The current market creates an interesting dynamic when it comes to restaurant brand owners and how they view selling. Many owners are bearish when discussing a capital related transaction, be it a capital raise, selling a minority stake, or selling their beloved brand creation. More than likely, these restaurant owners have had knowledgeable advisors, but they sometimes miss the mark with M&A guidance. They whisper in the ear of these owner clients that today is not a good time to be in the capital markets, with high interest rates and limited activity.
Quite the contrary, this market has provided substantial opportunities for brands that could be categorized as “unicorns.” What’s a unicorn in business terms? In this context, it’s a brand that is different, that has the “it” factor separating it from competition.
Other brand owners see this market as a huge opportunity, knowing that they have built something truly different. These leaders have developed a successful brand and understand that market scarcity drives market demand—and that this can and usually will command a premium valuation. Warren Buffett once said, “be fearful when others are greedy and be greedy when others are fearful.” That sage advice is playing out in this market, where many are running towards the fire, or turbulent market, and are trying to find ‘diamonds in the rough.’ If we sat down for a conversation, I could give you example after example of this.
What Attracts a Buyer to a Brand?
So, with many brand owners moving in these two different directions, how does this affect their company valuation? I have been on all sides of these transactions—seller, buyer, and advisor—and most times buyers are looking for growth: a business with a demonstrated track record, one that’s somewhat successful, and carries tremendous growth potential.
Buyers will pay for several years’ worth of cash flows, depending on the quality (4x, 5x, 10x, etc..), then make improvements and flip that business again, turning a healthy profit. We hear often cited examples of this over the last few decades, with the proliferation of private equity and family offices. This amount of dry powder looking to buy brands has risen substantially, but why? Besides just the growth in our global economies (2008 and 2023 notwithstanding), these groups understand the power of buying low, making the necessary changes to the business and having a dynamic growth plan, that they can then sell high. This, in many cases, takes fewer than five years to accomplish.
However, looking at it from the founder/seller side, why does a buyer get to harness that extra value and not the seller? Buyers know the secrets to growing value while utilizing a consistent playbook. This playbook builds the business to sell, paying close attention to what I call “needle movers” or areas in the company that if focus and close attention is paid, can unlock value. So, why can’t the brand owner do that? They absolutely can!
How Sellers Can Command a Higher Valuation
Many owners may think since they have been in operation for years, it is too late to start. It is not too late. Start right where you are. When a company focuses on building foundational pillars to success, buyers will take note, usually resulting in a higher valuation. These include:
- Invest in Leadership - Get the right people on the bus and in the right seat. Also, a huge word of caution that unfortunately hurts many: Owners need to replace themselves or at least be on the road towards replacing themselves. This can be a huge detractor to value.
- Provide Financial Visibility - I can’t tell you how many owners do not receive timely and/or accurate financial information. You must keep your finger on the financial pulse of the business to maintain a great brand.
- Demonstrate High Gross and Net Margins Compared to Peers - Why should a buyer look at your brand as opposed to your competitor? Usually, it is because of details, such as margin and overhead (OH) management.
- Understand Your Addressable Market and Your Share of That Market – Too many brands are either in a dying niche or in locations that aren’t growing. They also need to increase their market share in their locations.
- Keep Your Legal House in Order - This is an area that I have seen cost way too many, way too much. Make sure that your business is buttoned up and clean.
- Maintain a Strong Culture – This is critical. I was involved in a recent transaction where the unique culture of the brand was a top priority for the owner. The buyer doubled their offer and culture was a significant factor.
- Demonstrate a Dynamic Growth Plan – Operating with a growth plan, backed up by realistic assumptions, offers the buyer confidence that the brand is scalable.
- Show a Proven Track Record – If you are just opening a bunch of locations, but not managing them well, nor creating “wow” experiences for customers, this can drag value down or scare off buyers.
With the opportunities available to stand out in today’s market, brand owners would be wise to build on their organizational pillars. While the above is not an all-inclusive list, it does provide a lens into details that can create tremendous value. At FOCUS, we’re always happy to speak with a brand owner and share our insights.
To learn more, please contact Mike McCraw at [email protected].