Sources told us HotSchedules was losing $10M per year, which ain’t good for this level of growth. The revenue CAGR of 13% is decent, but what’s the EBITDA? To satiate the rule of 40, the business would need to have EBITDA margins of 27%. Early in the roll up Red Book touted tens of thousands of customers, but those were not POS-integrated merchants using a SaaS solution. Not only do these “undesirable “revenues conflate the value of the business, they also inflate the number of customers they have. Our guess is that many of these existing Red Book customers would find another solution if asked to pay a recurring fee for a simple logbook, so HotSchedules has not pressed the issue. As we understand it, $40M of these revenues come from one-off, non-recurring sources: implementation services, and Digital Red Book, which is industry jargon for a basic logbook. However, these are not recurring, SaaS revenues. HotSchedules is nominally earning enough revenue to go public – which is $100M. Does that mean the numbers weren’t sterling? We’ll need to use what we’ve heard to estimate. Unlike ECI, TPG has not publicly announced their IRR. PE companies often collaborate when deals are sufficiently large, as we’ve talked about previously. Insight Partners teamed up with Marlin, another PE shop, to fold HotSchedules into their portfolio. Fourth took institutional capital from ECI in March of 2011, who exited the business in June of 2015 to Insight Venture Partners for an ROIC of 3.5X and an IRR of 35%. That’s because funds have 10-year lifecycles, with the first five years dedicated to deploying capital and the last five dedicated to harvesting those returns. Ideally funds get out in 5 unless they’re making money hand over fist, in which case they’ll typically roll the investment into their next fund. When we heard the news of TPG exiting HotSchedules we had to find out how things transpired, and what would be next for the combined business. These difficulties are only compounded when customers are of the unsophisticated variety, precisely like the kinds you find in brick and mortar. These investments usually only meet expected levels of investor returns when levered with substantial debt, which the market or the next private equity owner assumes when the initial private equity (PE) investor exists the business. Rollup strategies are fairly straight forward: buy market share and use your heft to negotiate better terms from suppliers, decrease OPEX through “synergies”, and cross-sell products across the rolled up assets. Among with many other restaurant assets, TPG executed the proverbial private equity rollup. You may recall that TPG was an investor in HotSchedules back in early 2013. Public equities grow ~8% on average, so you’re achieving nearly a 3x rate of return. As companies get larger, that’s really hard to do. There are plenty of calculators that show you how much you need to sell for to achieve these levels of returns, but the easy math is that you must triple your value in a 5-year period. The base case analysis for most investors is a 25% internal rate of return (IRR). Your friends and family are forgiving and patient, but professional investors are under the gun. As soon as you take private capital the timer starts.
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