Chain Leader

David Farkas

Now is the Time to Sell
November 21, 2006

I just got back from Vegas. They say what happens there stays there. But I feel like sharing—and, anyway, I didn’t experience anything salacious. Honest.

What happened in Sin City (specifically at the Venetian Resort Hotel Casino) was the Restaurant Finance & Development Conference, an annual meeting attended by some 600 restaurant executives and at least that many financial-services vendors, according to its organizers, who publish the Restaurant Finance Monitor. The meeting’s main topic is growth—of units, capital and profits.

For the last two years, growth has been largely stimulated by the flood of private capital from equity sponsors and hedge funds that 10 years ago would rarely have considered throwing money in a restaurant chain’s direction. Too risky—then.

How that has changed. Today, the private-equity and hedge-fund boys are anxious to leverage the industry’s strong cash flows, real estate and seasoned executive teams, for better or worse.

As a result, they have bid up prices for well-run chains to the point that strategic buyers, i.e., other chains, have a hard time justifying the multiples. There was no lack of talk about this particular topic in many sessions.

No lack of discussion about attracting such capital, either. “If you hit plan, great, you’ll get more equity,” declared Minneapolis-based investment banker Allan Hickok, in a session on public vs. private financing. “If you don’t hit plan, you probably haven’t raised enough equity. And raising more is going to be tougher.”

Later, two successful restaurant CEOs—Craig Culver (r.) of Culver’s and George Katakalidis of Daphne’s Greek Cafe, both privately run—explained how they funded their companies in the early stages. Neither, coincidentally, has yet traded equity for growth capital. Never say never.

Still, the prevailing mood of the meeting was: given so much growth capital looking for a place to go, this may be a golden moment to unload a restaurant company. That is, assuming management can manage the inevitable recapitalization wisely. Feel free to share that information.

Posted by David Farkas on November 21, 2006 | Comments (0)