Exit Strategy: How to Get a Greater Valuation For Your Concept
What to know when you want to get out.
Rick Camac, Dean of Restaurant & Hospitality Management at ICE, talks through what to consider when thinking about an exit strategy for your business and how to drive up the value of your concept.
When you begin to think about your first concept, it’s also the right time to consider your exit strategy. That may seem odd at first, but what you want down the road has a lot to do with how you start.
Whether you want to run a mom-and-pop in the Caribbean or start a QSR that ultimately grows to 100 stores, the decisions you make from day one can greatly affect your plans down the road.
A fairly standard valuation for a restaurant venue is based on bottom line profits, or EBITDA (earnings before interest, tax, depreciation and amortization). Typically, depending on several factors, you may be offered five to seven times EBITDA. That said, it could be as low as two times, and I’ve heard of as high as 13 times. So, what makes that difference in valuation? Let’s explore what an investor may want to see (noting that investors invest for many reasons).
Will you be able to expand your concept geographically? Could you open (assuming you have available financing) 10, 25, 50 or even 150 stores? Does it have that “approachability factor?” While you may be able to expand a Mexican concept to 100 stores, a Southeast Asian venue may only work in 25 geographical areas. (Twenty years ago, that number may not have even been 10.) To get a high multiple of earnings, expandability will matter to savvy a investor.
Most investors would not give you a multiple of 10, which assumes, all things being equal, it would take 10 years to get their money back — that’s too long. A smart investor will not want to take the risk on waiting more than three-and-a-half to five years to see a return on investment (ROI). What accelerates their return is building out more stores (and quickly).
It’s helpful if your concept is adaptable to bigger and smaller spaces. Can it be scaled for food trucks, arena concessions or kiosks? Can it scale up to a larger space? Does adding a raw bar component, a private event space or a rooftop bar work with the concept?
How complex is the menu? Is it chef-driven? Can it be easily duplicated? Is it farm-to-table? If so, how could you have the same concept in NYC, Miami and San Francisco? What type of cooks do you need to execute the cuisine? Will training be difficult? How much training will a cook need and how will you train them? Think about these things before you plan to open five stores in 10 years.
Being recognizable makes a big difference, so strong brand recognition may be the most important thing you bring to the table to a new investor. Strong marketing and PR, a strong brand message, staying on point and delivering on your brand promise is everything — it’s what makes the sum worth greater than its parts. Your IP (intellectual property) and brand equity could be worth considerably more than your cumulative bottom line.
Ergo, do you make money? A reasonably healthy EBITDA for a casual full-service concept is 8% to 12%. For example, if you owned three stores that did $3M each at 10% profit, and you only received an offer of five times EBITDA for your entire company, you would net $4.5M. Not a bad exit!
Does the bulk of your team want to stay on board? Is it a strong team? Have they been with you long? What’s your average employee turnover rate? (Many venues turn over as much as 75% per year — and that was pre-COVID.) An incoming company (purchaser) does not necessarily want to reinvent the wheel. They may replace some key people but they’re not typically looking for a “fix what isn’t broken” approach (this may vary widely but we all need good people, especially today). Your managers could very well be an asset to the purchase.
Systems and Procedures
Have you built strong systems? Are you taking advantage of software and products that streamline your business? Are you organized? Do you have SOPs (standard operating procedures), steps of service, a well documented and up to date employee handbook? Are recipes in electronic form? Video how-to’s? That all matters and saves time to an incoming team and mitigates the risk of your team bailing out on new ownership.
The bottom line is this: Whether you want to sell in five years and get out, sell and stay in or just continue to make a good living and not sell at all, please consider all these things prior to opening your first venue. These important decisions will greatly affect how an outside company will view you in the future.