Scale For Growth Or Die

Or worse than death, become someone else's bargain

I have been in the restaurant business for 45 years. My beloved industry has undergone many design changes, both in physical space and menu presentations over these past four decades. It started with brass railings and hunter green interiors with garage-sale junk bolted to every square inch of wall space (like anyone would want to steal those dime store treasures.) Then came restaurants with dark earth tones, stone accents and low lights. Now, restaurant designs are open, airy, and neutral colored, with large windows and plenty of natural light. Restaurant designs, as well as menu offerings, are ever changing as we compete for our customers' attention and loyalty. That form of change is as old as the restaurant industry itself.

Just how old is the restaurant industry?

I learned this story while teaching culinary arts at Le Cordon Bleu:

Picture Paris in the late 1780s. The air is tense, bread prices are soaring, and the streets are buzzing with revolutionary ideas. Inside gilded mansions, the French aristocracy is still dining on elaborate multi-course meals prepared by teams of chefs and servants. Outside those walls, ordinary Parisians eat simply, often at taverns or inns where you had no menu, no choice — just a communal table and whatever the cook had made that day.

Then the Revolution strikes. In a matter of years, the aristocracy collapses. Noble households are dismantled, fortunes are lost, and many of the great patrons of French cuisine are either exiled or executed. Suddenly, hundreds of highly trained chefs are unemployed.

But rather than fade into obscurity, these chefs did something radical: they took their skills to the public. They opened small dining houses and offered what had once been exclusive to kings and dukes — refined, plated meals, ordered off a printed menu, and served at private tables.

This was more than a culinary innovation; it was a cultural one. In the old taverns you ate what everyone else ate, shoulder to shoulder. In these new restaurants — a word borrowed from the French restaurer, “to restore” — you had freedom of choice. You selected your dish. You dined at your own table. You paid for what you wanted, not what the house dictated.

In a way, the restaurant became a living metaphor for revolutionary ideals: liberty, equality (at least for those who could pay), and the right to choose.

By 1804, Paris had more than 500 restaurants. Within decades, the model had spread across Europe and beyond. What began as a byproduct of social and political upheaval became a permanent institution: the modern restaurant, a place where luxury and everyday life could finally meet.

So, the next time you sit down with a menu in hand, remember — you’re not just choosing dinner. You’re participating in a tradition born in the chaos of the French Revolution.[i]

But there is something new in my industry, something I have not seen before.

Private Equity has found restaurants attractive. Now, PE has been in our space for some time, but by and large PE didn't have a great reputation for maintaining the beloved regional brands they acquired. The drive for ROI over guest loyalty made early PE acquisitions simply focus on wringing out as much cash from their acquisitions as they simultaneously drove nails into the brand's coffin.

The good news is today’s private equity firms are changing this dynamic. No longer content to purchase healthy EBITDA and hollow out the brand for short-term profit, PE is truly looking to invest in growth. These new acquisition firms are hospitality focused, and the good ones are maintaining the brand magic of the restaurants they invest in. That includes keeping founders and key culinary and operational staff in place. This is great news for restaurants – with PE, your truly have a viable market for your successful brand.

How does this affect the independent restaurant operator?

If you are an independent restaurant over five years old, congratulations! You have beaten the odds. You now have a greater probability of getting a divorce than going out of business. According to data from the U.S. Bureau of Labor Statistics, Cornell University’s School of Hotel Administration, and the National Restaurant Association, roughly 25–30% of independent restaurants close in their first year, about 50% within three years, and around 60% within five years. You are amongst the elite players.

You are the 40% of independent restaurateurs that survived. You have established strong customer loyalty, consistent daily financial practices, and operational systems that weather economic downturns. With these three basic restaurant operating components down, you are positioned to become a multiple unit brand. And, more importantly, outside investors will start to pay attention to what you are building. Your concept design, service execution, customer energy and sales are the “curb appeal” that draws PE attention. But your financials are what will drive their offer.

How do you look on paper?

This is the million-dollar question (literally.) You crossed the five-year mark, you figured out how to cost your menu to turn a profit, schedule staff for appropriate coverage and keep your costs in line. You have systems for opening and closing your restaurant and most importantly, you have figured out how to collect the money, put it in the bank and spend less of it on expenses than you bring in. However, if you are like most restaurant operators at this stage, you watch your bank statement like a hawk and leave your financial statements to the care of your CPA.

How a restaurant looks on paper is where a lot of independent operators struggle. CPAs typically set up financial systems for paying taxes, not operational success. CPAs also see themselves as stalwarts of your money and as such are always looking for creative ways to mitigate taxes. They are the masters of understanding the ever-changing tax codes and will point you in the direction of spending capital (profit) on improvements, equipment or vehicles to reduce tax liability. Lastly, since CPAs typically are not with you for the day-to-day financial decisions, your balance sheet becomes messy. For the CPA is a mere historian. All they can do is “after the fact” recording of the financial decisions you have already made. CPAs simply record your restaurant’s debt service, asset purchases, owner’s equity in and owner’s draw out. And, if you are a multi store operator, CPAs will create another nebulas and black hole depository of data on the balance sheet for recording due to / from other entities to capture cash and inventory transfers from one entity to another. The CPA mentality may reduce some of your tax liability, but they often overlook the need to position your business for acquisition.

Now the hard truth.

Private equity does not buy, and banks do not lend, on your restaurant’s charm, your ambiance or even your overwhelming guest satisfaction reviews. They purchase or lend based upon your Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA,) your debt to equity and your liquidity ratios. This is where a great restaurant CFO comes in. We will make your restaurant look as good to buy on paper as your Pappardelle with wild mushroom cream sauce looks to buy on your menu.

If you are not running your financial statements as tight as you are running your kitchen, when it comes to leveling up with investors or selling your restaurant, you are leaving money on the table. Most of these transactions are based on some multiple of EBITDA. If you are not managing your EBITDA as closely as your kitchen production, you are throwing your hard-earned money into the trash. And, if you are selling a multi-unit brand, that sum could be in the seven figures. You invest in high production value equipment to make your kitchen run more efficiently, if you are thinking about expanding or selling your restaurant, it is time to make that same investment into your financial efficiency as well.

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[i] Restaurant history sources: Rebecca L. Spang, The Invention of the Restaurant: Paris and Modern Gastronomic Culture (Harvard University Press, 2000); Parsa, H.G. et al., “Why Restaurants Fail,” Cornell Hotel and Restaurant Administration Quarterly (2005).