Restaurant Development & Design

WINTER 2014

restaurant development + design is a user-driven resource for restaurant professionals charged with building new locations and remodeling existing units.

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W I N T E R 2 0 1 4 • R E S T A U R A N T D E V E L O P M E N T + D E S I G N • 3 1 P erhaps you still think private equity frms only invest in large restaurant chains, leverage them to the hilt and then escape with the cash before the Chapter 11 fling — that, in short, they're a fnancial Grim Reaper. Think again. For a variety of reasons, not the least of which is piles of dry powder sitting on the sidelines, PE (private equity) frms con- tinue to hunt for growth concepts, typically small, barely tested chains that show potential to expand at a rapid pace. "There's an enormous amount of interest in new concepts and enormous amounts of capital," declares fnancial advisor Jim Parish, an industry veteran who works with restaurant founders. Indeed. Last year, Catterton Partners used its growth fund to take majority and minority stakes in Protein Bar, Bruxie, Piada Italian Street Food, Snap Kitchen and Primanti Brothers — none of which operated more than 15 units at the time of the investment. The founders of all but one — 80-year-old Primanti Brothers — remained in place. "Private equity is looking for much smaller-sized restaurant companies," says consultant James McGehee of Results Thru Strategy, a systems specialist who helps founders prepare for investments. "You no longer have to be a 30-unit chain with a regional footprint and an EBITDA of at least $5 million." And last fall at the Restaurant Finance and Development Conference in Las Vegas, no less than fve sessions addressed fnancing emerging concepts. During one, panelist Blythe Jack, managing director at TSG Consumer Partners, which recently acquired a stake in My Fit Foods, said her frm "came in behind the founders," whom she dubbed "the secret sauce." Look Beyond Bucks for Expertise Founders usually excel at creating great cultures and motivating staff; however, they're typically adrift when it comes to thinking strategically about real estate, demographics and fnancials. It's not that they ignore such issues — after all, they've opened a series of successful restaurants. It's just that, for private equity frms, gut feel doesn't suffce. In fact, it's a good idea for found- ers to consider a PE frm's experience in the restaurant space as carefully as they do their own capital requirements. Scott Pressly, managing director of BIP Opportunities Fund, who also spoke at the conference, noted he likes to work with founders who don't believe they have all the answers. At Tin Drum, an Asian street-food concept based in Atlanta, founder Steve Chan, who had no experience expanding restaurants, tried franchising them. Chan eventually reached out to BIP as much for guidance as for fnancing. After the private equity frm acquired a minority interest in September 2012, the founder began implementing sys- tems that allowed management to monitor unit performance more closely. Last fall, Chan hired several industry veterans, including former Arby's executives to relaunch franchising. Andy Pforzheimer, who co-founded Norwalk, Conn.-based Barcelona Wine Bar and Bartaco, told Restaurant Finance Monitor in 2012 that "writing a check was not the primary reason we ended up talking to Rosser Capital [founded by long-time res- taurant investor Harold "Hal" Rosser]. The two important things were the relationship and the level of expertise." Pforzheimer, a chef, and partner Sasa Mahr-Batuz talked with several private frms before signing a deal. Even founders with successful track records rely on the industry connections private equity frms have with former port- folio executives. "I've brought [Catterton] in to consult on key positions, like chief development offcer," acknowledges Piada founder Chris Doody, co-founder of the Bravo Brio Restaurant Group, which he sold to the private equity frm that took the company public in 2010. Doody, by the way, recently spent time visiting new concepts in Southern California with former Outback CEO Bill Allen, a Catterton ally who is said to operate an "incubator" for emerging concepts. Among the small chains they visited was sandwich-maker Mendocino Farms, which boasts average unit volumes of $2.5 million a year. "[Bill] has his own projects and works with what he thinks is hot," Doody says. Consider Performance Metrics Few restaurant concepts are deemed hot — at least by institutional investor standards — without high average unit volumes (AUV). "High" is relative, of course. But fnancial advisors and private Small companies are taking a big bite of the PE pie. Here's how.

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