The Fast Casual Gold Rush


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Restaurant chain success has always been a three-step process. Step 1: Start a concept and prove it works. Step 2: Add more units. Step 3: Once the concept has grown to the entrepreneur's management limits, bring on an investor who can take the chain to the next level.

But lately, Step 2 has seemed less and less important. Recently, private equity groups and even some strategic buyers have been looking at concepts at earlier stages of their growth cycle. And by early, we mean early.

At a conference on Mergers and Acquisitions in the franchise sector earlier this week in Minneapolis, Investors Management Corporation's Andy Phipps noted that his company's emerging brands-focused private equity firm Morehead Capital, recently spoke with a two-unit brand. "They told us, 'Oh, we've talked to 10 private equity groups,'" Phipps said.

Private equity companies, he said, are going downmarket, looking to get in on hot young concepts. Catterton Partners' recent emerging brands shopping spree has included concepts with 10, 12 and 14 units. It also included the six-unit waffle sandwich brand Bruxie. To be sure, many of these brands are considered among the hottest young concepts in the restaurant business, but it shows how strong the demand for growth in the restaurant business.

And it's not just private equity companies, either. Arguably the most aggressive recent deal for a young brand came from none other than Minneapolis-based chicken wing chain Buffalo Wild Wings, which last year invested in the Los Angeles-based fast-casual pizza concept PizzaRev.

When Buffalo Wild Wings made the investment, PizzaRev had just three units. And the brand was less than a year old.

The primary risk behind such deals is obvious: the restaurant business is really hard, and the ideas simply may not work beyond those first few locations. Plus, it also brings the potential for investor-entrepreneur conflict at an earlier, sensitive stage in the concept's development. But we can't help but think of this as something of a gold rush, akin to other business sectors like technology, as investors eagerly seek out the next big thing in the restaurant business.

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