three panels, and some disagreements – namely as it pertained to the pros and cons of private equity and franchising. Majewski called all financing options a “necessary evil,” but sharpened his crit- icism on PE. “I think PE puts pressure on restau- rants to grow at such a fast rate, then they fail and then your time’s up and they get out. That’s sort of why we’re seeing this mass filing of bankruptcies today,” he said. “You need to control your destiny – friends, family, (commu- nity facilities).” However, PE is necessary “at some point,” he added, which is usually when a concept reaches 50 to 100 units. On the franchising side, many of the panelists said it is a growing option as financing remains expensive and PE stays largely on the sidelines in the hos- pitality sector. That said, Brock consid- ers operators’ decision to franchise as his company’s biggest competition. “If you’re going to make that deci- sion, then I hope you’re making it with the largest amount of data that you can. The risk in franchising early on, there’s just a lot of it,” he said. “If you’re fan- tastic at creating a concept and you’re skilled enough to move forward, that’s fantastic. Franchising is a completely different business.” “If you have booming unit econom- ics and your business is growing nicely, you don’t need to franchise, but it can be an interesting growth path,” Leavitt added. “But be aware that consum- ers don’t know that they are eating at a franchised restaurant versus your restaurant and if they have a bad expe- rience, they’re going to think the whole concept is like that.” Peskoe opened up his participation by reminding the audience that both franchising and private equity are im- portant drivers of the American dream and have fueled much of the restau- rant industry’s growth. “They are not evil,” he said. Some other key takeaways from the trio of panels: The pandemic forced more operators to assess and tweak their strategies. Brock said it forced his company to look at qualitative filters more closely, as it’s always done with financial metrics. “The best part of the restaurant in- dustry is that it’s the people first and
you really have to care about the peo- ple who worry about your customers,” Leavitt added. Indeed, Smith asked his panelists why they invest in this industry that is fraught with failure and challenge. “You can’t take on the risk in this in- dustry if you don’t love it. You’ve got to have the passion,” Gala said. The topic of debt was prominent throughout the day. Having no debt is tricky, but the unit-level economics have to work for operators to take on such leverage. The pandemic into the current environment, high interest rates included, has forced everyone to slow down and be more disciplined, ac- cording to consensus. “You have to think that debt is good only if you can swallow it in times when there’s a hiccup in the market,” Smith said. Gala said debt “has a place,” but it has to align with your growth plans and vision. If you’re trying to build a bunch of units, it’s going to be chal- lenging with a load of debt and interest expense every year. He said that is the reason there have been several recent bankruptcies. “You have to know what the worst- case scenario is and that includes low sales and high interest rates. Never take debt that puts you outside of what you believe is a reasonable payback pe- riod. For us, that’s two-to-three years. If I ask the question, ‘why did you take this debt to do X’ and they can’t answer it, that’s a problem. I want to know if they went through a best- and worst- case scenario and people need to take the time to think those things through. If they took the debt when it was cheap and didn’t think about worst case sce- narios, that’s a problem,” Fernandez said.
Early missteps from emerging brands The biggest misstep investors see with emerging brands is weakness in the financials. Second, is not having struc - tures and processes – and documenta- tion for both – in place. Third is not hav- ing the right team in place. “We see a lot of brands that have an amazing CEO and the rest of the team hasn’t been built yet. It’s really import- ant to have a great team around you,” Leavitt said, adding that an operations person, financial person, and marketing person to carry the culture are priority hires for her consideration. The final misstep is that some brands don’t know who their customers are. “If you’ve caught lightening in a bot- tle in your home market but you don’t really get why, you really haven’t done analytics on that? That’s a challenge be- cause when you try to extrapolate out into other markets it fails miserably because you don’t understand demo- graphics and who your customer is,” Fernandez said. Alternative options For emerging operators, there are alter- native options outside of private equity and franchising, but there is a barrier in finding the time to explore what those options are and what might best fit for you. “Restaurateurs are some of the busi- est people that you’ll ever meet, so tak- ing the time to understand what’s out there, meet with partners and form a relationship with somebody in the mar- ket is important,” Anderson said. Miller added that it takes time to think through a long-time plan and where operators are going to need cap- ital in the future. “A lot of folks will rush into franchis- ing and not take the time to be thought-
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