On The Money: Jim Parish on the State of Hyperactivity

A financial guru ponders the outcome of the rush to buy and sell.

By David Farkas, Senior Editor -- Chain Leader, 4/1/2006

The current rash of buying and selling companies is keeping financial adviser Jim Parish of Vancouver, Wash.-based Parish Partners in high demand. Chain Leader talked to Parish about the state of the industry.

What do so many deals these days say about the health of the restaurant industry?

The industry has been behaving pretty well for the past five years or so. Publicly held companies have tacked on impressive gains in market prices, comparable sales and average sales overall have been positive, growth has proceeded, and costs are behaving, too. Food commodities have been volatile by component from time to time, but overall costs have been manageable.

On the negative side, restaurant companies are seeing negative traffic counts due to a variety of factors including competition and aggressive menu price increases.

Do the generally high multiples fairly represent the underlying value of the chains switching hands?

To me fair value is determined by what someone will pay, so I’d have to say that right now, these transaction prices represent fair value—right now.

My personal opinion is that values are inflated by factors including lower cost financing, abundant (some say excess) capital chasing deals, and many new faces directing investments in the industry. It’s not smart to pay up for restaurant businesses to the levels we’ve seen recently. At the levels some of these companies are being valued, there is absolutely no room for mistakes—and mistakes will happen.

Do you see a slowdown in the number of transactions this year?

I see the number of transactions leveling off but not slowing down. Low financing costs, plentiful bank and senior capital, and many new capital pools with seemingly unlimited resources are going to support this activity for a while. And since so many of the restaurant deals done in the private side of the market are being done by investors new to the area, it may take a while for the realization to sink in that returns are harder to come by than originally thought.

What advice are you offering sellers about how to value and position a company in today’s transaction-oriented market?

Just being in the restaurant business gives much more visibility than in years past. For many years the restaurant industry was shunned by all but a few private-equity firms. [They] are sellers, by and large, these days. That should tell us something.

I don’t think the advice I would give is any different than five or 10 years ago. The most absolutely critical factor in restaurant success is management. So the first criterion for me is excellence there. The time spent on identifying, culturing, mentoring and developing management at all levels is the absolute highest priority.

Are we now moving into a lesser-quality deal phase?

That’s very hard to answer, since “quality” is so hard to define. Certainly some fine companies have been acquired, financed or drawn into the public sector in the past two years. And some not-so-fine companies have, too. My opinion is that the capital now being deployed in restaurants is by and large new to the industry and perhaps less discriminating as to “quality.” You can argue that new capital brings fresh ideas, which is why the outcome of this cycle will be so interesting.

Web Exclusive: Check out what Jim Parish has to say about the influx of capital in the restaurant space.