April 4, 2025 • 34 mins
In this insightful episode of "Rock My Restaurant," host Paul Barron interviews Jim Balis of CapitalSpring about the evolving restaurant investment landscape. Balis shares CapitalSpring's approach to investing in restaurants, revealing they look for concepts with 15%+ store-level margins and 20%+ ROI. He discusses valuation multiples in today's "moderate" market, when founders should consider taking capital, exit strategies for brands, and his optimism about "fast casual 3.0" concepts that deliver elevated dining experiences without full service.
~This episode is sponsored by: Gusto → https://gusto.pxf.io/PBN ~
#1 rated HR platform for payroll, benefits, and more
With Gusto’s easy-to-use platform, you can empower your people and push your business forward. See why over 400,000 businesses choose Gusto.
RestaurantInvestment #FastCasual3 #RestaurantGrowth
Get Your Podcast Now! Are you a hospitality or restaurant industry leader looking to amplify your voice and establish yourself as a thought leader? Look no further than SavorFM, the premier podcast platform designed exclusively for hospitality visionaries like you. Take the next step in your industry leadership journey – visit https://www.savor.fm/
Capital & Advisory: Are you a fast-casual restaurant startup or a technology innovator in the food service industry? Don't miss out on the opportunity to tap into decades of expertise. Reach out to Savor Capital & Advisory now to explore how their seasoned professionals can propel your business forward. Discover if you're eligible to leverage our unparalleled knowledge in food service branding and technology and take your venture to new heights.
Don't wait – amplify your voice or supercharge your startup's growth today with Savor's ecosystem of industry-leading platforms and advisory services. Visit https://www.savor.fm/capital-advisory
~This episode is sponsored by: Gusto → https://gusto.pxf.io/PBN ~
#1 rated HR platform for payroll, benefits, and more
With Gusto’s easy-to-use platform, you can empower your people and push your business forward. See why over 400,000 businesses choose Gusto.
RestaurantInvestment #FastCasual3 #RestaurantGrowth
Get Your Podcast Now! Are you a hospitality or restaurant industry leader looking to amplify your voice and establish yourself as a thought leader? Look no further than SavorFM, the premier podcast platform designed exclusively for hospitality visionaries like you. Take the next step in your industry leadership journey – visit https://www.savor.fm/
Capital & Advisory: Are you a fast-casual restaurant startup or a technology innovator in the food service industry? Don't miss out on the opportunity to tap into decades of expertise. Reach out to Savor Capital & Advisory now to explore how their seasoned professionals can propel your business forward. Discover if you're eligible to leverage our unparalleled knowledge in food service branding and technology and take your venture to new heights.
Don't wait – amplify your voice or supercharge your startup's growth today with Savor's ecosystem of industry-leading platforms and advisory services. Visit https://www.savor.fm/capital-advisory
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Turn of the volume and subscribe now to Rock My Restaurant,
the podcast Setting your brand on Fire for you coming too.
You live every week branding, marketing, innovative tech, don't get
left behind.
Speaker 2 (00:16):
The future is now.
Speaker 3 (00:21):
All right right back here on Knock My Restaurant.
Speaker 2 (00:23):
And today I've got Jim Bayless with me, of.
Speaker 3 (00:25):
Course, coming in from Capital Spring. Jim, how are you
doing great?
Speaker 4 (00:31):
Paul? How are you good.
Speaker 2 (00:32):
To see you? Man, Good to see you.
Speaker 4 (00:33):
It's been a while year, same year.
Speaker 3 (00:35):
So let's talk about Capital Spring first, so people to
get a framework of what you guys do over there,
give me kind of an insight of where you guys
are today.
Speaker 4 (00:44):
Sure, you know, we're a restaurant focused investment firm. We're
kind of like private equity, except the differences is we
invest in other ways in addition to conventional private equity.
So for example, you know, most private equity is but
they're buying controlling stakes and businesses, you know, more than
fifty one percent, so they have, you know, full holding
(01:05):
rights on the board and control of the business should
anything happen. We also do minority investing, so we might
buy into forty percent of the business or thirty percent
of the business. In addition, we also actually financed some
businesses like banks do when it's you know, right for
the capital structure. So we're very flexible capital and creative capital.
(01:27):
We're focused on the restaurant space. We've invested I think
close to four billion dollars now and currently have three
or four thousand restaurants in our portfolio, representing you know,
pretty much everything early stage. You know, we bought into
a four unit fast casual concept, kind of chef driven
in California. You know, we have a number of independent concepts,
(01:52):
we have franchise or businesses, We have franchise businesses. We've
started investing in non red restaurant multi units. So it's
really the full gamut across the restaurant space. And you know,
we really try to be a very good partner to
our investment. So it's in addition to writing a check.
(02:12):
You know, we have arrangements with a number of different
vendors you know that we all use in the restaurant space,
whether it's payroll vendors. I'm on the TOAST Advisory Board,
so you know, we're able to have a say in
the roadmap or TOAST for those businesses on that pos
platform and just you know a number of different benefits
(02:34):
you get by tying into the Capital Spree family. So
been around for twenty five years, you know, investing out
of our sixth and seventh So that's about it.
Speaker 3 (02:43):
So ten to one hundred and fifty million Asia target
investment area correct.
Speaker 4 (02:49):
Okay?
Speaker 3 (02:49):
Within that, you just mentioned an early stage, fast casual,
chef driven concept. Can you talk about the brand.
Speaker 4 (02:57):
YEP, it's called Bushfire Kitchen and based in UH started
in the San Diego area and they've grown pretty rapidly.
We have a location growing opening here and probably the
next few weeks. So excited for that.
Speaker 3 (03:13):
All right, I've got to pull them up while we're
talking here, because now you've got me curious. It's a
fast casual that I don't know, and I thought I
knew every fall.
Speaker 4 (03:21):
It's very small.
Speaker 3 (03:22):
So in your defense, well, good, what was it that
drew you to them?
Speaker 4 (03:30):
You know, it's interesting. I think we we were introduced
to them. I don't remember who may be introduction, but
you know, a lot of times people might introduce us
because we're a good fit for you know, these various
emerging brands and met with them at their restaurants ate
the food. It was so good that myself and one
of my other partners, we looked at each other and said,
(03:51):
we need to invest in this business. Wow. And so
we did and work out a deal with them, and
you know, very excited. We're growing it very aggressively and
trying to find a location outside of the California market.
Now I think we found one in Phoenix and looking
for some others. So you know, we're going to start
expanding beyond the core. And you know, very exciting business,
(04:14):
very exciting time, and great to be a part of
their growth.
Speaker 3 (04:17):
So they well, first of all, the visuals I have
for you guys that are listening to the audio podcast,
jump over to savor FM on YouTube catch the video
version of this. So I'm on their website and you're right,
I think the visual side of this, in terms of
the food quality, this looks fantastic.
Speaker 4 (04:34):
Yeah, it's great, you know, and and they roll out
promotional items you know, every quarter that are also very good.
They really do a fantastic job. You know, the food
is you know, very clean, and that the ingredients are
very fresh, and they also have an impanada program that's
very interesting. Number of the units have bars, so it's
(04:57):
a it's a it's a really interesting concept and.
Speaker 2 (05:00):
Yeah, I see it well.
Speaker 3 (05:02):
And the thing about this is, you know, this reminds
me of a concept that many of our listeners probably
know about, and that's Tender Greens, which was also a
California based brand, had a lot of that home style cooking,
very high end ingredients, which they appear to be very similar.
Obviously there's some changes there, but it but not as
(05:25):
unbelievable burgers in there, sandwich salads, bowls, So they're they're
kind of hitting on a variety of things. When you
pick out an investment, you know, and you get a
chance to see the brand. How important is the founder
set when you have these emerging brands, because a lot
of these are founder led in most cases, What is
(05:45):
it that you guys look for?
Speaker 4 (05:47):
Yeah, I mean, you know, we a lot depends on
what the founder's interested in. You know, there are times
when we've invested in businesses and the founder says, look,
you know, I'm out day one. I've been grinding it
out for X number of years. I want to pour
gas on the fire and grow roll some equity into
the next transaction, so that I got a second bite
at the apple when it sells again, but I just
(06:10):
don't want to do the work every day. And then
in other situations they want to stay actively involved. And
you know the best situation for us is when they
want to stay actively involved. We can depth obviously, but
you know, we really like to support great operating partners.
We all have the bandwidth, the capital spring to be running,
you know, the thirty six investments that we have, so
(06:33):
you know, it's it's usually the situation where the founder
wants to stay in and we work with them because
they know the DNA of their brand better than anybody,
and you know what we can bring to the table
sort of that strategic partnership. Okay, you know, we we've
grown a lot of brands. You know, one of the
other businesses that we invested in a few years ago,
we're planning to take public here and you know that's
(06:57):
that's one where the founder stayed in and we with
them very closely in his team to help build out
the infrastructure for the aggressive growth that we have going
on in that brand. So you know, what we look
for is really you know, people that are passionate about
their brands, that want to grow because you know, at
the end of the day, bank financing, which is usually
or passing the hat around, which is usually the first
(07:20):
phase of financing for these emerging concepts, has its limitations,
and you know, we can then take it, you know,
so much further with the capital that we can provide
and some of the resources that we bring to the
table specifically around growth.
Speaker 3 (07:32):
Well, and I think you hit on a couple of
points here. You look at the phase of the founder,
what phase of life you're in, whether they're ready to
grow or step away. But also I think at the
same time, it's like the real question a lot of times,
I know, when we're doing advisory with Fast Casuals right
now at Saber, a lot of times the real question
(07:56):
that it's actually one of the first questions they asked me,
is is it time to take capital? Is now the
time to do it with the current economic condition, my
current growth state. What are some of the factors that
you guys see on that decision that's being made of
whether or not to even take on capital in early
stage growth brands.
Speaker 4 (08:17):
It's a great question, and we got we get it
a lot too, you know, because a lot of you know,
especially smaller concepts debate. You know, if there are benefits
from all different kinds of investments, right, passing the hat
around has its benefits because usually you know, the friends
and family aren't expecting an immediate right on capital. You know,
(08:38):
the bank financing can be very favorable because you're not
giving up any percent of your business, any equity in
your business, so you hold on to as much as
you could possibly hold on to. But then the banks
have you know, a limited amount of really growth potential
for first of all, you know, they usually have very
restrictive covenants and their bone documents that right, you know,
(09:01):
don't really allow for a lot of growth. At the
end of the day. They're very conservative in nature. They
want their loan paid back. So the dollars that come
out of the business versus reinvesting it in growth, you're
paying it back to you know, lower the principle and
pay back to the interests. Yeah, you know, bringing in
private equity or investor capital the benefit there and that
you know, if you want to call a disadvantage, you're
(09:23):
going to give up some percent of your company at
the end of the day, because that's what the investment
investor is going to want. But the benefit is somebody
comes to the table with you know, arguably unlimited amount
of capital. Right. They're every dollar that comes off the business,
they want to reinvest it in additional growth versus getting
(09:43):
paid back. They're much more long term thinker, right. You know,
we're five, seven, ten years out on our investment, so
you know that's when our payback comes. So for us,
you know, we want we don't want those dollars to
start paying back our investment each month. We want to
reinvest in the business, you know, especially because you know,
most businesses that are growing have good return on investment
(10:05):
with their growth. You know, if you're getting twenty percent returns, right,
you want to put more dollars into that. I mean
thinking about your you know, your own stock portfolio, right,
you know, if you're getting twenty percent returns, you're going
to go back to the well for that investment because
it's a great return. And that's how we feel as well.
You know, we like to invest in that growth.
Speaker 3 (10:25):
Let's talk about the cycles because a lot of times,
you know, we've done a handful of investments here at SABER,
and what I'm finding is when you look at the
cap table, typically on these emerging brands. To your point,
there's usually family and friends involved. Very rarely do we
see structured capital coming in. But once it structured capital
(10:47):
starts to move into a brand like that, let's say
it's a five unit brand, maybe like Bushfire, and you
start to see the recapitalization of the brand itself. Have
you found that friends and family want to continue on
the ride or have you found this is a good
time for them to come off the cap table when
(11:08):
it comes to the reinvestment.
Speaker 4 (11:10):
You know, again it comes down to what the parties
at the table want. You know, I would say, as
a preference, we prefer a cleaner cap table, which means
it's us and the founder and when we come in,
we're paying off a lot of those ancillary investors. It
just makes life easier, easier. Although you know, there are
(11:33):
times when you know people are excited, Yeah, they want
to take the ride, yeah yeah, and to see what
happens because they know that you know, we're we're going
to be investing in heavily in growth. So it kind
of goes both ways. But we prefer a cleaner cap table.
Speaker 2 (11:48):
Yeah, for sure.
Speaker 3 (11:49):
Let's talk about the brands. So obviously the category of
emerging brands. That's really kind of the focus today. This
could fall into most of the time, it's going to
fall into fast and maybe some casual dining. Is that
really the wheelhouse that you guys focus in on right now,
is emerging or are you looking for maybe older brands
that are looking for revitalization. What's the DNA of capital
(12:13):
spring in terms of what works?
Speaker 4 (12:16):
You know, we look at everything, so I'll say that
out of the gate, you know, well, we'll look at
just about everything, with the exception of like bankruptcies, turnarounds.
You know, we tend you know, not to really focus
on those situations. We really like to invest in growth
at the end of the day. So brands that are growing,
whether they're old or young, whether they're large or small,
(12:39):
we like to invest in growth brands, you know. So
for us, you know, we're it doesn't matter if it's
you know, we have a fine dining investment. You know,
we have coffee, we have fast Foh yeah, all right,
you know, so we're really investing across you know, the
whole segment, all the segments.
Speaker 2 (12:55):
Yeah, I see the the opportunity.
Speaker 3 (12:58):
We've seen a variety of different you know, private equity
groups throughout the state the United States that have really
kind of focused in on this these fast casual concepts,
some of which have started to struggle in the last
few years, and we're starting to see some consolidation in
the market. What are you guys finding, especially in these
emerging brands. I'm sure you're shopping deals all the time.
(13:21):
Are you seeing some market pushback now because of the
competition or maybe because of the macro environment you know
from a you know, inflation side, consumer spending all that.
Speaker 2 (13:32):
What are you guys seeing in the market today?
Speaker 4 (13:35):
Yeah, you know, look, there was a recent you know
raised by a fast casual business based at New York City, uh,
the owners of a friend of mine, and he did
very well with it. He brought in a bank, they
raised a lot of money on it on it insane valuation,
not insane like it's crazy, but you know, very big
(13:57):
valuation because it's a very unique concept with incredible unit
level economics. So what I would say from an investor standpoint,
generally the valuations have gone down a little bit, right
because you know, you are seeing competition saturation within certain categories,
like especially the salad category, you know, very saturated coffees
(14:20):
becoming pretty saturated, you know, between Dutch Bros. And you
know a lot of the other players that are coming
in Seven Brews and others. So you know, in certain
areas you are seeing a bit of a of a
pressure on the multiples of people are paying. But those
businesses that generate have very good store economics. And you know,
(14:41):
the way we look at economics at the end of
the day is we look at, you know, what the
restaurant's producing at the store level. You know, that's everything
including rent, and then okay, now what's the corporate office
infrastructure that's needed to run the business because you know
we're buying too, is part of our investment and so
(15:02):
you know, if that's you know, an additional couple of
million bucks, is the business profitable at the end of
the day, and a lot of that can make the
determination as to whether or not we make the investment
and the multiple we look at, you know, the pipeline.
So really the key items that we look at when
we're making an investment are, you number one, the store economics.
(15:23):
You know, trends relative to other businesses in the segment.
You know, some segments right now are just struggling on trends,
you know, on the same store traffic and transactions and
sales just given like you said, some of the environmental issues.
But we look at the you know, we like to
see at the store level north of fifteen percent margins,
you know, after rent. Then we like to see a
(15:46):
good pipeline. You know, are there stores that are going
to be coming on soon. We like to see good
return on that investment, usually north of twenty percent. And so,
you know, all in what's the cost to get the
store open, including all the build out, all the soft
costs like the training and the inventory and marketing, all
the things we have to do before we open the store,
(16:07):
that expense against you know, once the business kind of
levels off and produces a steady cash flow, you know what,
what's the return on that investment, and we like to
see twenty percent or more there.
Speaker 3 (16:19):
Okay, So let's let's talk about you hit on valuations
slightly there. Obviously we're telling one story that got a
fairly favorable valuation, but I'm not trying to pin you
down on valuations, but just the range, you know, especially
for fast casual, what have you seen in the market,
Let's say the high and the low. You know, in
terms of valuations, how do you how do you do it?
Speaker 4 (16:40):
So the you know, the business that just received a
very high valuations called Just Salad. It was brought to
market by Bank of America, you know, and they I
don't remember the exact valuation, but you know, it's high
double digits. You know. Again, it had great store economics,
better than Sweet Greens and Cava and some others, and
so for that reason, you know, and they had an
(17:02):
incredible pipeline. They had proven coretability, so they had proven
that they're successful in multiple states from Florida to New York,
mid Atlantic, Chicago. And so because of that, a business
comes in, looks at it and says, we'll pay very
high multiple because there's a lot of restaurants coming on
in the pipeline that Lisa is signed under construction. We
(17:22):
know they're going to open at some point in the
next twelve months or so. You know, they have great
return on that investment. The business is performing well relative
to the competitive sets, and the multiples very high. You know.
Typical though, what you're seeing is you know, you'll see
multiples that range anywhere from six times probably or five
times on the low end depending upon the business, you know,
(17:44):
and again that depending is store level economics, return on
investment for new growth and pipeline and leadership team and execution,
and then you know, those can go up to seven, eight, nine, ten,
mid teens. You know, I talked to a group recently that,
you know, their their store level economics are kind of
(18:06):
in the mid twenty percent. They're getting you know, right
around forty percent cash from cash returns for their new
story development. They have a good pipeline, they've built it
in multiple states. They might get you know, a low
teens or so valuation multiple of EBI DA because they
(18:26):
were just firing on all cylinders. You know, we looked
recently at a full service brand that you know is
going to get sort of mid single digits because it's
expensive to build a full service brand. The margins are good,
you know, relative to other full serbs, but you know,
kind of played in the casual dining plus category, which
(18:47):
is you know, expensive, lots of people to operate, you know,
lots of skews and other yeah.
Speaker 3 (18:53):
Yeah, multiple So okay, so let me kind of throw
this at you if you're if you're an average brand
trying to become great. Is it's consistent, but it's not
you know, it's not top of of you know, the
food chain A ten x eba dah.
Speaker 2 (19:13):
Would that be a good valuation or a brand like that?
Speaker 4 (19:16):
For sure? Okay, for sure it's a.
Speaker 2 (19:19):
Good valuation ten x Ibada.
Speaker 3 (19:21):
I know a lot of you guys are listening on
this because you're probably thinking when is the right time
to accept capital? And and this is usually going to
you know, frame it in a lot of decision processes.
Is you know, what's the valuation proposition in the market
at that particular time. Would you say this market is
hot right now?
Speaker 2 (19:40):
Moderate?
Speaker 4 (19:40):
Or cold? I'd say moderate. You know, at the end
of the day, it's not like so hot. I mean again,
you know there's always going to be exceptions to that,
but you know, for the most part, people are a
little bit conservative right now. You know, there's some unknowns
on tariffs. I mean, what we get you know better
than I do, Paul, seventy five percent of work BOO
comes from Mexico, right all the resident all the packaging
(20:03):
comes from China, So you know, there could be some
major impacts to the business. Coffees and an all time
high eggs with bird flu. There are just a lot
of things, you know, pressures that are kind of hovering
out there.
Speaker 3 (20:16):
Yeah, you hit on something here that I think a
lot of people are one missing outside the operators because
we're not seeing Everybody's so worried about the car industry
getting you know, snagged this week with Trump's tariffs, but
right now the restaurant industry is still This is one
point two trillion dollar industry in the United States, employing
around twelve to thirteen million people.
Speaker 2 (20:39):
This seems to not be as big of a story.
Speaker 3 (20:42):
So the question is, because I talk to people at
the NRA, the National Restaurant Association, they seem to be
running around with their hair on fire right now because
of just the amount of lobbying that they're going to
have to do to this administration. Do you think this
impacts sales this year in twenty twenty five for a
lot of these brands.
Speaker 4 (21:01):
I think a couple of things are already impacting sales
for these brands. I think there are certain regions of
the US, and we're experienced it in a few of
our portfolio businesses where the ice raids are causing you know,
certain groups of demographics to stay home or not come
to work because they're afraid. So you know, that's impacting
(21:23):
sales and operational execution in a few markets where those
raids are more prevalent, you know, and then in other
areas you know you're seeing I think generally, the less
affluent consumer is the consumer that's been pressure. You know,
you're hearing you know a lot of people talk about
(21:43):
the stock markets that you know, all time highs and
it's doing very well. And but the the demographic that
doesn't have retirement and stock accounts that you know, is
going to the supermarket and buying eggs and coffee and
those types of things that are much more expensive than
the used to be. Those are the groups that are
pulling back on some of the restaurants spending and it
(22:05):
is impacting sales.
Speaker 2 (22:06):
Yeah for sure.
Speaker 3 (22:08):
All right, so we've had a chance to kind of
grill you on valuations. When's the right time to take capital,
you know for these emerging brands. Let's move to a
new topic now, and that is exits, because there's every
brand you know is looking for that. Where you're a founder,
you know, a capital group, exits are are very mostly
(22:32):
let's first of all frame up the topic of where
exits should be looked at when you're when you're seeing
new capital come into an emerging brand, is it unit based,
time based, how do you guys, you know, kind of
frame it or when Capital Spring would say this is
an exit for us.
Speaker 4 (22:52):
That's a hard question to answer. It's a very good question,
but it's a hard question. You know, we exited a
business about a year and a half ago. It was
a franchise e business and it wasn't as you know, typically,
you know, private equity is exiting when they're getting to
the end of their fund life. So you know, we
(23:13):
raise money in funds that fund has a certain time horizon.
As it gets towards the end of that time horizon,
we're looking to exit those transactions that to close out
the fund because that's how we personally get paid. So
you know, sometimes it's dependent upon the life horizon the front.
So you know, a very important factor. What you know
(23:34):
for your listeners is if you are talking to a
private equity firm, ask them in what stage are the
fund It's in right, it's in the end of the
fund cycle. There may only be a few years, right,
which may not be enough to get the growth that
you want. If it's in the beginning and it's a
ten year fund, you know, do you want to be
in it for ten years? But you can have that
conversation and say, hey, we want to be out in
(23:55):
five that's great, you know, we don't have to stay
in for ten. So I mean it's an important factor.
But you know, typically you're looking at some of the economics,
like you know, that particular business. The commodities that that
business relied on was low at that time, so we
had very good trailing twelve numbers in there, We had
a great pipeline, we had a great record of growth,
(24:16):
and we felt it was the right time to sell.
You know, we're looking another one of our businesses that's
just posted two years of same store sales growth and
same store traffic growth that it's firing on all cylinders.
We have, you know, the unit that just opened Monday.
You know, three more or four more in the pipeline.
Will probably you know, maybe look to sell that business,
(24:37):
you know, because it's again firing on all cylinders, it's
performing very well, and we have some something to sell
to the next buyer. Yeah, So for us, I think
it's you know, very important to look at, you know,
what the historical performance is because remember a lot of
these businesses are selling off of the trailing twelve periods, right,
(25:00):
those to be good. You know, you may have a
business you want to sell, but if the trailing twelve
weren't good, you know, it's probably not going to command
a high price, right exactly. You know, a lot of
it's around the performance of the business and kind of
looking ahead and seeing what might be The challenge is
you always want to have something you're selling for the
next person. Right, If you've exhausted your pipeline and you
(25:20):
know there's really you're not sure where to grow next,
probably not a good time to sell because what you're
selling to the person is, hey, the next buyer, you
can pour more gas on the fire than we even
did and grow it even for.
Speaker 3 (25:33):
Yeah, and you look at I think you know, when
brands are starting to go into that phase, they've been
through a funding round, maybe a couple, they're starting to
either get into that growth concept and moving to either
the next stage of their investment cycle. In many cases,
it could be a franchise business or maybe you know
(25:53):
a founder operated business that just grows internally, What have
you found that works best in the markets in terms
of performance? Maybe from your years of being in this industry,
is a franchise business still a good solid investment, you know,
from a capital injection point, because a lot of times
it's they only run maybe one or two stores and
(26:16):
then everything is franchise.
Speaker 2 (26:18):
What would you guys say to that?
Speaker 3 (26:20):
Is that an investable strategy and brand or do you
feel more founder led with company owned stores?
Speaker 4 (26:28):
I mean we like both, right, I mean Chipotle has
done very well as a company owned brand, yes, rely
because the unit economics they generate and the way they
look at it is if I'm making you know, call
it twenty five percent sto a level profit, you know,
and if I were to franchise it, I only make
six percent royalty, Like I'll take that twenty five percent
yeah sure, yeah so, but generally speaking from an investor standpoint,
(26:53):
franchise or businesses sell for a higher multiple. And even
though like to your point, not owning the stores and
it's mostly franchised, and again it depends a little bit.
Are they you know, a lot of like ones that
chose the franchises are consolidated as a franchise base growing. Yeah,
what a franchise economics. You know, there's a lot of
factors that go into it. But generally speaking, because it's
(27:16):
a steadier stream of cash flow, the franchises that are
signing up for these businesses, they are usually signing ten
or fifteen year franchise agreements, I vester. We kind of
view it as like this SETI stream of cash flow
and then you know, there let's say there are commodity problems.
And this sounds horrible, and I don't mean it to
sound horrible, but if there are commodity pressures and you
(27:38):
have to raise prices as a franchise or you're getting
to tire royalty, right because prices go up and you
get five or six percent of the whatever that those
dollars are. And then there's usually you know, a lot
some franchisors. There's some supply chain revenue streams that come
in as well. So you know, generally speaking, franchise ors
(27:59):
will sell or higher multiples because of a lot of
those factors. They're a little bit less pressured by the
business than the franchisees are. Yeah, and you know that
being said, you know, we get I'm sure you get
the quick question all the time too. Should I franchise
this business? Oh yeah, it's also a very hard question
to answer, and you know, I typically advise people not
(28:20):
to in the beginning, because you know, there's a lot
of infrastructure to build too. Franchise. You have to support
these franchisees, you know, selling franchises and opening new stores
with them. There's just a lot of variables that come
into play. So I always recommend try to get a
very solid store base. Then maybe if you want to
dip your toe, maybe sell some of your corporate stores
(28:41):
to franchisees, let them learn how to operate it, and
then they can open some more. There are ways to
do sort of hybrid approaches so that you can mitigate
some of the risks of franchising.
Speaker 3 (28:52):
Well, I think that's a good you know how to
for many early stage brands, because to your point, everybody's
always trying to rush to that state of franchising. I
kind of argue the point against that because of the
fact that we are dealing with such uncertain times economically
right now, we could see a pullback from the American consumer,
which obviously, if you're based on royalty, you're going to
(29:14):
see slower store sales that's lower royalty. Granted, you've got
to look at kind of the long term effect of this.
Is this a three year, five year, ten year play
that we may see in the market and know where
they are at that time as well?
Speaker 2 (29:30):
I think is so important.
Speaker 3 (29:32):
Let's talk last up here before we let you go
fast casual casual dining, and then you look at this
emerging sector that is in between those two, which is
very elevated. Maybe your brand over here with Bushfire might
be in that category, which is what I'm kind of
(29:52):
referring to as fast casual three point zero. It's very
high level quality but yet still no servers. What do
you think about that as is that maybe the future
of where this sector is going.
Speaker 4 (30:07):
I mean, we like that sector a lot, we like
fast casual a lot. I do think that you're going
to see a proliferation of brands that are delivering an
elevated experience without the full served model. It's you know,
in Bushfire, you know, you order it a counter and
the food is cooked to order and brought to your table.
(30:27):
So it's you know, fresh, you know, just cooked or
rethermalized product that you're getting. And I think we're going
to start to see more and more of those types
of brands. I was recently in Spain and I visited
a brand called Honest Greens. Ron Shake, who's the pounder
of Panera, is an investor in that brand, and you know,
(30:47):
they're doing very similar to Bushfire. You know, this this
broad breath of menu of proteins and bowls and salads
and you you know, our food arrived in I think,
I mean I timed it. It was like three and
a half minutes. Incredible, and you know, we got tested
a number of different proteins that were cooked to various temperatures.
(31:08):
So you know, I think you're going to see more
and more of those kinds of brands come out where
you know, people can get sort of a like you said,
a hybrid experience. You know, are the brand that we
have has bars, right, so you're seeing some you know,
liquor component to it. Social clip and you know, I
think it's.
Speaker 3 (31:28):
At the Honest Screen's website right now that you're exactly right.
Speaker 2 (31:31):
This is definitely elevated.
Speaker 3 (31:32):
I mean you're looking at a salmon right there on
their marketplates. Nice salad, great, you know, great flatbreads, garden bowls,
this I think this gets down to the point I'm
getting at, and that is that is the casual dining
experience going away because of one, there's now a new
you know, kind of a new element in this fast
(31:53):
casual or this limited service model. It seems to be
servicing that. And you have a demographic shift. It's a
current so under thirty five young families, you know, they're
always much faster moving. They're not necessarily looking for a
Chili's or a red robin experience. They're looking for something
maybe a little bit more of a sweet green concept
(32:13):
or maybe something like this where honest greens even though
it's European, but concepts like that. Back to Bushfire, do
you feel like that is the growth mechanism? And when
you look at that opportunity, what is AUV for those
kind of units?
Speaker 2 (32:28):
Where do those cap out? Do you think?
Speaker 4 (32:31):
Yeah? I mean, you know, I don't think casual dining
is going away, but you know you're seeing more bankruptcies
in that segment of our industry than you are anywhere.
I say that's casual for Avis for sure. It's right.
You know, you have these big boxes and you know
people are using restaurants different with off premise and a
lot of the menu items or casual dining don't travel
(32:52):
that well. So you know, I don't think it's going away,
but I do think to your point, you're going to see,
you know, more of the growth of these brands. You know,
we own a business called Nukes. It's yeah, yeh, yeah,
you probably heard it. I mean it's you know, that's
a brand that sells pizzata. We have center to play
proteins and you can get.
Speaker 2 (33:13):
Set Frank, isn't it.
Speaker 4 (33:15):
What's that?
Speaker 2 (33:15):
That's their CEO?
Speaker 4 (33:16):
Frank, yep, Frank, Yeah, he's their CEO. And so you
know brands like that that have this full, you know,
breadth of a menu, right that you can get in
a lot of the casual dining restaurants, pizzas and other things,
but in a in a faster kind of more casual,
not tipping as much, help yourself to a drink and
(33:38):
a refill. It's a different experience, and I do think
you're going to see more and more of that because
that's how people like to engage with restaurants these days.
And also you have very good for off premise and
delivery and cater right right.
Speaker 3 (33:50):
Well, and I think you hit on the the element
here is that FASCA or excuse me, casual dining not
going away. That's a big you know, that's a huge sector,
you know, for the market. But I think we're definitely
going to be seeing some cool, maybe some cool futures
around this sector that's opening up inside fast casual.
Speaker 2 (34:09):
Maybe Bushfire will be a you know, one of those.
Speaker 3 (34:12):
So anyway, anyway, Jim, it's always fun chatting with you.
Thank you so much for stopping in on the show today.
We appreciate it.
Speaker 4 (34:19):
Thanks for having me. Paul really appreciate it. You bet.
Turn of the volume and subscribe now to Rock My Restaurant,
the podcast Setting your brand on Fire for you coming too.
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left behind.
Speaker 2 (00:16):
The future is now.
Speaker 3 (00:21):
All right right back here on Knock My Restaurant.
Speaker 2 (00:23):
And today I've got Jim Bayless with me, of.
Speaker 3 (00:25):
Course, coming in from Capital Spring. Jim, how are you
doing great?
Speaker 4 (00:31):
Paul? How are you good.
Speaker 2 (00:32):
To see you? Man, Good to see you.
Speaker 4 (00:33):
It's been a while year, same year.
Speaker 3 (00:35):
So let's talk about Capital Spring first, so people to
get a framework of what you guys do over there,
give me kind of an insight of where you guys
are today.
Speaker 4 (00:44):
Sure, you know, we're a restaurant focused investment firm. We're
kind of like private equity, except the differences is we
invest in other ways in addition to conventional private equity.
So for example, you know, most private equity is but
they're buying controlling stakes and businesses, you know, more than
fifty one percent, so they have, you know, full holding
(01:05):
rights on the board and control of the business should
anything happen. We also do minority investing, so we might
buy into forty percent of the business or thirty percent
of the business. In addition, we also actually financed some
businesses like banks do when it's you know, right for
the capital structure. So we're very flexible capital and creative capital.
(01:27):
We're focused on the restaurant space. We've invested I think
close to four billion dollars now and currently have three
or four thousand restaurants in our portfolio, representing you know,
pretty much everything early stage. You know, we bought into
a four unit fast casual concept, kind of chef driven
in California. You know, we have a number of independent concepts,
(01:52):
we have franchise or businesses, We have franchise businesses. We've
started investing in non red restaurant multi units. So it's
really the full gamut across the restaurant space. And you know,
we really try to be a very good partner to
our investment. So it's in addition to writing a check.
(02:12):
You know, we have arrangements with a number of different
vendors you know that we all use in the restaurant space,
whether it's payroll vendors. I'm on the TOAST Advisory Board,
so you know, we're able to have a say in
the roadmap or TOAST for those businesses on that pos
platform and just you know a number of different benefits
(02:34):
you get by tying into the Capital Spree family. So
been around for twenty five years, you know, investing out
of our sixth and seventh So that's about it.
Speaker 3 (02:43):
So ten to one hundred and fifty million Asia target
investment area correct.
Speaker 4 (02:49):
Okay?
Speaker 3 (02:49):
Within that, you just mentioned an early stage, fast casual,
chef driven concept. Can you talk about the brand.
Speaker 4 (02:57):
YEP, it's called Bushfire Kitchen and based in UH started
in the San Diego area and they've grown pretty rapidly.
We have a location growing opening here and probably the
next few weeks. So excited for that.
Speaker 3 (03:13):
All right, I've got to pull them up while we're
talking here, because now you've got me curious. It's a
fast casual that I don't know, and I thought I
knew every fall.
Speaker 4 (03:21):
It's very small.
Speaker 3 (03:22):
So in your defense, well, good, what was it that
drew you to them?
Speaker 4 (03:30):
You know, it's interesting. I think we we were introduced
to them. I don't remember who may be introduction, but
you know, a lot of times people might introduce us
because we're a good fit for you know, these various
emerging brands and met with them at their restaurants ate
the food. It was so good that myself and one
of my other partners, we looked at each other and said,
(03:51):
we need to invest in this business. Wow. And so
we did and work out a deal with them, and
you know, very excited. We're growing it very aggressively and
trying to find a location outside of the California market.
Now I think we found one in Phoenix and looking
for some others. So you know, we're going to start
expanding beyond the core. And you know, very exciting business,
(04:14):
very exciting time, and great to be a part of
their growth.
Speaker 3 (04:17):
So they well, first of all, the visuals I have
for you guys that are listening to the audio podcast,
jump over to savor FM on YouTube catch the video
version of this. So I'm on their website and you're right,
I think the visual side of this, in terms of
the food quality, this looks fantastic.
Speaker 4 (04:34):
Yeah, it's great, you know, and and they roll out
promotional items you know, every quarter that are also very good.
They really do a fantastic job. You know, the food
is you know, very clean, and that the ingredients are
very fresh, and they also have an impanada program that's
very interesting. Number of the units have bars, so it's
(04:57):
a it's a it's a really interesting concept and.
Speaker 2 (05:00):
Yeah, I see it well.
Speaker 3 (05:02):
And the thing about this is, you know, this reminds
me of a concept that many of our listeners probably
know about, and that's Tender Greens, which was also a
California based brand, had a lot of that home style cooking,
very high end ingredients, which they appear to be very similar.
Obviously there's some changes there, but it but not as
(05:25):
unbelievable burgers in there, sandwich salads, bowls, So they're they're
kind of hitting on a variety of things. When you
pick out an investment, you know, and you get a
chance to see the brand. How important is the founder
set when you have these emerging brands, because a lot
of these are founder led in most cases, What is
(05:45):
it that you guys look for?
Speaker 4 (05:47):
Yeah, I mean, you know, we a lot depends on
what the founder's interested in. You know, there are times
when we've invested in businesses and the founder says, look,
you know, I'm out day one. I've been grinding it
out for X number of years. I want to pour
gas on the fire and grow roll some equity into
the next transaction, so that I got a second bite
at the apple when it sells again, but I just
(06:10):
don't want to do the work every day. And then
in other situations they want to stay actively involved. And
you know the best situation for us is when they
want to stay actively involved. We can depth obviously, but
you know, we really like to support great operating partners.
We all have the bandwidth, the capital spring to be running,
you know, the thirty six investments that we have, so
(06:33):
you know, it's it's usually the situation where the founder
wants to stay in and we work with them because
they know the DNA of their brand better than anybody,
and you know what we can bring to the table
sort of that strategic partnership. Okay, you know, we we've
grown a lot of brands. You know, one of the
other businesses that we invested in a few years ago,
we're planning to take public here and you know that's
(06:57):
that's one where the founder stayed in and we with
them very closely in his team to help build out
the infrastructure for the aggressive growth that we have going
on in that brand. So you know, what we look
for is really you know, people that are passionate about
their brands, that want to grow because you know, at
the end of the day, bank financing, which is usually
or passing the hat around, which is usually the first
(07:20):
phase of financing for these emerging concepts, has its limitations,
and you know, we can then take it, you know,
so much further with the capital that we can provide
and some of the resources that we bring to the
table specifically around growth.
Speaker 3 (07:32):
Well, and I think you hit on a couple of
points here. You look at the phase of the founder,
what phase of life you're in, whether they're ready to
grow or step away. But also I think at the
same time, it's like the real question a lot of times,
I know, when we're doing advisory with Fast Casuals right
now at Saber, a lot of times the real question
(07:56):
that it's actually one of the first questions they asked me,
is is it time to take capital? Is now the
time to do it with the current economic condition, my
current growth state. What are some of the factors that
you guys see on that decision that's being made of
whether or not to even take on capital in early
stage growth brands.
Speaker 4 (08:17):
It's a great question, and we got we get it
a lot too, you know, because a lot of you know,
especially smaller concepts debate. You know, if there are benefits
from all different kinds of investments, right, passing the hat
around has its benefits because usually you know, the friends
and family aren't expecting an immediate right on capital. You know,
(08:38):
the bank financing can be very favorable because you're not
giving up any percent of your business, any equity in
your business, so you hold on to as much as
you could possibly hold on to. But then the banks
have you know, a limited amount of really growth potential
for first of all, you know, they usually have very
restrictive covenants and their bone documents that right, you know,
(09:01):
don't really allow for a lot of growth. At the
end of the day. They're very conservative in nature. They
want their loan paid back. So the dollars that come
out of the business versus reinvesting it in growth, you're
paying it back to you know, lower the principle and
pay back to the interests. Yeah, you know, bringing in
private equity or investor capital the benefit there and that
you know, if you want to call a disadvantage, you're
(09:23):
going to give up some percent of your company at
the end of the day, because that's what the investment
investor is going to want. But the benefit is somebody
comes to the table with you know, arguably unlimited amount
of capital. Right. They're every dollar that comes off the business,
they want to reinvest it in additional growth versus getting
(09:43):
paid back. They're much more long term thinker, right. You know,
we're five, seven, ten years out on our investment, so
you know that's when our payback comes. So for us,
you know, we want we don't want those dollars to
start paying back our investment each month. We want to
reinvest in the business, you know, especially because you know,
most businesses that are growing have good return on investment
(10:05):
with their growth. You know, if you're getting twenty percent returns, right,
you want to put more dollars into that. I mean
thinking about your you know, your own stock portfolio, right,
you know, if you're getting twenty percent returns, you're going
to go back to the well for that investment because
it's a great return. And that's how we feel as well.
You know, we like to invest in that growth.
Speaker 3 (10:25):
Let's talk about the cycles because a lot of times,
you know, we've done a handful of investments here at SABER,
and what I'm finding is when you look at the
cap table, typically on these emerging brands. To your point,
there's usually family and friends involved. Very rarely do we
see structured capital coming in. But once it structured capital
(10:47):
starts to move into a brand like that, let's say
it's a five unit brand, maybe like Bushfire, and you
start to see the recapitalization of the brand itself. Have
you found that friends and family want to continue on
the ride or have you found this is a good
time for them to come off the cap table when
(11:08):
it comes to the reinvestment.
Speaker 4 (11:10):
You know, again it comes down to what the parties
at the table want. You know, I would say, as
a preference, we prefer a cleaner cap table, which means
it's us and the founder and when we come in,
we're paying off a lot of those ancillary investors. It
just makes life easier, easier. Although you know, there are
(11:33):
times when you know people are excited, Yeah, they want
to take the ride, yeah yeah, and to see what
happens because they know that you know, we're we're going
to be investing in heavily in growth. So it kind
of goes both ways. But we prefer a cleaner cap table.
Speaker 2 (11:48):
Yeah, for sure.
Speaker 3 (11:49):
Let's talk about the brands. So obviously the category of
emerging brands. That's really kind of the focus today. This
could fall into most of the time, it's going to
fall into fast and maybe some casual dining. Is that
really the wheelhouse that you guys focus in on right now,
is emerging or are you looking for maybe older brands
that are looking for revitalization. What's the DNA of capital
(12:13):
spring in terms of what works?
Speaker 4 (12:16):
You know, we look at everything, so I'll say that
out of the gate, you know, well, we'll look at
just about everything, with the exception of like bankruptcies, turnarounds.
You know, we tend you know, not to really focus
on those situations. We really like to invest in growth
at the end of the day. So brands that are growing,
whether they're old or young, whether they're large or small,
(12:39):
we like to invest in growth brands, you know. So
for us, you know, we're it doesn't matter if it's
you know, we have a fine dining investment. You know,
we have coffee, we have fast Foh yeah, all right,
you know, so we're really investing across you know, the
whole segment, all the segments.
Speaker 2 (12:55):
Yeah, I see the the opportunity.
Speaker 3 (12:58):
We've seen a variety of different you know, private equity
groups throughout the state the United States that have really
kind of focused in on this these fast casual concepts,
some of which have started to struggle in the last
few years, and we're starting to see some consolidation in
the market. What are you guys finding, especially in these
emerging brands. I'm sure you're shopping deals all the time.
(13:21):
Are you seeing some market pushback now because of the
competition or maybe because of the macro environment you know
from a you know, inflation side, consumer spending all that.
Speaker 2 (13:32):
What are you guys seeing in the market today?
Speaker 4 (13:35):
Yeah, you know, look, there was a recent you know
raised by a fast casual business based at New York City, uh,
the owners of a friend of mine, and he did
very well with it. He brought in a bank, they
raised a lot of money on it on it insane valuation,
not insane like it's crazy, but you know, very big
(13:57):
valuation because it's a very unique concept with incredible unit
level economics. So what I would say from an investor standpoint,
generally the valuations have gone down a little bit, right
because you know, you are seeing competition saturation within certain categories,
like especially the salad category, you know, very saturated coffees
(14:20):
becoming pretty saturated, you know, between Dutch Bros. And you
know a lot of the other players that are coming
in Seven Brews and others. So you know, in certain
areas you are seeing a bit of a of a
pressure on the multiples of people are paying. But those
businesses that generate have very good store economics. And you know,
(14:41):
the way we look at economics at the end of
the day is we look at, you know, what the
restaurant's producing at the store level. You know, that's everything
including rent, and then okay, now what's the corporate office
infrastructure that's needed to run the business because you know
we're buying too, is part of our investment and so
(15:02):
you know, if that's you know, an additional couple of
million bucks, is the business profitable at the end of
the day, and a lot of that can make the
determination as to whether or not we make the investment
and the multiple we look at, you know, the pipeline.
So really the key items that we look at when
we're making an investment are, you number one, the store economics.
(15:23):
You know, trends relative to other businesses in the segment.
You know, some segments right now are just struggling on trends,
you know, on the same store traffic and transactions and
sales just given like you said, some of the environmental issues.
But we look at the you know, we like to
see at the store level north of fifteen percent margins,
you know, after rent. Then we like to see a
(15:46):
good pipeline. You know, are there stores that are going
to be coming on soon. We like to see good
return on that investment, usually north of twenty percent. And so,
you know, all in what's the cost to get the
store open, including all the build out, all the soft
costs like the training and the inventory and marketing, all
the things we have to do before we open the store,
(16:07):
that expense against you know, once the business kind of
levels off and produces a steady cash flow, you know what,
what's the return on that investment, and we like to
see twenty percent or more there.
Speaker 3 (16:19):
Okay, So let's let's talk about you hit on valuations
slightly there. Obviously we're telling one story that got a
fairly favorable valuation, but I'm not trying to pin you
down on valuations, but just the range, you know, especially
for fast casual, what have you seen in the market,
Let's say the high and the low. You know, in
terms of valuations, how do you how do you do it?
Speaker 4 (16:40):
So the you know, the business that just received a
very high valuations called Just Salad. It was brought to
market by Bank of America, you know, and they I
don't remember the exact valuation, but you know, it's high
double digits. You know. Again, it had great store economics,
better than Sweet Greens and Cava and some others, and
so for that reason, you know, and they had an
(17:02):
incredible pipeline. They had proven coretability, so they had proven
that they're successful in multiple states from Florida to New York,
mid Atlantic, Chicago. And so because of that, a business
comes in, looks at it and says, we'll pay very
high multiple because there's a lot of restaurants coming on
in the pipeline that Lisa is signed under construction. We
(17:22):
know they're going to open at some point in the
next twelve months or so. You know, they have great
return on that investment. The business is performing well relative
to the competitive sets, and the multiples very high. You know.
Typical though, what you're seeing is you know, you'll see
multiples that range anywhere from six times probably or five
times on the low end depending upon the business, you know,
(17:44):
and again that depending is store level economics, return on
investment for new growth and pipeline and leadership team and execution,
and then you know, those can go up to seven, eight, nine, ten,
mid teens. You know, I talked to a group recently that,
you know, their their store level economics are kind of
(18:06):
in the mid twenty percent. They're getting you know, right
around forty percent cash from cash returns for their new
story development. They have a good pipeline, they've built it
in multiple states. They might get you know, a low
teens or so valuation multiple of EBI DA because they
(18:26):
were just firing on all cylinders. You know, we looked
recently at a full service brand that you know is
going to get sort of mid single digits because it's
expensive to build a full service brand. The margins are good,
you know, relative to other full serbs, but you know,
kind of played in the casual dining plus category, which
(18:47):
is you know, expensive, lots of people to operate, you know,
lots of skews and other yeah.
Speaker 3 (18:53):
Yeah, multiple So okay, so let me kind of throw
this at you if you're if you're an average brand
trying to become great. Is it's consistent, but it's not
you know, it's not top of of you know, the
food chain A ten x eba dah.
Speaker 2 (19:13):
Would that be a good valuation or a brand like that?
Speaker 4 (19:16):
For sure? Okay, for sure it's a.
Speaker 2 (19:19):
Good valuation ten x Ibada.
Speaker 3 (19:21):
I know a lot of you guys are listening on
this because you're probably thinking when is the right time
to accept capital? And and this is usually going to
you know, frame it in a lot of decision processes.
Is you know, what's the valuation proposition in the market
at that particular time. Would you say this market is
hot right now?
Speaker 2 (19:40):
Moderate?
Speaker 4 (19:40):
Or cold? I'd say moderate. You know, at the end
of the day, it's not like so hot. I mean again,
you know there's always going to be exceptions to that,
but you know, for the most part, people are a
little bit conservative right now. You know, there's some unknowns
on tariffs. I mean, what we get you know better
than I do, Paul, seventy five percent of work BOO
comes from Mexico, right all the resident all the packaging
(20:03):
comes from China, So you know, there could be some
major impacts to the business. Coffees and an all time
high eggs with bird flu. There are just a lot
of things, you know, pressures that are kind of hovering
out there.
Speaker 3 (20:16):
Yeah, you hit on something here that I think a
lot of people are one missing outside the operators because
we're not seeing Everybody's so worried about the car industry
getting you know, snagged this week with Trump's tariffs, but
right now the restaurant industry is still This is one
point two trillion dollar industry in the United States, employing
around twelve to thirteen million people.
Speaker 2 (20:39):
This seems to not be as big of a story.
Speaker 3 (20:42):
So the question is, because I talk to people at
the NRA, the National Restaurant Association, they seem to be
running around with their hair on fire right now because
of just the amount of lobbying that they're going to
have to do to this administration. Do you think this
impacts sales this year in twenty twenty five for a
lot of these brands.
Speaker 4 (21:01):
I think a couple of things are already impacting sales
for these brands. I think there are certain regions of
the US, and we're experienced it in a few of
our portfolio businesses where the ice raids are causing you know,
certain groups of demographics to stay home or not come
to work because they're afraid. So you know, that's impacting
(21:23):
sales and operational execution in a few markets where those
raids are more prevalent, you know, and then in other
areas you know you're seeing I think generally, the less
affluent consumer is the consumer that's been pressure. You know,
you're hearing you know a lot of people talk about
(21:43):
the stock markets that you know, all time highs and
it's doing very well. And but the the demographic that
doesn't have retirement and stock accounts that you know, is
going to the supermarket and buying eggs and coffee and
those types of things that are much more expensive than
the used to be. Those are the groups that are
pulling back on some of the restaurants spending and it
(22:05):
is impacting sales.
Speaker 2 (22:06):
Yeah for sure.
Speaker 3 (22:08):
All right, so we've had a chance to kind of
grill you on valuations. When's the right time to take capital,
you know for these emerging brands. Let's move to a
new topic now, and that is exits, because there's every
brand you know is looking for that. Where you're a founder,
you know, a capital group, exits are are very mostly
(22:32):
let's first of all frame up the topic of where
exits should be looked at when you're when you're seeing
new capital come into an emerging brand, is it unit based,
time based, how do you guys, you know, kind of
frame it or when Capital Spring would say this is
an exit for us.
Speaker 4 (22:52):
That's a hard question to answer. It's a very good question,
but it's a hard question. You know, we exited a
business about a year and a half ago. It was
a franchise e business and it wasn't as you know, typically,
you know, private equity is exiting when they're getting to
the end of their fund life. So you know, we
(23:13):
raise money in funds that fund has a certain time horizon.
As it gets towards the end of that time horizon,
we're looking to exit those transactions that to close out
the fund because that's how we personally get paid. So
you know, sometimes it's dependent upon the life horizon the front.
So you know, a very important factor. What you know
(23:34):
for your listeners is if you are talking to a
private equity firm, ask them in what stage are the
fund It's in right, it's in the end of the
fund cycle. There may only be a few years, right,
which may not be enough to get the growth that
you want. If it's in the beginning and it's a
ten year fund, you know, do you want to be
in it for ten years? But you can have that
conversation and say, hey, we want to be out in
(23:55):
five that's great, you know, we don't have to stay
in for ten. So I mean it's an important factor.
But you know, typically you're looking at some of the economics,
like you know, that particular business. The commodities that that
business relied on was low at that time, so we
had very good trailing twelve numbers in there, We had
a great pipeline, we had a great record of growth,
(24:16):
and we felt it was the right time to sell.
You know, we're looking another one of our businesses that's
just posted two years of same store sales growth and
same store traffic growth that it's firing on all cylinders.
We have, you know, the unit that just opened Monday.
You know, three more or four more in the pipeline.
Will probably you know, maybe look to sell that business,
(24:37):
you know, because it's again firing on all cylinders, it's
performing very well, and we have some something to sell
to the next buyer. Yeah, So for us, I think
it's you know, very important to look at, you know,
what the historical performance is because remember a lot of
these businesses are selling off of the trailing twelve periods, right,
(25:00):
those to be good. You know, you may have a
business you want to sell, but if the trailing twelve
weren't good, you know, it's probably not going to command
a high price, right exactly. You know, a lot of
it's around the performance of the business and kind of
looking ahead and seeing what might be The challenge is
you always want to have something you're selling for the
next person. Right, If you've exhausted your pipeline and you
(25:20):
know there's really you're not sure where to grow next,
probably not a good time to sell because what you're
selling to the person is, hey, the next buyer, you
can pour more gas on the fire than we even
did and grow it even for.
Speaker 3 (25:33):
Yeah, and you look at I think you know, when
brands are starting to go into that phase, they've been
through a funding round, maybe a couple, they're starting to
either get into that growth concept and moving to either
the next stage of their investment cycle. In many cases,
it could be a franchise business or maybe you know
(25:53):
a founder operated business that just grows internally, What have
you found that works best in the markets in terms
of performance? Maybe from your years of being in this industry,
is a franchise business still a good solid investment, you know,
from a capital injection point, because a lot of times
it's they only run maybe one or two stores and
(26:16):
then everything is franchise.
Speaker 2 (26:18):
What would you guys say to that?
Speaker 3 (26:20):
Is that an investable strategy and brand or do you
feel more founder led with company owned stores?
Speaker 4 (26:28):
I mean we like both, right, I mean Chipotle has
done very well as a company owned brand, yes, rely
because the unit economics they generate and the way they
look at it is if I'm making you know, call
it twenty five percent sto a level profit, you know,
and if I were to franchise it, I only make
six percent royalty, Like I'll take that twenty five percent
yeah sure, yeah so, but generally speaking from an investor standpoint,
(26:53):
franchise or businesses sell for a higher multiple. And even
though like to your point, not owning the stores and
it's mostly franchised, and again it depends a little bit.
Are they you know, a lot of like ones that
chose the franchises are consolidated as a franchise base growing. Yeah,
what a franchise economics. You know, there's a lot of
factors that go into it. But generally speaking, because it's
(27:16):
a steadier stream of cash flow, the franchises that are
signing up for these businesses, they are usually signing ten
or fifteen year franchise agreements, I vester. We kind of
view it as like this SETI stream of cash flow
and then you know, there let's say there are commodity problems.
And this sounds horrible, and I don't mean it to
sound horrible, but if there are commodity pressures and you
(27:38):
have to raise prices as a franchise or you're getting
to tire royalty, right because prices go up and you
get five or six percent of the whatever that those
dollars are. And then there's usually you know, a lot
some franchisors. There's some supply chain revenue streams that come
in as well. So you know, generally speaking, franchise ors
(27:59):
will sell or higher multiples because of a lot of
those factors. They're a little bit less pressured by the
business than the franchisees are. Yeah, and you know that
being said, you know, we get I'm sure you get
the quick question all the time too. Should I franchise
this business? Oh yeah, it's also a very hard question
to answer, and you know, I typically advise people not
(28:20):
to in the beginning, because you know, there's a lot
of infrastructure to build too. Franchise. You have to support
these franchisees, you know, selling franchises and opening new stores
with them. There's just a lot of variables that come
into play. So I always recommend try to get a
very solid store base. Then maybe if you want to
dip your toe, maybe sell some of your corporate stores
(28:41):
to franchisees, let them learn how to operate it, and
then they can open some more. There are ways to
do sort of hybrid approaches so that you can mitigate
some of the risks of franchising.
Speaker 3 (28:52):
Well, I think that's a good you know how to
for many early stage brands, because to your point, everybody's
always trying to rush to that state of franchising. I
kind of argue the point against that because of the
fact that we are dealing with such uncertain times economically
right now, we could see a pullback from the American consumer,
which obviously, if you're based on royalty, you're going to
(29:14):
see slower store sales that's lower royalty. Granted, you've got
to look at kind of the long term effect of this.
Is this a three year, five year, ten year play
that we may see in the market and know where
they are at that time as well?
Speaker 2 (29:30):
I think is so important.
Speaker 3 (29:32):
Let's talk last up here before we let you go
fast casual casual dining, and then you look at this
emerging sector that is in between those two, which is
very elevated. Maybe your brand over here with Bushfire might
be in that category, which is what I'm kind of
(29:52):
referring to as fast casual three point zero. It's very
high level quality but yet still no servers. What do
you think about that as is that maybe the future
of where this sector is going.
Speaker 4 (30:07):
I mean, we like that sector a lot, we like
fast casual a lot. I do think that you're going
to see a proliferation of brands that are delivering an
elevated experience without the full served model. It's you know,
in Bushfire, you know, you order it a counter and
the food is cooked to order and brought to your table.
(30:27):
So it's you know, fresh, you know, just cooked or
rethermalized product that you're getting. And I think we're going
to start to see more and more of those types
of brands. I was recently in Spain and I visited
a brand called Honest Greens. Ron Shake, who's the pounder
of Panera, is an investor in that brand, and you know,
(30:47):
they're doing very similar to Bushfire. You know, this this
broad breath of menu of proteins and bowls and salads
and you you know, our food arrived in I think,
I mean I timed it. It was like three and
a half minutes. Incredible, and you know, we got tested
a number of different proteins that were cooked to various temperatures.
(31:08):
So you know, I think you're going to see more
and more of those kinds of brands come out where
you know, people can get sort of a like you said,
a hybrid experience. You know, are the brand that we
have has bars, right, so you're seeing some you know,
liquor component to it. Social clip and you know, I
think it's.
Speaker 3 (31:28):
At the Honest Screen's website right now that you're exactly right.
Speaker 2 (31:31):
This is definitely elevated.
Speaker 3 (31:32):
I mean you're looking at a salmon right there on
their marketplates. Nice salad, great, you know, great flatbreads, garden bowls,
this I think this gets down to the point I'm
getting at, and that is that is the casual dining
experience going away because of one, there's now a new
you know, kind of a new element in this fast
(31:53):
casual or this limited service model. It seems to be
servicing that. And you have a demographic shift. It's a
current so under thirty five young families, you know, they're
always much faster moving. They're not necessarily looking for a
Chili's or a red robin experience. They're looking for something
maybe a little bit more of a sweet green concept
(32:13):
or maybe something like this where honest greens even though
it's European, but concepts like that. Back to Bushfire, do
you feel like that is the growth mechanism? And when
you look at that opportunity, what is AUV for those
kind of units?
Speaker 2 (32:28):
Where do those cap out? Do you think?
Speaker 4 (32:31):
Yeah? I mean, you know, I don't think casual dining
is going away, but you know you're seeing more bankruptcies
in that segment of our industry than you are anywhere.
I say that's casual for Avis for sure. It's right.
You know, you have these big boxes and you know
people are using restaurants different with off premise and a
lot of the menu items or casual dining don't travel
(32:52):
that well. So you know, I don't think it's going away,
but I do think to your point, you're going to see,
you know, more of the growth of these brands. You know,
we own a business called Nukes. It's yeah, yeh, yeah,
you probably heard it. I mean it's you know, that's
a brand that sells pizzata. We have center to play
proteins and you can get.
Speaker 2 (33:13):
Set Frank, isn't it.
Speaker 4 (33:15):
What's that?
Speaker 2 (33:15):
That's their CEO?
Speaker 4 (33:16):
Frank, yep, Frank, Yeah, he's their CEO. And so you
know brands like that that have this full, you know,
breadth of a menu, right that you can get in
a lot of the casual dining restaurants, pizzas and other things,
but in a in a faster kind of more casual,
not tipping as much, help yourself to a drink and
(33:38):
a refill. It's a different experience, and I do think
you're going to see more and more of that because
that's how people like to engage with restaurants these days.
And also you have very good for off premise and
delivery and cater right right.
Speaker 3 (33:50):
Well, and I think you hit on the the element
here is that FASCA or excuse me, casual dining not
going away. That's a big you know, that's a huge sector,
you know, for the market. But I think we're definitely
going to be seeing some cool, maybe some cool futures
around this sector that's opening up inside fast casual.
Speaker 2 (34:09):
Maybe Bushfire will be a you know, one of those.
Speaker 3 (34:12):
So anyway, anyway, Jim, it's always fun chatting with you.
Thank you so much for stopping in on the show today.
We appreciate it.
Speaker 4 (34:19):
Thanks for having me. Paul really appreciate it. You bet.
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