Are you planning to expand your restaurant business? Do you plan to open new stores? Do you need outside capital to fund that expansion? Here are five steps to take now to improve your chances of successfully raising capital – debt, equity, or both.
1. Make Sure Your Books are in Good Order
Most restaurant owner/managers focus on the product and the customer experience – and rightly so. When it comes to financial matters, the focus tends to be on AP and payroll. The question of revenue recognition, capitalization of certain costs, accruing employee and tax liabilities and other financial reporting issues are rarely addressed on an ongoing basis. Investors, on the other hand, especially equity funds and institutional lenders, are very focused on the numbers. Whether you intend to raise money from individuals or institutions, sell equity, or borrow money, your potential investor/lender will ask for your company’s financials. If they perceive any issues with your accounting methods and your ability to report accurate financials, they will likely walk away or at best, ask for a reduction in your valuation. Our recommendation is that you make the necessary changes to your accounting and financial reporting methods before going to the market. If you don’t have the skills in-house, hire a qualified accounting firm with a specialization in the restaurant industry. The investment of time and money on this subject will produce a guaranteed return if the capital raise is successful.
2. Make Sure Your Corporate Legal Documents are in Good Order
This includes incorporation documents, operating agreements, partnership and shareholder agreements, and certificates of good standing. Does the company have all the necessary state and city licenses? Are state employment laws being abided by? Confer with specialists and advisors in the restaurant industry who understand these details, and talk to your law firm if changes are required. We also recommend that you hire an attorney, with experience in debt and equity transactions, before going to market. As with any questions that may arise about the veracity of your financials, inadequate and incomplete legal documents have a chilling effect on a potential transaction.
3. Make Sure Your valuation Can be Justified
This mainly applies to an equity raise, but even a lender will have questions about your valuation. Is your estimate based on the known valuation of similar companies? Is it based on the EBITDA or revenue multiples of recent relevant transactions? Is it based on a discounted cash flow model? What are the industry trends? If you don’t know the answers to these questions, hire an M&A/Capital Markets advisor who has the relevant data, and can help you build a valuation model.
4. Approach Multiple Investors and Lenders at the Same Time
Raising money is very time-consuming. If you connect with one party, have a meeting with them, but then it goes nowhere, what’s the next step? Do you search for another interested party? Our advice? Don’t work in series, work in parallel. Make an investors/lenders list, based on known investment preferences and precedent transactions. Contact multiple parties at once. This method is significantly better than engaging and disengaging with each party in series. Ideally get a competitive process going. Two interested investors are five times better than one. Consider using an M&A/Capital Markets advisor to do the research and to run the process – they will (a) have access to the details of investors and lenders with a history of relevant transactions and (b) can run a process without taking time away from your operational responsibilities.
5. Get Tax Advice
Make sure you understand the tax implications of a transaction now, not in the final hours of a deal. Getting tax advice in advance of a transaction may well change the structure of a transaction.
In summary – be prepared. Hire professionals that have the experience and skills that will guide you through a transaction. Time and money spent in advance will pay handsomely when a capital raising transaction closes.
About the Author
Paren Knadjian, Practice Leader
Mergers & Acquisitions, Technology, PPP Forgiveness
Paren is the practice leader of the M&A and Capital Markets group at KROST. He comes with over 20 years of experience in mergers and acquisitions as well as equity and debt financings. In that time, Paren successfully completed over 200 M&A and Capital Markets transactions worth over $1 billion, acting as both a buy-side and sell-side advisor. » Full Bio