What investors look for in food businesses

In February 2020, just before COVID decimated hospitality, research firm MCA predicted that the value of the food-to-go market in the UK would reach £21.7bn in 2020. The study went on to say that the top ten brands, including McDonalds and Greggs, now account for 33.6% of sales in the sector.

Given the scale of this market opportunity and the ability of brands such as Greggs to become dominant in sub-segments of food-to-go, it’s easy to see why private equity loves this market.

Many of the well-known fast casual / QSR brands in the UK have received PE backing at some stage in their growth journey. Ireland has also seen its share of food-to-go private equity deals with Renatus backing the 2015 management buy in of Boojum, Causeway Capital providing equity and board support to both BB’s Coffee & Muffins and Patisserie Valerie, and Biavest recently investing in Brian and Sandra O’Casey’s Offbeat Donuts business.

With the food-to-go sector emerging from COVID we expect private equity firms to continue to invest in leading brands with proven unit economics, good growth potential and strong management teams.

So, what do investors look for in food-to-go businesses?
Here are five factors that need to be in place:

1. Strong store level economics

The brand must be able to demonstrate a capacity to generate compelling store level returns, ideally across a number of format and location types. Return On Capital Employed (ROCE) and Return On Invested Capital (ROIC) are key metrics that investors use to establish the commercial potential of food-to-go brands. Essentially, they are looking for brands that can quickly generate a return on the capital they deploy.

2. Excellent management teams

Entrepreneurs who are focussed and passionate about what they are creating are a magnet for investment. Investors back the people as much as they back the concept and need to feel that the leadership team has the ability to deliver, in good times and in bad.

3. Track record

While early-stage PE investments are not unheard of investors will generally look for brands with an established track record. A proven ability to deliver sustained profitability and incremental revenue growth will help to get investors excited about the investment opportunity.

4. Growth potential

Private equity and venture capital firms invest to generate returns. Brands that attract investment have developed a solid plan to deliver growth. While investors won’t expect entrepreneurs to have everything figured out, demonstrable growth should be clearly evident in the business plan. To support these growth projections the concept must be replicable, scalable and ideally, transferrable into other markets.

5. A concept that resonates

Investors are looking for unique concepts with clear points of difference and a compelling value proposition that resonate with consumers. It can be difficult to raise capital for another “me-too” brand entering an already crowded marketplace. Entrepreneurs that can identify and capture an emerging zeitgeist and position their concept as the market leader in a new or developing segment will be attractive to PE and VC firms.

While this list isn’t intended to be exhaustive, you can be absolutely certain that all elements were present when Famously Proper / Claveton UK (owner of Byron Burger) acquired southern fried chicken concept Mother Clucker in May 2021.  It appears that the pandemic has done little to dampen private equity’s appetite for the food-to-go sector. We expect to see continued investment and a decent volume of transaction activity as the year rolls on.

If you would like to discuss food-to-go sector valuations, acquisitions, disposals, fundraising or any other corporate finance matter please contact Johnny O’Sullivan in our corporate finance department.

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