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Private market value - fast food restaurant


Sunrider
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Hi all

 

I’m hoping to tap into the wisdom of this board. I’ve been offered a minority investment in a private fast food restaurant that was taken over from the original owners by two guys who have now nurtured it to just above break even, with a clear path to reasonable profitability (call it a 20% return on my investment over the next 12 - 18 months if they hit their numbers). The real pay-off would be by getting another funding round in the future for the next location(s) or starting a franchise.

 

The valuation they want is basically about 2x sales and I was wondering if anyone here is able to share whether this is reasonable in a private market transaction and what it might look like in a public company setting. They say they can get the shop to 10% net margins (it’s largely take-away and delivery but also some limited seating). I have no idea how realistic that is in a food business, but if they were to run at 10% then 2x sales would be about 20x earnings, perhaps not too bad for a growing business.

 

Note that I’m deliberately not talking about the kind of food, concept, etc. as I’m looking for input on valuation .. whether or not I’m comfortable with the rest is a separate matter. Oh, and this is in a large English speaking European city.

 

Many thanks!

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A friend of mine brokers small businesses in the US.  He has sold a good number of restaurants and has occasionally taken stakes in them.  EBITDA multiples on single locations range from 1.5x - 2.5x, chain style 2-3x.  Yes, you read that right. 

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Sunrider,

 

Several years ago I purchased a minority interest in a fast food restaurant that a friend decided to purchased via a leveraged buyout.  The business had been around for over 50yrs and had a history of fantastic profitability and continues to (net profit margins of 25%), Sales > $5mm.  It was purchased from the original owner for roughly 1x Sales and 7x Ebitda.

 

The business you mention....2x Sales seems a bit high given the profitability.

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Bojangles has $540mm revenue in the past 12 months.

 

EBITDA margins have ranged between 13.5% and 14% over its time as a public company.

EBITDA over the past 12 months is $76mm.

 

Bojangles has an EV of $622 million (8x EBITDA),

 

EV / Sales is 1.15x

 

Bojangles is having issues. Comps are down and labor costs are rising.

 

That being said, your friends' restaurant is barely breakeven and Bojangles has been around since the 70's. Selling Sweet Tea and Fried chicken is probably more profitable than what your friends restaurant is doing.

 

You would be paying a huge premium to the value of the established business and would be making a venture capital investment in the franchising upside.

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Unless the business is particularly "heavy" in assets (own their location?), or has some other type of unusual situation going on (incredibly talented managers wanting to expand?), I would say that this is almost certainly a very high price to pay.

 

Valuation for single restaurants in the USA are in the low single digits.

 

Most of these place simply don't scale...and owners have simply bought themselves a job.

 

 

 

 

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From my experience, around 2x EBITDA. The restaurant business is a shitty business to be in. That's a direct quote from somebody I know who has started from scratch dozens of restaurants and currently owns several very high profile restaurants in NYC. For LPs or private investors, you generally look to recoup your initial investment in about 3 years.

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Take a look at some other fast food restaurants for sale on various business brokerage sites. I'm hard pressed to find any priced at even 1x sales much less 2x. Here's a search setup but there are other sites you can browse too.

 

https://www.bizquest.com/restaurants-for-sale/?q=a3dpZD0xMjM=

 

I guess the real question is whether you see your investment as being in the existing restaurant or in the brand and receiving a portion of all future earnings whether it be from franchise fees or from opening additional locations. Still seems expensive based off the numbers you've given us but if you think they can execute and use this location as a springboard for expansion then maybe.

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There are some publicly traded FF franchisees like Carrols & Meritage.  However with these business you have better operations (shown by margins) & with Carrols the RoFR on BK franchisees in some states.  So they are not comparable to your situation.

Carrols buys franchises at 3.5 to 4x EBITDA that typically have margins in the mid single digits so that translates into a revenue multiple of 0.25x. 

 

Without the real estate or some non-operating asset, 2x sounds high, esp. with break-even profitability today.  One adjustment you have to make to some of the private market data is owner's comp & money made in cash "on the side".  I have seen the low valuations but many assume the owner is will willing to work for below market wages for the level of responsibility.  So the Carrols transactions that are disclosed include this comp adjustment in them so IMO they are cleaner.  One additional questions on future cash flow is minimum wage.  If the restaurant is located in one of these to be higher minimum wage states like New York you need to account for that in projected margins. 

 

Packer

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Since you didn't talk about the specific concept, here's the way that I would frame it

 

1) 2x sales seems expensive just based on the number. 

2) When we sold our Chinese takeout, it was done at a 0.35 times sales back in 2004.  I structured the sale myself for my family as a 22 year old at the time.

3) Carrols which owns 800 Burger Kings franchises (no real estate) would buy mismanaged restaurants at about 0.25x sales.  They implement some operational improvements and they can increase EBITDA by 2-400bps. 

4) 2.0x sales with no profit seems like a stretch

5) 10% net margin is very hard to get. The only public chain that accomplished that was Chipotle before the health crisis

6) There is a situation where it could be cheap if you think you're buying the next five guys, shake shack, Halal Guys etc.  If you think you've stumble upon the next original store of a 500 store chain roll out, then 2x sales is likely fine.  But that's a huge stretch.  If you can't tell, you're likely the patsy at the table. 

7) If they own real estate in NYC/SF and the RE comes with it, view it through the RE angle.  Restaurants in NYC really live on borrowed time if they don't own the RE as every rent renewal means the operator can't afford the new rent.  So it's really a 10 year DCF.  Same likely applies for SF and other cities experiencing high rent growth. 

 

Hope this helps. 

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I agree with BG 100%. The only thing that could change that is if you think these guys are truly great operators and/or it's a concept that has room to grow. If you look at it as a cigar butt value investment there's probably better opportunities. If it's more of a venture capital / growth investment it could work out really well. As an American I found the English parts of Europe to be lacking for good fast food / fast casual. Ireland was better than the UK I thought. Somehow places like Pret a Manger are blanketing the UK with those awful factory sandwiches (http://www.mirror.co.uk/news/uk-news/sandwich-factory-workers-make-three-5844492). Maybe people actually like those though.

 

If you choose to proceed be sure to confirm that they're taking a salary now and that the breakeven earnings are after that (I assume it is). You should also know how that will change going forward, what your cash is being used for, and what they intend to do with any excess cash flow. Ultimately with a business of this size you're investing in them.

 

Someone posted this on twitter recently... it's talking about higher end restaurants I think, but still an interesting read: https://www.newyorker.com/business/currency/the-thrill-of-losing-money-by-investing-in-a-manhattan-restaurant

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Hi everyone

 

Thank you all for your input - very valuable. It definitely would be a VC type investment, but I think for the risk, the return profile just isn’t there, even after the tax incentives here.

 

Anyway, thank you all for your input.

C.

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