats up, valuations continue to be robust.
The strength of the private equity market is good news for growth-oriented restaurant operators. With abundant pools of capital in the market waiting to be put to work, growth concepts –especially high-growth multi-unit restaurant concepts—are a prime target for private equity firms that understand the dynamics and opportunities in the hospitality space.
The restaurant industry is attractive to numerous private equity firms due to the unique dynamics of the industry; restaurants provide an opportunity for substantial unit growth due to the highly replicable nature of the operations which allows for scalable growth both geographically and across brands. With the right capital availability, a local restaurant group can become a regional restaurant group, and the right concept can scale nationally and, eventually, internationally via franchising and brand acquisition.
However, not every private equity investor is enamored with restaurant deals. Some private equity firms are reluctant to invest in the restaurant space due to typically razor-thin margins, relatively low barriers to entry, and susceptibility to the unpredictable nature of consumer trends. A restaurant brand that is hot one day can suddenly cool off the next.
Still, private equity firms that invest in the hospitality sector have a growing appetite for the right restaurant deals. Private equity firms represented 27 percent of all M&A transactions in the restaurant industry last year, according to J.H. Chapman. Some private equity firms see such substantial opportunity in this market that they are starting to redefine their transaction criteria.
Previously, a restaurant operator needed at least $10 million in EBITDA, along with a very convincing growth story, before private equity would even consider an investment or acquisition. In today’s market, however, $5 million is the new $10 million. Today, CohnReznick is seeing deals closing with EBITDA of $5 million or less, provided that investors like the concept and can foresee the potential to grow operations and value.
For more information about M&A activity in the Restaurant Industry, contact Gary Levy, CohnReznick’s Hospitality Industry Practice Leader at Gary.Levy@CohnReznick.com, or Jeremy Swan, Principal in CohnReznick’s Private Equity and Venture Capital Industry Practice at Jeremy.Swan@CohnReznick.com.
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