Manna Buys Growth Without Giving Up Equity
When a small franchisee wants to buy a few restaurants, it’s pretty straightforward. You go to the bank; you leverage the existing business or real estate and take out a loan. But as franchisees get more and more sophisticated, so does the financing.
So when the panera operator Manna and No. 73 on the 2017 Restaurant 200 list was looking to acquire 38 Panera restaurants, it would mean equity or a lengthy recapitalization process. Instead, the company tapped CapitalSpring, a dedicated private investment firm focused exclusively on restaurants, for help.
“CapitalSpring delivered a unique financing solution that allowed us to achieve our strategic goals, while maintaining ownership and control of our company,” said Paul Saber, President & CEO of Manna
Easy enough, right? Well, there was a bit more to the story.
“Over the last year or so, they were looking to start growing more aggressively from an acquisition standpoint,” said Erik Herrmann, managing director and head of the restaurant investment group at CapitalSpring. “As they were out looking at M&A targets, they came across this 38-unit package in Panera.”
While terms of the deal were not disclosed, we can do some basic math to get close. The average unit volume of a franchisee-run Panera is $2.5 million, EBITDA comes in at $441,147 and the current EBITDA multiple for restaurant investments is a wild 15.7 times EBITDA. That multiple has been driven up by some huge and expensive deals, so let’s assume they did some negotiating and landed at a more rational 6- to 7-times EBITDA multiple seen in standard franchise restaurant deals. That still comes to about $108 million for the 38 restaurants. That’s a lot of money, even for a company with annual sales of in the range of $150 million to $175, according to the 2017 Restaurant 200.
“They looked at their balance sheet and determined that the most likely path was to bring in a control investor, but it didn’t really align with the fact that it was a family-owned business or the brand’s desires,” said Herrmann.
For family businesses, giving up a big chunk of the business to a “control” or equity investor means that the family pie gets smaller with every investment. That puts the long-term family strategy at odds with the short-term private equity mindset.
When private equity gets in the mix, they typically want a chunk of equity. Traditionally, private equity firms want the power to come in, rapidly enhance the business and sell it to the next investor or take the company public for a healthy return.
Investors have been pouring money into private equity funds lately, seeking a higher return than even the red-hot stock market can provide. And the higher returns keep coming. Since 2001, private equity investments have returned 288 percent compared to the paltry 155 percent return for the S&P 500 index.
But that has caused a bit of an issue. According to Pitchbook, private equity now has $1 trillion in dry powder or un-invested capital that they have to spend. The problem with having that absurd and historic amount of money is that the rest of the business landscape hasn’t transformed at the same rate. So the bevvy of new investment firms have to compete against each other, against the influx of family offices and traditional financing sources like banks.
So when a good deal emerges, it’s a frenzy of pitches from across the industry. It’s a good time to be a company like Manna that is already looking to grow at the fast pace investors want.
CapitalSpring tapped Owl Rock, a direct lending platform in the middle market, for part of the debt financing and the rest was structured capital—in essence it was a fixed-return instrument that kept everyone happy without shifting equity around.
“It was actually a relatively easy deal to get done, since the company is substantial and very sophisticated—a great operation,” said Richard Fitzgerald, co-founder and managing partner at CapitalSpring. “It was more about arriving at the structure than anything else, just threading the needle between their desires and a creative structure that worked for all parties.”
While this doesn’t signal a sea change for private equity as a whole, it does show that firms are willing to eschew the traditional private equity mantra of “buy, boost, sell.” After all, they have a lot of money and they have to put it to work.
“I think the broader themes of consolidation in the franchise space are creating bigger and bigger companies that have access to different capital options,” said Herrmann. “So you’ll see more of this.”