What Investors Look for in Multi-Unit Businesses

You operate a successful multi-unit business and you’re interested in raising capital or even selling the company. So, what are institutional investors looking for? Knowing this can help you maximize the value of your company and even start positioning it for success well in advance of a fundraise or exit.

Performance

There are numerous useful metrics for gauging the performance of multi-unit businesses, but ultimately the key leading indicators of long-term success are Unit-Level Return-on-Investment (ROI) and Same-Store Sales.

Unit-Level ROI

In the words of Charlie Munger, “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns.” Put into the context of a multi-unit business, the Unit-Level ROI of your business effectively sets the ceiling for the return it will provide your investors over the long-term, which is why it’s so important.

While not the most robust measure of Unit-Level ROI, Cash-on-Cash return is a useful shorthand for understanding returns and commonly used in discussions with investors. It equals your Unit-Level EBITDA (aka Four-Wall EBITDA) divided the upfront investment required to open those units (capital expenditures net of tenant improvement allowances, pre-opening expenses, and working capital)—typically limited to units that have reached maturity (1-3 years since opening). Investors look for Cash-on-Cash returns in excess of 50% at early-stage concepts, while returns of 25% or higher are acceptable at later-stage companies that have more predictable performance across their footprints.

Same-Store Sales

Same-Store sales is the other key indicator of long-term success for multi-unit businesses. It measures the year-over-year percentage change in sales for units that were open in both the current year and the previous year. Same-Store sales is a huge focus for investors as unit-level profitability can quickly expand or erode given that most multi-unit businesses have significant bases of fixed costs—minimum labor requirements and occupancy costs.

Investor expectations for Same-Store sales can vary depending on the context—the maturity of the units, the unit growth rate, the macroeconomic environment, and so on—but they will typically want to see Same-Store sales comfortably outpace inflation, which has compounded at 2.5% per annum in the US over the past 25 years, according to BLS. The drivers of Same-Store sales are also important. It’s generally preferable to drive growth through volume (number of customers or orders) rather than average order value (AOV). High volume growth often indicates that the company has the potential to optimize operations to further increase volume, increase prices, or open additional units with lower risk of cannibalization.

Customer Love

If you have outstanding Cash-on-Cash Returns and Same-Store Sales, why would it matter to an investor if your customers love your business? Well, a few reasons…businesses whose customers love them are more likely to retain their customers if competition increases, more likely to be able to successfully increase prices, and more likely to benefit from word-of-mouth marketing as they expand. On the softer side, it’s more fun to invest in businesses that people love.

Common ways to measure customer love are through Net Promoter Score and Customer Satisfaction (CSAT) surveys, or by comparing Google and Yelp ratings across a set of relevant competitors. These scores and ratings vary widely across industries—the important thing is to perform strongly relative to your competitors.

Growth Potential

Multi-unit businesses drive the majority of their growth by…opening more units. As a result, investors need to believe that your business can open new units with strong ROIs over at least a 5-10-year time horizon. How do you demonstrate that kind of long-term potential?

Consistency Across Cohorts

While it’s critical to demonstrate strong Unit-Level ROI across your entire portfolio, it’s even more important to demonstrate strong-unit level ROI in your recently opened units. Operators and investors often refer to groups of units based on the year they opened as “cohorts” or “vintages”. Strong performance by recent cohorts indicates the business still has attractive investment opportunities and hasn’t already reached its full potential.

Established Density

When evaluating a multi-unit business, investors commonly estimate the “full potential” of a concept by estimating the maximum unit density it can achieve in a geographic area and then extrapolating that to the rest of the country. Concepts that prove they can establish a high density of units in a given geographic area build credibility with investors that they will be able to recreate that level of density in other geographic areas and thus open a large number of units.

Geographic Portability

A common concern with multi-unit businesses is whether they can make the leap from “regional” to “national”, either due to operational challenges or, more importantly, varying customer preferences in different regions. Businesses that demonstrate strong Unit-Level ROIs in multiple, varied regions achieve stronger valuations. Similarly, businesses that prove success in both urban and suburban areas are viewed as having higher growth potential.

Increasing Rate of Openings

Proving consistency across cohorts, density, and geographic portability is essential for framing the growth potential of your business, but investors will also want to develop confidence that your business can open new units at a rate that delivers on that potential. A steady increase in the number of new unit openings per year indicates that your business is developing the operational muscle to maintain a healthy growth rate as it scales up. Investors will look for earlier stage businesses to grow their unit counts by 20-30%+ annually, while growth rates closer to 10% are acceptable for more mature businesses.

On-Trend

While it’s possible for companies to check all of the above boxes in a declining market or market segment, investors have a strong preference for businesses that are on-trend and supported by market “tailwinds”. This is particularly important given the long-term orientation of investors—even signs of market growth slowing can be a concern when small changes in assumptions around growth rate can yield estimated market sizes that are materially different 10 years down the line. Ideal markets will be growing rapidly and be viewed as durable in the context of long-term trends. Clearly defining the market in which you compete and the key trends it benefits from helps position your company for success.