Current State of the KFC M&A and Financing Market – Summer 2018

By Rick Ormsby
Managing Director
[email protected]

The state of KFC M&A and financing has changed substantially in the past twelve months. While various franchisees have been consolidating small KFC operators for several years, we are now seeing larger, legacy KFC franchisees as active M&A participants. Some are selling, some are buying and some are recapitalizing their businesses.

Unbridled has had an unprecedented start to 2018 within the KFC brand, and our experience and perspectives below come from assignments eclipsing 200 KFC restaurants so far this year:

  1. The lending market is very strong locally, regionally and nationally for the KFC brand – across franchises of all sizes. Refinancing a KFC business is very easy right now as national lenders are voraciously looking for good KFC clients. It is refreshing to see and reminds me of days of old.
  2. Interest rates are increasing, resulting in higher borrowing costs. Watch the trend here – this could eventually put a wet blanket on further increases in valuations.
  3. New buyers are very interested in entering the KFC system; however, there are limited opportunities to do so since the average franchisee is small, and they generally need 10+ units to establish a ‘platform’ or ‘beach-head’ investment in a given brand. Any franchisee with a KFC business this large, or larger, should be poised for a big premium in a sale.
  4. KFCC recently told me that only 3 or so outside franchisees have entered the system in many years. Corporate is thus very interested in approving new groups to become KFC franchisees. They are more eager to approve outside groups than most other brands we follow. Why? Developing new units and strengthening their franchise base are their likely goals.
  5. Last fall, Unbridled began a massive campaign to attract new franchisees and buyers into the KFC system, anticipating that several larger KFC franchisees might be ready to sell in 2018 and 2019. We now have a robust Rolodex of over a dozen well-capitalized, prospective franchisees and investors for the KFC brand.
  6. These new prospects are large operators of other brands, young professionals backed by family offices and private equity firms. Our competitors generally do not know many of these groups.
  7. Several of them have now begun to make offers on our recent KFC sell-side M&A assignments. They generally offer high prices and strong terms, better than most existing KFC franchisees who are buyers. However, today’s buyers have complex requirements. Sellers need significant business and legal representation to navigate a successful closing or risk making huge mistakes.
  8. Though there have been delays and plenty of frustration, remodels at KFC are happening and are generally resulting in sales lifts – sometimes substantial ones.
  9. EBITDA multiples are ranging from 5.5 – 6.6X depending on the size, scale and sales volume of the packages. On recent acquisitions, we are seeing the top-end of these multiples for the first time in over 20 years!!!
  10. Cap rates on real estate are still favorable but are expected to worsen as the 10-year treasury continues to climb. In our view, this will dampen any further increase in valuations on the sale of KFC real estate (similar to comment #2 above).

Given our view of the KFC market at mid-year 2018, we feel like now is as good as it is going to get from a KFC valuation perspective unless franchisees somehow start selling much more chicken. If you have any questions or would like to discuss further, please feel free to reach out anytime to Rick Ormsby, Managing Director, at 502-252-6422 and [email protected]

Rick Ormsby
Managing Director
[email protected]