CapitalSpring: How Restaurant Concepts Can Secure Financing in 2023’s Climate

CapitalSpring, a private equity firm that has invested more than $2.7 billion in 70-plus foodservice and restaurant franchises, is constantly keeping tabs on industry trends. The firm is dedicated to understanding the economy’s effects on the sector so its team can aid restaurant companies in navigating the financing process and continue to get deals done.

As 2023 is underway, CapitalSpring has identified a number of headwinds that are challenging the industry, including risk repricing, commodities, and a pull-back from consumers, said Erik Herrmann, partner and head of the Investment Group at CapitalSpring. 

“The cost of loans has gone up massively because the Fed has raised rates so much. That has an impact downstream where deals are riskier and thus more expensive, creating a cascading effect of higher costs of capital across the board from debt to equity,” said Herrmann. “That obviously has implications on business plans, a concept’s ability to withstand turbulence, and ratios that lenders underwrite to.”

Other issues facing restaurants include decreased traffic and sales. It’s important to note, though, that those figures are compared to 2021 when people were spending stimulus money and antsy to dine out once pandemic restrictions were lifted. The data is less skewed and traffic is much more stable in comparison to 2019 and earlier. 

“The demand side seems relatively healthy for our concepts, but we are keeping a watchful eye on the lingering effects of inflation for consumers,” he added. “The situation with the type of cost pressure we're seeing is something to monitor and hard to compare to the last few decades.”

As for how restaurant franchises should proceed in this environment and still execute deals, Herrmann’s advice is to be flexible with timing, capital structure and financing solutions. 

“If your earnings trend is declining, that is definitely not the time to go raise money because investors are going to see the business is moving the wrong way, and they have no clue where the bottom is,” Herrmann said. “If a company believes that things will stabilize or improve in a few months, it would likely benefit from waiting until they have a better story to sell that will enhance access to capital.”

However, because it's impossible to predict future trends and foresee the related implications on the industry, Herrmann stressed that concepts must “remain flexible.”

“Having a capital structure that's flexible and resilient is a really valuable asset in this environment,” he said. “While we have reason to believe that 2023 should be a normalization year, the last couple of years have shown us there's certainly a chance that's not the case. For that reason, having a capital structure that is more resilient to these types of swings should be a priority.”

Companies should conduct an exhaustive analysis of their options when securing capital and not just focus on conventional lenders. There are numerous financing solutions available, including interest-only debt, fixed-rate debt, Pik toggle loans, debt with warrants structures, debt+preferred equity and more, offering various trade-offs for different situations. 

The key when vetting options is to partner with a financial institution that understands the restaurant industry and knows how to react when there are hardships or pressures.

“Partnering with somebody who has plenty of experience in the sector is vital. You want to work with somebody that's very experienced with the types of challenges the restaurant business is likely to have in this environment. They're more likely to have the right answers and to be patient, supportive and understand what the company is dealing with,” said Herrmann.

ABOUT CAPITALSPRING:

CapitalSpring is a leading institutional investor with deep expertise in food service, multi-location business models and related industries. For over 17 years, we have supported proven management teams with financial, strategic, and operational resources to accelerate growth and realize their businesses' full potential. CapitalSpring offers one-stop solutions for a broad range of investments, including private equity, mezzanine capital and senior lending and has offices in Nashville, Los Angeles, Atlanta, and New York. For more information about CapitalSpring, please visit www.capitalspring.com.