To PE or not to PE, that is the question

When it comes to private equity, the hospitality sector represents a hot market, and has done for some time. Since January 2014 a large number of restaurant brands – both established and comparative newcomers – have changed hands and/or been invested in, with private equity being the buyer, seller and/or invested. Joe Bedford, Corporate Finance partner provides the bottom line on private equity and offers advice to those who may be thinking of this for their business in an article published in Essentially Catering.

How does Private equity work
The private equity model tends to rely upon investing at a particular price – calculated using a multiple of the business’s profit – then exiting (typically after three to five years) both when profit is significantly higher and, ideally, multiples payable in the relevant sector have also increased, or at least held steady.

Once the underlying cost of the investment to the relevant private equity house are stripped out then an ultimate multiple on their investment should be achieved (different houses have different minimum return requirements).

Private equity investors are generally keen to see significant short–term profitable growth year on year. It is importance that owners and managers understand this and buy in to it from the outset. If interests are aligned, including as to the exit horizon, then decision making (whether operational or otherwise) is more likely to be aligned as well – if not, conflict may arise.

Investor’s knowledge
A well–informed PE house investing into the hospitality industry will have views on matters such as strategy, targeting, customer behaviour, demographics, market trends, brand positioning, brand experience and service delivery. Even if they do not have hospitality market experience through their portfolio, they will have carried out detailed sector due diligence and specific due diligence on your business.

Consequently, there is a good chance that any input the PE house gives regarding your business will be provided on an informed basis, whether or not you agree with it.

Why private equity
PE could be an ideal option for any of the following:

  • You are looking for a full or partial exit
  • You want to take some cash out of the business
  • You require an injection of funds to assist more rapid growth in a competitive market
  • You could do with an experience business partner to help take the brand forward.

Click here to read the full article in full.

First published in Essentially Catering, June 2016

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