In the world of restaurant mergers and acquisitions, big deals — like 2017’s sales of Popeyes Louisiana Kitchen or Panera Bread — tend to get the most attention. But private equity firms should also look at lower middle market restaurant investment opportunities for deals that deliver solid growth to their partners. Across the investment landscape, most middle-market activity has been concentrated in the upper middle market. Deals in the core middle market ($100m to $500m) and lower middle market have decreased over the last five years.
Lower middle-market concepts are becoming an investment sweet spot: with valuations attesting to profitability and good growth rates, this segment should provide strong returns. Further, the smaller size of these enterprises makes their systems more dynamic, able to adapt more quickly than many larger businesses. In the restaurant industry, where quick-change consumer preferences can transform the market in a matter of months, speed is key. Not many private equity firms are aggressively active in this segment, which cuts down on competition among bidders. But investing in small concepts can be tricky. Most lower middle market restaurants are looking for private equity to expand into new markets, a complicated process that can surface a host of underlying issues. Without careful planning, adding locations stretches an operation’s supply chain — both in terms of volume and geography — pushing costs up and profits down.
The expansion process also puts pressure on a restaurant chain’s executive team. This means they would likely welcome expert advice from their private equity partners, but they will also need much more active guidance from investors. Before entering into a lower middle market deal, fund managers and investors should consult with industry experts who have handled both buy- and sell-side transactions. Restaurant consultants can guide private equity firms to promising small concepts, help judge the feasibility of an expansion plan, create unbiased models of future growth, and spot red and yellow flags in the operation. Done correctly, investments in smaller concepts will not only deliver strong returns but also allow the private equity firm to participate in the excitement of delivering the next best thing to diners all over the country, if not the world. Private equity firms now have a golden opportunity to enter this promising segment of the restaurant industry. But, as other investors catch on, valuations are likely to start going up, up, and up, just as we’ve seen them do across sectors.
That expertise that both the buyer and seller require for a successful acquisition is a strength of the team at SA Capital Partners. With experience in the lower middle market and plenty of successful sales under their belt, let knowledge and experience be your two biggest advantages to entering the lower middle market.
About SA Capital Partners:
SA Capital Partners is an innovative financial services firm that specializes in mergers & acquisitions advisory and capital raising for lower middle market businesses. We aspire to give all the tools necessary to complete any transaction. SA Capital Partner’s financial services industry specialists provide comprehensive, integrated solutions to banking transactions. Our breadth of services and industry knowledge allow us to understand each client’s unique business needs. Our goal is to make all financial services available to every small business.