Three decades back, I was a brand new commercial lender at a community bank, eager and still sporting a full head of hair. Our bank’s best restaurant niche was McDonald’s franchisees, who were paying four times cash flow to purchase restaurants; our bank was lending with SBA guarantees at Prime plus two. Forgive me if that seems like the good old days.
Eventually I ran that community bank for five years, then founded an equity fund, SB Partners. We were open to investing equity in small restaurant deals before that was a common approach for private equity. Our best investments included a Taco Bell franchise which started small in Atlanta and Savannah and eventually built to forty units in those locales and in Orlando. We also had a brief but lucrative run as the second largest investor in the McAlister’s franchisor before that business was sold to another, larger equity fund.
What did we learn? Our three most compelling lessons: 1) Partner with an outstanding operator, and remove as much of the G&A nonsense as possible from their plate, so the operator can focus on running great restaurants. 2) Outsourcing is essential, particularly for accounting, HR, and new store development. 3) Purchase price isn’t everything, but it is a key piece. If the price is fair going in, then there’s free cash flow to remodel restaurants and run them right. Overleveraged, which fortunately we never were but often observed in our colleagues, one has to rob Peter to pay Paul, and while that can continue for quite a while, it is not much fun for anyone involved.
We remain excited about purchasing multiunit operations. But I expect that the best opportunities will be to find one or two unit operators with compelling concepts, who want to continue running their stores, and partner with someone else to grow the concept outside their geographic footprint. Such expansion is hard and risky. It requires someone with equity, access to experienced multiunit operators, and the general business expertise to put the pieces together.
If you think we might be the best fit for your opportunity, please call, text, or email.