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A fork in the road: trade sale or private equity buy-out?

Côte Restaurants and The Alchemist are recent examples of an increasing appetite by private equity to invest in the restaurant sector. Whether as a direct investment, buy-out by an investor or a trade sale to one of the larger groups, the drivers for this are clear. Consumers appear confident, the short term economic outlook is positive and investors have money that they are keen to put to work. Some of the larger groups are also looking to grow faster than may be possible organically. 

The primary targets are entrepreneurs with an established group of restaurants; typically 20 or more. For those in this category, it is possible investors or potential acquirers will get in touch, keen to start a dialogue. These conversations need not of course lead to an immediate transaction. But, they are nearly always worth exploring because they can open the door to joint ventures and other collaborations that may be useful in the future. Before you start a dialogue, it is valuable to have an honest conversation with the current shareholders and executive team to clarify objectives and identify areas of alignment or perhaps misalignment that a transaction may be able to solve.

Transactions come in all types of flavours from a "clean break" for shareholders with value being fully realised at completion, right through to a "buy-out" where the majority, if not all, of the investment is made to grow the business. In the latter scenario, existing shareholders maintain ownership, albeit alongside a third party investor. The opportunities are certainly out there.  But, it will be the clarity of purpose at the start that will help determine whether a change in the existing ownership structure of the business is really needed. This clarity will also help to ensure that any transaction is designed to deliver what the business needs.  

Top tips

  • Think about the drivers for a transaction - does the founder feel that running a larger group, with all the management responsibility and administration that it involves, is no longer providing fulfilment? Is there a personal desire to "de-risk" to some extent and achieve a degree of financial security, whilst continuing to be heavily involved in the business and rewarded for growing it further? 
  • Consider the desire for future growth - what further potential does the business have for example, geographic expansion or brand extension. Can this be exploited with current resources in terms of finance, people and expertise? What is the managements' view on building the business further? 
  • Seek the right professional advice – this is a specialist area, in which entrepreneurs will be dealing with parties for whom the structuring and negotiation of transactions is their core competency. Entrepreneurs therefore need to surround themselves with legal and financial advisers who know the sector, know the counterparties and can provide the experience, resource and context to achieve the right result. This can often result in a "change point" for the business's existing advisers, who whilst may have been well suited to "business as usual" advice, may not be the right fit for such a critical and ultimately time consuming project. 
  • Get the business fit for third party scrutiny – deal with any disputes quickly and permanently, ensure the brand is properly protected, ensure that any real estate issues are managed professionally, and invest in the infrastructure to demonstrate the business has the capacity for further growth. These pre-emptive steps will ensure that buyers or investors focus on the future potential they are buying, rather than being distracted by legacy issues that could cause problems in the future.

First published by The Caterer on 30 October 2015.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

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