Opportunities abound as valuations fall
ExitStrategies
BY DEAN ZUCCARELLO
Casual Dining ’ s Upside
Opportunities abound as valuations fall
I
frequently receive questions from clients and prospective buyers asking , “ What ’ s the hottest new opportunity in the marketplace ?” While it ’ s true that discovering the new McDonald ’ s or sexiest “ brand du jour ” seems most exciting , often the greatest opportunities are far less glamorous . Do new and flashy concepts seem instinctively more appealing ? Perhaps , but glamour is inherently fleeting . And since we operate in the multi-unit franchise industry and not the fashion industry , this subjective allure will forever be eclipsed by stability and the potential for operational upside .
This might come as a shock to some , but I believe that casual dining might just be that opportunity in 2017 . So what about the widely publicized reports that the casual dining subdivision has suffered greatly over the past few years ? It turns out that the explanations for this are legitimate . But they also are manageable , and by no means are going to cause the downfall of the entire segment . For example , some of the primary reasons for casual dining ’ s downtrend include more competition , consumers ’ shifting preference toward take-out and delivery , changing tastes , and the demand for high-quality offerings and speedy service .
Considering these factors , it ’ s not farfetched to view casual dining as behind the times . However , it is also important to note that all of the aforementioned elements affecting this segment are not solely problems for casual dining , or even restaurant concepts at large , but instead are factors that affect all businesses operating in the market today .
Despite these issues , casual dining concepts will almost certainly bounce back in the future . There is one particular phenomenon I have witnessed time and again during my 35 + years working in the restaurant industry that is particularly relevant in this case : brands don ’ t die . Some brands will inevitably dissolve , but most find a way to survive and even thrive . Some relevant examples of this happening can be found by examining
the Burger King , Arby ’ s , and Denny ’ s systems . All of these brands found a way to weather some serious hardships and are now arguably operating better than ever before . Thus , it is reasonable to expect that casual dining can and will experience a similar rebound .
Furthermore , the casual dining segment is certainly not sitting idly by , waiting for the market to bring about this rebound . The big , savvy brands are making some
crucial adjustments to address the issues they are facing . Because of their established nature , these systems have the ability to leverage their large-scale infrastructure to put the necessary resources behind initiatives to win back their customer base . With a renewed focus on providing higher food quality , improving their menus , and refining their mobile apps and online ordering , these restaurants are ready to fight for the consumer ’ s attention . Casual dining is also in a unique position , as it is perfectly situated to capitalize on the growing take-out and delivery trends that
are making a huge impact on the restaurant industry today .
Lower multiples , greater opportunity Interestingly enough , it is this current conflict in the casual dining segment that presents prospective buyers with the most substantial opportunity . The underperformance of the segment as a whole has significantly brought valuations down to the lowest multiples seen in years . On the flip side , valuation multiples for the topperforming QSR brands , such as Taco Bell , have reached record highs , making the casual dining financials look far more attractive to a prospective purchaser .
We must also consider the fact that it wasn ’ t so long ago that the QSR segment was experiencing a nearly identical struggle , further demonstrating the ebb and flow of concept and segment success that is fundamental to the industry . Granted , casual dining restaurants will experience their own distinct complications , such as more limited financing options and a larger capital requirement . Nonetheless , these strong , broadly recognized concepts possess the brand equity to maintain consumer interest and adapt to better address the demands of the marketplace .
Everyone who is active in the field plays with their own strategy , and there is no basis on which any one specific approach can be touted as best . But before determining which method suits you best , ask yourself this : “ As a buyer , what do I find more compelling right now : a hot QSR brand at 8.0x EBITDA or a national casual dining brand sitting at 5.0x EBITDA ?” We think some buyers will make the move toward casual dining and ultimately be happy that they did .
Dean Zuccarello is CEO and founder of The Cypress Group , a privately owned investment bank and advisory services firm focused exclusively on the multi-unit and franchise business for more than 25 years . He has more than 35 years of financial and transactional experience in mergers , acquisitions , divestitures , strategic planning , and financing in the restaurant industry . Contact him at 303- 680-4141 or dzuccarello @ cypressgroup . biz .
86 MULTI-UNIT FRANCHISEE ISSUE III , 2017