Article
IPO or No? Top considerations for restaurants thinking about going public
Last year saw a marked increase in restaurants exploring going public, with around half a dozen concepts taking the plunge with an IPO. When is it time for a brand to go public?
June 12, 2015
By Gary Shamis & Dustin Minton, BDO Restaurant Practice
Last year saw a marked increase in restaurants exploring going public, with around half a dozen concepts taking the plunge with an IPO. Consumers have more dollars to spend with help from a strong dollar and low oil prices, and more diners are eager to spend those extra dollars on healthy, innovative foods when eating out. The current IPO landscape is attractive for restaurants in those niches, especially for concepts that can build grassroots buzz and differentiate themselves in a loaded market. Furthermore, the critical mass required to go public has dropped significantly in recent years, paving the way for smaller companies to pursue IPOs.
Exploring an IPO can be an exciting venture, but knowing whether the time is right can be difficult and riddled with a variety of complex considerations.
Heightened Regulatory and Internal Control Requirements up the Ante
Public companies are subject to more bureaucratic business environments than privately held companies, and therefore must implement a more sophisticated corporate structure to allow for proper governance. Necessary compliance measures such as establishing audit committees and structuring an independent Board can be costly and time-consuming, while also adding a layer of oversight that executive teams may not have anticipated ahead of the IPO.
Restaurant CEOs and CFOs are no strangers to risk, but going public brings up a new crop of business considerations and risks that are unique and personal for these individuals. Specifically, the Sarbanes-Oxley Act, or SOX, requires that senior management assume personal responsibility for the accuracy of reported financial statements, including quarterly and annual reports to the SEC. Another key provision of SOX requires management to establish extensive internal controls, as well as reporting methods on their adequacy.
For growth chains focused on finding an influx in funding to sustain needed changes and expansions, it's important not to forget the elevated regulatory requirements associated with an IPO, or underestimate their ramifications on business functions.
New Stakeholders Intensify Earnings Pressure and Financial Scrutiny
When going public, restaurants open themselves up to scrutiny from a variety of stakeholders that might not have impacted them previously, including investors, analysts, regulatory bodies, the public and the media.
One driving force behind the recent uptick in restaurant IPOs is a trend toward major spikes in valuation. Many restaurants choosing to pursue an IPO have extensive growth plans that benefit from the influx in capital that comes with an IPO offering.
But high valuations result in a pressure to maintain earnings per share and trade at a high level, placing public restaurants under a microscope. Quarterly reporting to the SEC can also add a level of required financial oversight that many smaller companies might not have practiced prior to considering an IPO.
Broad Market Conditions Shape the Funding Landscape
The influx of private equity funding since the 2008 recession has stimulated the IPO market for restaurants as those investments mature. Private equity investments are made with the ultimate goal of turning the investment into a liquidity event within approximately five to seven years, either by selling to another company or by taking the concept public. This timeline has held true as many concepts that received post-recession private investments have evolved into potential IPOs today.
Restaurants looking for funding can also consider holding onto their concept, or pursuing further investment from private equity. Some well-established legacy concepts benefit from choosing to remain private, though in the current business landscape, the trend favors public offerings among emerging brands.
Gut Check: How do Internal Factors Affect your Growth Potential?
Restaurants should weigh timing and their concept’s overall outlook by considering various factors that might impact growth potential, including location, branding, competition and potential for market differentiation.
From a logistical perspective, concentration in a particular region plays a role in a concept’s growth potential. For example, Bojangles’, which recently went public, is located primarily in a few Southeastern states and has amassed a loyal following there. Stepping up to the national IPO stage could open up the possibility of expansion nationwide.
Restaurants thinking about an IPO should also consider whether the concept will be able to differentiate itself in the market. For instance, Chipotle Mexican Grill pioneered meal customization in the fast casual segment, but the company’s investment in cause marketing differentiates it further as personalization becomes more commonplace.
Looking Ahead
As private equity investment in specialty and niche restaurant concepts builds momentum, the end goal of a liquidity event will remain consistent and could continue to stimulate unprecedented numbers of restaurant IPO offerings. We expect that as innovative concepts emerge within the marketplace, IPO activity will continue its upward trajectory, providing fruitful opportunities for restaurateurs and investors alike.
