Wow: two and a half months have whizzed by, and the search continues. But in an altered way, given the state of the middle market for debt financing. In short, we've been searching for in-house positions at private equity-owned large chains. I took a look at a turnaround management job at a large casual dining chain, and both of us took some time to examine possibilities at a large fast food chain that changed ownership in the last year. We're also looking at sundry other opportunities at brands we admire, or business units we'd like to learn from.
Overall, what the last two months have revealed are the tradeoffs of choosing in-house positions over leading an acquisition. In short, we trade away control for higher salaries. We trade in brands we believe in for the ones that need fixing. We trade in a focus on improving the core business for extracting financial value.
The last point is nuanced. Obviously improving the core business will create financial value for investors, and of course extraction of financial value includes activities to improve the core business. There's a difference in practice, though, and it's in where one begins: the store experience, or the balance sheet, income statement, and cash flow statement.
There isn't an inherently better set of characteristics. But our preference for leading an acquisition becomes more apparent the closer we get to the private equity opportunities. Frankly, we don't mind being paid less if it means we have more control. We find promising brands incredibly energizing, and dying brands (that we don't believe in) equally depressing. We want to start with the customer experience, not the financials.
Given our preferences, it's easy to moralize, and say that we feel "soulless" or like we're "selling out" as we seriously consider joining operating teams at top private equity shops. It's important to note that the sentiments don't speak to the opportunities or firms themselves. For each pair like us, there are many more people whose hearts are in the business of private equity, and who have happily bought into the merits of the industry. The words rather express our gut reactions to the possibility of shelving our original dream and taking on jobs that, admittedly, do promise a steadier and larger paycheck. Our own actions are what can feel immoral -- self-defeating -- and discordant with our longtime song of hope.
And so we seek a path forward. At the moment, interim consulting and writing gigs as we await a mid-market debt revival feels just about right... Stay tuned for more.
Friday, May 7, 2010
Tuesday, February 16, 2010
The beat goes on
When my business partner and I started on this road to buying a struggling restaurant chain, we attended a search fund panel featuring the best of them: Joel Peterson, Chairman of JetBlue, head of Peterson Partners, and much-beloved lecturer at Stanford GSB; Jim Southern, legendary search funder and now Boston-based search fund investor; and others listed here. The forecast was not good. Not only was the average searcher taking one to two years to identify and buy a target, the financing was becoming more difficult as banks (i.e. "senior debt") became more risk averse in the wake of the country's financial crisis.
We've confirmed how difficult financing is. Longtime industry consultant Mark Saltzgaber puts it succinctly in a Chain Leader interview: "Generally speaking," the types of financing available range from: "traditional bank financing, SBA (Small Business Association, or Federal Government) loans, equipment financing, sale leasebacks (given owned properties), and subordinated debt and private equity (friends and family, 'angel' investors and institutions)."
Right now, banks want a lot of evidence that a business will do well before financing it, either in the form of consistent, growing sales, or saleable assets (in the case of foreclosure). SBA loans, which are administered by traditional banks, remain difficult as well, given banks' attitudes towards business financing. Equipment financing is generally available through shops like GE Capital, but they're usually not integral issues for people like my b-partner and me, who need a lot more money than what it takes to buy a new oven or walk-in refrigerator. Sale leasebacks, or the practice of selling the land underneath a business only to lease it right back, are only an option if the business comes with land -- but smaller chains don't tend to have this option available.
What's available is subordinated debt, or so-called "junior" debt. This debt comes from parties like the seller, or from other debtholders who are lower down on the pecking order than traditional banks, and therefore carry more risk for the debtholder. If the business collapses, "senior" debtholders have first dibs on what's left. Then the junior debtholders. And then the equity holders. In exchange for taking on a subordinated position in the pecking order, junior debtholders charge more interest. So if banks are taking 5% for their first-in-line right to take back what they're owed, a seller who is financing a portion of the sale might charge 10%. Equity holders, like family and friends, might expect back 20% return on their investment. And so on.
We've accepted that we have the best shot at financing if we have more to put in. As everyone says, there's nothing like putting some of our own "skin in the game" that indicates that everyone's interests will be aligned. So while we're searching, we're trying to cobble together some money of our own, by taking odd jobs (MBA style), and living as sparsely as we can. We're also keeping a tight loop with our favorite banker (a fellow at Wells Fargo), making sure we're aware of what's going on in that world in case senior debt becomes available again. There are some angels we're ready to tap once a good investment opportunity becomes clear.
The beat goes on! We don't know what we'll end up with, but we're sure gunning for something good. Next post: an update on the search itself.
We've confirmed how difficult financing is. Longtime industry consultant Mark Saltzgaber puts it succinctly in a Chain Leader interview: "Generally speaking," the types of financing available range from: "traditional bank financing, SBA (Small Business Association, or Federal Government) loans, equipment financing, sale leasebacks (given owned properties), and subordinated debt and private equity (friends and family, 'angel' investors and institutions)."
Right now, banks want a lot of evidence that a business will do well before financing it, either in the form of consistent, growing sales, or saleable assets (in the case of foreclosure). SBA loans, which are administered by traditional banks, remain difficult as well, given banks' attitudes towards business financing. Equipment financing is generally available through shops like GE Capital, but they're usually not integral issues for people like my b-partner and me, who need a lot more money than what it takes to buy a new oven or walk-in refrigerator. Sale leasebacks, or the practice of selling the land underneath a business only to lease it right back, are only an option if the business comes with land -- but smaller chains don't tend to have this option available.
What's available is subordinated debt, or so-called "junior" debt. This debt comes from parties like the seller, or from other debtholders who are lower down on the pecking order than traditional banks, and therefore carry more risk for the debtholder. If the business collapses, "senior" debtholders have first dibs on what's left. Then the junior debtholders. And then the equity holders. In exchange for taking on a subordinated position in the pecking order, junior debtholders charge more interest. So if banks are taking 5% for their first-in-line right to take back what they're owed, a seller who is financing a portion of the sale might charge 10%. Equity holders, like family and friends, might expect back 20% return on their investment. And so on.
We've accepted that we have the best shot at financing if we have more to put in. As everyone says, there's nothing like putting some of our own "skin in the game" that indicates that everyone's interests will be aligned. So while we're searching, we're trying to cobble together some money of our own, by taking odd jobs (MBA style), and living as sparsely as we can. We're also keeping a tight loop with our favorite banker (a fellow at Wells Fargo), making sure we're aware of what's going on in that world in case senior debt becomes available again. There are some angels we're ready to tap once a good investment opportunity becomes clear.
The beat goes on! We don't know what we'll end up with, but we're sure gunning for something good. Next post: an update on the search itself.
Friday, January 15, 2010
Entrepokiggas
My business partner and I are what my boyfriend calls entrepokiggas: entrepreneurial, po', Korean, and decidedly ghetto in our eating habits, if not our business trips. The moniker is a reference to Ice Cube's "We Be Clubbin'," which goes something like this: Hey hey hey look here look here. First of all I wanna welcome all y'all broke-ass entreponiggas to the Players Club.
Ah yes. My players club is definitely stocked with taco supremes (Taco Bell), Whoppers (Burger King), and chili cheese tater tots (Sonic). I get quite a mental bang for spending less bucks on equivalent goods or equivalent needs -- like breakfast, lunch, and dinner. (Which, I think, is partly how I've managed to survive for so long on zero income. That, and of course generous bridge loans from my lifelong benefactors: Dr. and Mrs. Parents. In b-school we'd call my little operation a low overhead, high revenue scenario.)
Business travel is no exception. My business partner and I made the third of three trips to the same city a few weeks ago to meet with a potential seller, and to tour potential housing options with our respective others (SOs): his wife and my boyfriend. We Pricelined the entire trip, paring down our expenses to the max. We shared one car (a cherry red Ford Fusion with a crappy turning radius), picking up each SO from the airport as she, then he, arrived on separate flights. We street parked the car to save on the $15 carport fee at the Best Western, then rose extra early to move the car before the meter maids swept the street. We had breakfast at McDonald's (Egg McMuffin Value Meal -- yum!), and lunch at one of the target locations. We chose a divey Vietnamese restaurant for dinner, and returned to the Bay on our el cheapo flights. As business trips go, it was a sparse one, and at risk for bleakness. But for the fact that we are so supported and loved.
It's hard being the SO of a searcher. Each time we submit a new Letter of Intent (LOI), we are consumed by anxiety as we await a response to our offer. Behind closed doors, we overreact to the minutest of overtures from the other side, and speculate ad nauseum about the meaning of their silences. We are insufferable. Our SOs are with us, patiently enduring, on the same side of the doors.
Moreover, when an LOI is accepted, and we ultimately execute a Purchase and Sale Agreement -- i.e. actually buy something -- their lives will change dramatically. We will forsake both time shared with them and our personal incomes in pursuit of our dream. But neither has direct control over the deal flow; both face limited efficacy over the outcome, in addition to the general uncertainty we face as searchers. Perhaps worst of all: we may not even succeed once we acquire a target business. It could all be for naught. Or worse.
I feel grateful for the admirable ways our SOs have played their roles. They have been gracious to us throughout the search process, showing loving interest, asking challenging questions, and expressing their faith in us all along the way. They have no script; they just play. It's been a long ride to the end of this, our first walk away decision. Without them, we couldn't have gotten here, heads held high. We wouldn't be able to dream of trying again. SOs show us love up in the club.
Ah yes. My players club is definitely stocked with taco supremes (Taco Bell), Whoppers (Burger King), and chili cheese tater tots (Sonic). I get quite a mental bang for spending less bucks on equivalent goods or equivalent needs -- like breakfast, lunch, and dinner. (Which, I think, is partly how I've managed to survive for so long on zero income. That, and of course generous bridge loans from my lifelong benefactors: Dr. and Mrs. Parents. In b-school we'd call my little operation a low overhead, high revenue scenario.)
Business travel is no exception. My business partner and I made the third of three trips to the same city a few weeks ago to meet with a potential seller, and to tour potential housing options with our respective others (SOs): his wife and my boyfriend. We Pricelined the entire trip, paring down our expenses to the max. We shared one car (a cherry red Ford Fusion with a crappy turning radius), picking up each SO from the airport as she, then he, arrived on separate flights. We street parked the car to save on the $15 carport fee at the Best Western, then rose extra early to move the car before the meter maids swept the street. We had breakfast at McDonald's (Egg McMuffin Value Meal -- yum!), and lunch at one of the target locations. We chose a divey Vietnamese restaurant for dinner, and returned to the Bay on our el cheapo flights. As business trips go, it was a sparse one, and at risk for bleakness. But for the fact that we are so supported and loved.
It's hard being the SO of a searcher. Each time we submit a new Letter of Intent (LOI), we are consumed by anxiety as we await a response to our offer. Behind closed doors, we overreact to the minutest of overtures from the other side, and speculate ad nauseum about the meaning of their silences. We are insufferable. Our SOs are with us, patiently enduring, on the same side of the doors.
Moreover, when an LOI is accepted, and we ultimately execute a Purchase and Sale Agreement -- i.e. actually buy something -- their lives will change dramatically. We will forsake both time shared with them and our personal incomes in pursuit of our dream. But neither has direct control over the deal flow; both face limited efficacy over the outcome, in addition to the general uncertainty we face as searchers. Perhaps worst of all: we may not even succeed once we acquire a target business. It could all be for naught. Or worse.
I feel grateful for the admirable ways our SOs have played their roles. They have been gracious to us throughout the search process, showing loving interest, asking challenging questions, and expressing their faith in us all along the way. They have no script; they just play. It's been a long ride to the end of this, our first walk away decision. Without them, we couldn't have gotten here, heads held high. We wouldn't be able to dream of trying again. SOs show us love up in the club.
Tuesday, January 5, 2010
The Reply-All gaffe
Everyone's done it. They can usually remember when and why, and the thrill of panic and fear when they realized that they had actually done it. Ah yes, whoever designed Outlook, Gmail, and other email programs either had a wicked streak, or didn't realize the consequences of putting the Reply-All button right next to the Reply button.
Fortunately, it wasn't my business partner or me who committed the Reply-All gaffe this time 'round. It was the seller's rep. And in a plot twist more reminiscent of a soap opera rather than a business transaction, we discovered exactly what this particular seller thought of us: green, entitled, and power-hungry. We also realized that the seller's rep was misrepresenting us in a few ways.
Woah! That certainly wasn't the rejoinder we expected back from our measured reply to this seller's 'take it or leave it.' We had politely responded that if forced to choose, we'd have to 'leave it,' but here are the issues that, once addressed, can bring us back to the table. We really didn't want to leave it, but we came to embrace the view that a bad deal is worse than no deal at all. We had to walk away.
We've never had the experience of walking away from a deal before, but a close approximation is a breakup. Boy and girl meet and grow fond of each other, and then the time comes to fish or cut bait. Boy (that would be my business partner and me) says hey, I'm broke, but here's an IOU for a ring. Girl says forget your IOU, show me the money. Or else. And so boy says fine. Else. By the way, here's how you can bring me back.
In the pandemonium that ensued after the Reply-All gaffe, we learned that girl thought that boy was posturing. Which was interesting. Boy had thought girl was probably bluffing, but was responding in earnest anyway because boy was no good at playing games. Moreover, in his heart of hearts, boy had actually walked away. Misrepresentations, plot twist, missed signals... Were these the makings of a Shakespearean tragedy? (Comedy?) Or just real life soap opera?
Who knows. The moral of this story is this: don't click Send till you're damned sure that you want it going to everyone in the To, Cc, and Bcc fields. 'Cause once you click send, you're too late. It ain't coming back.
Fortunately, it wasn't my business partner or me who committed the Reply-All gaffe this time 'round. It was the seller's rep. And in a plot twist more reminiscent of a soap opera rather than a business transaction, we discovered exactly what this particular seller thought of us: green, entitled, and power-hungry. We also realized that the seller's rep was misrepresenting us in a few ways.
Woah! That certainly wasn't the rejoinder we expected back from our measured reply to this seller's 'take it or leave it.' We had politely responded that if forced to choose, we'd have to 'leave it,' but here are the issues that, once addressed, can bring us back to the table. We really didn't want to leave it, but we came to embrace the view that a bad deal is worse than no deal at all. We had to walk away.
We've never had the experience of walking away from a deal before, but a close approximation is a breakup. Boy and girl meet and grow fond of each other, and then the time comes to fish or cut bait. Boy (that would be my business partner and me) says hey, I'm broke, but here's an IOU for a ring. Girl says forget your IOU, show me the money. Or else. And so boy says fine. Else. By the way, here's how you can bring me back.
In the pandemonium that ensued after the Reply-All gaffe, we learned that girl thought that boy was posturing. Which was interesting. Boy had thought girl was probably bluffing, but was responding in earnest anyway because boy was no good at playing games. Moreover, in his heart of hearts, boy had actually walked away. Misrepresentations, plot twist, missed signals... Were these the makings of a Shakespearean tragedy? (Comedy?) Or just real life soap opera?
Who knows. The moral of this story is this: don't click Send till you're damned sure that you want it going to everyone in the To, Cc, and Bcc fields. 'Cause once you click send, you're too late. It ain't coming back.
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