We’ve not talked much about PAR, the parent company of Brink POS. For a quick primer PAR is a public company that has historically been a government contracting business. In 2014 PAR stumbled into perhaps the luckiest acquisition of POS history, buying Brink POS for $15M. That investment has paid dividends: while PAR’s conventional business lines have stagnated, Brink is now worth about $300M on fundamentals, representing an astounding IRR of 82% for PAR. Why do we say so?
Brink is currently on an $18M run rate, growing 50% annually. We’ll use the latest multiple analysis of public software companies to find Brink merits a 15x revenue multiple.
But the bigger story at PAR is what’s happened with their management team.
PAR was founded by Dr. John Sammon in 1968. Since that time the markets have changed to favor software over hardware and PAR has struggled to find the right leadership to build a software business. When activist investors involved themselves in 2018 they pointed out that PAR has underperformed the public markets by an alarming rate due to this reality.
“We estimate that if ‘Dr. Sammon’ had sold his PAR stock in 1982 when the Company went public and simply invested in the S&P, he would be worth over $5.5bn. How can we trust someone to make a decision about minority shareholder wealth when he clearly does not care about creating wealth for himself or has an [sic] awful track record of doing so?”
Adam Wyden, ADW Capital
In 2018 PAR brought in Savneet Singh as CEO. Savneet has a rich software background and made quick work of prioritizing growth at PAR. He remedied many of the agile practices within Brink’s software release schedules and trimmed company spending where relevant. He hired Ryan Volberg of Vivonet esteem, and most recently acquired Restaurant Magic, a restaurant back office tool, to double down on software growth.
We have a couple thoughts on the matter.
First, there’s massive pressure to verticalize. You’ve seen a lot of POS companies in the SMB space verticalize to drive ARPU. Before that the back office providers (HotSchedules, Compeat, Crunchtime, et al.) were verticalizing. And even before that legacy POS companies Micros and NCR used their walled gardens to keep out superior solutions while their merchants suffered with inferior products built by the mothership. PAR buying Restaurant Magic is no doubt in-effort to follow this trend.
Second, many independent software companies in this space will struggle to find an exit. Venture investors don’t care to touch this market and very few businesses will reach ever $10M in recurring revenues, the defacto baseline revenue number to solicit private equity interest. This is an opportunity for a company like PAR, which structured the Restaurant Magic acquisition perfectly:
“We acquired the business for $42 million, consisting of $13 million in cash, $27 million in PAR stock and a $2 million seller note payable over three years.”
Savneet Singh, PAR CEO
Restaurant Magic earned $8M ARR on 5,300 restaurant locations. This means that PAR effectively bought Restaurant Magic for 5x revenues, using only 2x revenues of cash with the rest in stock. PAR plans to grow Restaurant Magic to $12M of ARR in 2020 (a 50% growth rate) cross-selling to their enterprise customers and bringing in the software rigor Savneet instituted at PAR. Come 2020, Restaurant Magic should be worth $180M using public SaaS fundamentals (a 15x revenue multiple per the above logic for Brink).
Yet while financially good, we always worry about verticalization. That’s because it’s hard to do everything really well. In fact, we’ve yet to find any POS company that has magically solved any layer of the stack well enough that their stack solution would stand on its own in the market. Remember: Olo exists because POS companies can’t even get their APIs right – something that should be core to the business of POS companies. So third, we’re still not sold on verticalization.
That said, we told you that Savneet was sharp. Savneet sees defensible product opportunities in combining the data of the two companies. Instead of riding Restaurant Magic into the dirt, which is what we expect of many verticalization attempts via acquisitions, Savneet plans on heading the other way and investing in R&D to do things that expand value and revenue opportunities.
We talked with Restaurant Magic management for years and this was totally beyond their mental comprehension. PAR should be able to seize this upside and tack on even more value to its acquisition. This is the fundamental difference between a payments bro and a software executive: R&D investment to capture product upside. The opportunity may not be apparent at first but you feel so dumb for not seeing it after it reveals itself.
PAR will still remain neutral on back office, we might add. So while they will technically own Restaurant Magic, merchants won’t be forced to use it, or even pay integration fees like Toast and NCR have imposed upon third party solution providers. The R&D PAR intends to invest will benefit Restaurant Magic users who aren’t on Brink either, even though we think Savneet and his team are clever enough that they will make it really compelling to use Brink eventually.
While we don’t invest in POS companies, PAR is one that would be on the short list.
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