Hi, I'm currently looking to possibly leave my job at a hedge fund and move into becoming a franchisee in the convenience and QSR (quick-service restaurant) industry. Let me make clear that I am not very familiar with the world of private equity (I come from a commodity trading background) but I think people in the PE area could give me some valuable information. If I'm going to become become a business owner, it makes sense that PE people who acquire and run these business would know a thing or two about them.
A few questions, until I can think of some more, are....
1. How do you guys go about valuing stores?
2. Any particular sector within convenience and QSR that is undervalued or good to get into now and will be great in the future?
3. Are there any certain areas in the US (or even overseas) where you'd recommend starting a business?
4. What do you guys look for in stores your firms acquire?
5. Is there any particular industry outside of convenience and QSR that you think is good or better? (i.e. Green technology, trampoline arenas, janitorial subcontracting, gym/fitness complexes, etc)
Until I can think of more questions, thanks
Any answers?
Unlikely that anyone in PE is valuing an individual store. Most look at chains.
I've looked at a few QSR chains in Asia and the US from PE perspective, mezz debt perspective and as LBO underwriter perspective. A few random points below.
You split the chain's stores between mature stores and growing stores (with the latter sub-grouped by vintage), then look at the same store sales growth (SSSg) for mature stores and the sales ramp up trajectory for new stores to reach mature store sales levels (typically takes 2 - 3 years, but can vary a lot.
Store locations and cachement areas - where are stores located (eg near universities and other areas which supply whatever your target demographic is)? Are they positioned to capture a lot of foot traffic? How skilled/experienced is the leasing team for your chain and their ability to get access to good new sites, particularly if you're looking at growing store numbers.
What's the macro/demographic story for your target customer segments?
Food quality risks - how much control and traceability over your supply chain do you have? Do you use centralised food processing centres which distribute pre-prepared ingredients to stores (generally means strong quality controls) or do you rely on individual stores to source and/or prepare ingredients?
Margin risks - raw material food prices threaten to squeeze your margins, as customers usually aren't that price inelastic in QSR. What are the trends on your raw material (and labour) costs? What's your bargaining power (eg centralised purchasing at scale?) vs suppliers?
What part of the QSR market are you playing in/what's your competitive strategy? Low cost competitor, differentiated, etc?
What's happening with the QSR sector generally? Are sales migrating away from QSR to casual dining or home delivery (eg Seamless risk)? Where are out of home eating trends going?
Off the top of my head, I've seen EBITDA margins for QSR ranging between low teens up low 20s for QSR chains. Control of margins is critical at these margins, particularly as increasing food and/or labour prices can squeeze you, particularly as QSR is pretty competitive and the QSR alternative next door to your store may have more scale/control over its margins to undercut you on prices in times of squeezed margins. Unless you have a strong differentiated brand (which normally means marketing costs eating away at your margins), your customers are likely to be pretty price elastic and willing to eat elsewhere rather than support your higher prices.
I've just called up my notes from an Asian QSR deal I looked at. For comparison, COGS was 31% of sales, marketing was 2%, labour was 33%. That was for a well established QSR chain with strong market presence in a mature market with relatively high labour costs.
thank you so much
PS Take a look through the filings and equity research reports for listed QSR chains/groups (eg McDonalds, Yum Brands) and that will give you a lot of pointers on what matters for these types of business.
Answer to your original question...
Valuation: 3-5x EBITDA for an individual store depending on qualities below Look for in what to acquire: Location, Store level margin, potential for operational improvement, good store manager
"5. Is there any particular industry outside of convenience and QSR that you think is good or better? (i.e. Green technology, trampoline arenas, janitorial subcontracting, gym/fitness complexes, etc)"
This is kind of a ridiculous question. QSR/franchises are a low margin and competitive space. Not sure what you find attractive about them in the first place given 1) you have no experience running a retail store 2) you have no operational experience
Commodities trading -> HF -> operator doesn't seem like an overly logical path. Unless you have some prior operating experience, I'd recommend going into a role at a company before you risk your own money by buying a small business
As for a manager, that would be me in the case I do it. As why I find it attractive: because I've done a lot of research and gone and talked to people who've gotten into small businesses and have done very well. This was my original plan - I got into finance almost completely by chance; it wasn't planned. I've wanted to have my own business for quite some time now.
Already trying to get a job at one, just trying to decide which one.Good points. Your competitive advantage is going to be just customer service in this type of business. Basically, any one can come and open the same type of store next to you. So look to see how existing management is treating customers and involved in the community etc.
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