Expansion Capital: The Art of the (Small) Deal
Rod Guinn, a former Wells Fargo Foothill investment banker, explains scenarios growing restaurant chains will likely face when seeking capital.
By David Farkas, Senior Editor -- Chain Leader, 11/1/2009 12:00:00 AM
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“Investors may show operators a better way to think about their future and have a more refined view of what that future can be.” —Rod Guinn |
Growing chains in need of capital for additional units, G&A or partner buyouts, pay attention. FohBoh.com blogger and veteran restaurant advisor Rod Guinn, a former Wells Fargo Foothill investment banker, explains scenarios you'll likely face when seeking capital.
What pitfalls await even financially savvy operators who seek outside capital?
The first and negative piece of news I start with is, unfortunately, it is easier to raise $100 million than it is to raise $10 million from outside investors.
And that's because…
The main reason is that most institutional investors seek safety in numbers. As a result, over the years successful funds have gotten bigger and bigger, leaving a vacuum in their wake. Yes, there are small funds starting up. But at any given moment there are fewer of them, and they are more difficult to find.
How do you find them?
Quick and glib answer: It's worth talking to somebody who knows those funds, like myself. No one operator with, say, a 15-unit chain has the time to find them. If they are perchance lucky enough to find one…well, even in that situation they are not going to be well served unless they have [a deal] to compare it to.
Say the operator doesn't want to delegate everything to a financial advisor. Then what?
Operators shouldn't delegate everything, but they need an advisor to do some heavy lifting. Still, it's worth taking time to talk to other people who have been involved with a particular investor or fund—say, CEOs of other investments the fund has made. If you can get names, talk to CEOs who did not take the fund's money.
What might you learn?
If you want to take make money from an institutional investor—whether it's an equity investor or a lender—you will have live with them for a fairly long time. You'll want to know how they behave.
In a blog post, you mention “favorable modifications” investors make in a business. What can operators anticipate?
An investor might say, “We like what you are doing, but we have had investments in four other chains, and what seemed to work for three of them is, when they changed their utility purchase patterns from X to Y, they saved some money. When they changed insurance vendors, they were able to get better coverage and saved a few bucks.”
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You've written about investors “digging into the future” of chains seeking growth funds. Explain what you mean.
Many operators, when asked what their business will look like in four or five years, say more of the same, except they will have more leverage with vendors, landlords, etc. However, investors who have already invested in a handful of growth companies have learned from watching. That investor may say, “One thing you should think about is that you may not want to replicate the units. As you look at different markets and different economic segments, you may want to do things differently. Some of your next stores may not be the same as your others.”
