Stumptown's private equity deal

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Marshall

#1: Post by Marshall »

Expect to see more of these with "third wave" roasters: http://dinersjournal.blogs.nytimes.com/ ... -investor/
Marshall
Los Angeles

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SlowRain

#2: Post by SlowRain »

Private equity are those nice folks who are obsessed with maximizing profits, aren't they? I'm surprised it took this long. Looks like Starbucks will have some serious competition now.

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TrlstanC

#3: Post by TrlstanC »

I would actually say that of all the alternative investments, it's more likely you'll get someone who's interested in investing in a successful and focused business from a private equity fund. Not to say there aren't funds that would just like to sell off a company in pieces to maximize returns, or something like that. But there are lots of funds that are long term investors, and value a company with a good management team and a good vision for their place in the market.

I'm actually glad to see a company like Stumptown being given the chance to expand, and open up locations in new cities, maybe we'll get one in Boston eventually. And I don't think anyone would think it's a good business strategy to take the brand down market, and try to go head to head against Starbucks. Hopefully they (the owners and investors) think there's a market for quality coffee in this country, and that's what they'll try to hit.

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drgary
Team HB

#4: Post by drgary »

Stumptown in Brooklyn, Chicago, and San Francisco. Nice! :D
Gary
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What I WOULD do for a good cup of coffee!

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Peppersass
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#5: Post by Peppersass »

It'll be fascinating to see what happens.

There aren't a lot of ways for a business like Stumptown to obtain expansion financing, so it's fortunate that the founder has a friend in PE.

The deal structure, which they refused to disclose, is very important to the outcome:

A straight minority equity purchase (i.e., a "venture capital" deal) would give the founder the most time to achieve success, though it depends a lot on the kind of stock purchased -- common, preferred, participating preferred. If preferred, the rights, protective provisions and management performance requirements are key to determining how much pressure can be put on the founder and, ultimately, what the founder's share of the business will be.

"Venture debt" or subordinated debt, perhaps with an equity kicker, can be founder-friendly if the business is reasonably profitable and not too highly leveraged. In other words, if the debt can be serviced, the founder will retain most of the long-term appreciation. Some venture investors even do expansions loans and lines of credit like a bank, though with different performance covenants. For example, the business may be allowed to run in the red (something a bank wouldn't allow), but foreclosure terms might be more draconian.

But with any kind of debt, things can get pretty nasty for the founder if the business is highly leveraged and doesn't live up to expectations. That's when we might see a change in management, reduction in quality of products and services to save money, and/or sale of assets. This has been a problem for private equity buyouts that burdened the acquired business with way too much debt (some of which was used to pay fat fees to the PE firms.) Evidently, this wasn't an LBO of Stumptown, so there's hope.

From an investor's point of view, the question will be whether the business can expand and be profitable. From a coffee-fan's point of view, the question is whether the business can expand without sacrificing quality. The two are not synonymous, as Starbucks has proven.

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Marshall (original poster)

#6: Post by Marshall (original poster) »

Marshall
Los Angeles

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another_jim
Team HB

#7: Post by another_jim »

Does anyone know the history of deals like this? Specifically, is who owns the company a part of its assets, so that this deal is destructive; or is ownership irrelevant to the value?

I suppose most customers don't care how large a piece Duane Sorenson owns of Stumptown. But if everyone who works there, including Sorenson, believe that the nature of the company, and the prospects of the people working there, will change fairly soon, that would filter down. They could become tone deaf to all the nuances that made them successful to begin with.

Of course, the new owners may only desire for the current setup to hold together for just long enough to firmly establish Stumptown as a premium brand in the wider public's mind. Then they could cash out by mass producing and stamping the name on whatever bilge is selling best at the moment -- "Stumptown Buzzed: 3rd wave energy, now with Ginseng"
Jim Schulman

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Intrepid510

#8: Post by Intrepid510 »

Honestly, not good news for people that like Stumptown or perhaps some of the other companies that might be bought up by this private equity firm. I worked in finance for a while and unless you getting an angel investor, I don't think its good news for quality coffee.

geoffbeier

#9: Post by geoffbeier »

another_jim wrote:Does anyone know the history of deals like this? Specifically, is who owns the company a part of its assets, so that this deal is destructive; or is ownership irrelevant to the value?
Having experienced such acquisitions (not in coffee-related businesses), I've seen it break both ways. It depends on how the stake of the old principals in the new venture is structured, as far as I can tell.

That said... this reporting of the same development is much more amusing to read. As far as I can see (as an outsider reading nothing but the article Marshall linked and this article from the NYT) most of the Willamette Weekly's information seems to come from a pundit (and competitor) with a strong disdain for Stumptown. My googling tells me that the Willamette Weekly is a funny little tabloid very similar to DC's own City Pages.

Which is more credible: A tabloid's reporting of comments from a competitor who has repeatedly voiced disdain for Stumptown, or the NYT's reporting based on interviews with both the investor in question and the principal who is alleged to have sold the business? I'm reserving judgement, but the fact that the main source for the negative noise is both a competitor and a longtime noisemaker does color my opinion just a bit.

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SlowRain

#10: Post by SlowRain »

I heard that two Vancouver cafes have recently changed hands as well. Does anyone else have any information about other cafes changing ownership?