Private equity’s interest in restaurants as of late got me thinking …

Who is interested in buying a restaurant chain? Well, considering the difficulty that many restaurants seem to have sustaining customer traffic recently, perhaps nobody should want to buy a restaurant concept. In reality, though, many people remain interested in buying restaurants.

I’ve seen it many times throughout my many years in the restaurant business. Restaurants go public. Then they go private. Then public again. Some concepts get bought and sold several times. One of the best examples to follow is Burger King, a brand near and dear to my heart since I spent 17 years of my professional life there. It all started with Mr. McLamore selling to Pillsbury at a point in time when Pillsbury owned a few restaurant chains.

As of late more and more private equity firms seem to be purchasing restaurant chains. Golden Gate Capital’s purchase of family dining concept Bob Evans serves as the latest example of this trend. Not only do private equity firms buy an interest in owning the brand, but sometimes they buy a group of restaurants that a franchisee of the brand owns.

But bigger is not always better and some deals do not produce the desired results.

Two Questions

Seeing all of the merger and acquisition activity of late got me asking two basic questions:

1. Why does there always seem to be activity in this area? Why are restaurant concepts bought and sold on a regular basis?

2. Why, as of late, does it seem private equity firms have been more active in the buying and selling of restaurant concepts than publicly traded companies?

The answer to the first question is very simple: Food establishments are always necessary. As a general category, foodservice establishments are as recession proof as any business. Notice that I said foodservice establishments, which today include restaurants and other operators such as c-stores, grocery stores with restaurants, etc. When consumers have more disposable income, they go to more expensive restaurants; if they have less, they trade down to less expensive options. But the key point here is that they still purchase meals prepared outside of the home.

Turning to the second question, let’s start by realizing that both private-equity owned and publicly traded companies share the main goal of increasing shareholder value. In fact, after acquiring a restaurant concept, job No.1 for many companies is to improve unit economics to help increase shareholder value. I’ve seen it up close countless times.

Differences in Ownership

One of the largest differences between dealing with a company owned by private equity vs. a publicly traded entity is how the market affects these two types of ownerships. Privately held companies have more time to “right” the ailments of the concept and drive value. Publicly traded companies are subject to the seemingly daily pressure of the stock market, which we all know has a low tolerance for taking a step back in order to move forward. In the public sector, you are only as good as your last quarterly result. Oftentimes, publicly traded companies will place a project on the back burner due to time constraints as they prepare to issue a quarterly earnings report.

As a result, the regulatory requirements and up and down nature of the stock market can make it more difficult to deal with publicly traded companies than private ones. Add to this the slow traffic restaurants are experiencing now and you may be able to conclude why there seem to be less IPOs in the market as of late.

The old adage of “the happiest day of a boater’s life is when they sell the boat that they were so happy to get a few years before,” could apply to executives that go from private ownership to public ownership to private ownership again. I offer this observation from conversations that I have had with restaurant leadership, as they go through these evolutions.

But make no mistake, regardless of who owns the company, the focus will forever remain on driving unit economics to enhance shareholder value. That will always be the name of the game.