00:01:19
All right. Let me just start with a question, raise your hand, how many operators, business owners in the room?
00:01:25
I'm not one, but I'm demonstrating. OK, pretty good. How many have done an acquisition in the last year?
00:01:33
Does that mean 7?
00:01:35
Oh, we got to change.
00:01:36
That. Come on, look at.
00:01:38
This is depressing, I know it was a little bit down last year. Things were turning around. So we is the optimistic deal forward panel.
00:01:45
You know our topic, the acquisition path to growth, so this is really about giving you a market update on the state of M and.
00:01:53
A talking to some folks on the buy side sell side, see what's going on in the marketplace and understand strategies for how to build a company through acquisition, because that's really where a lot of you are. Here are the opportunity.
00:02:07
To start a platform and then add to it overtime successfully and we have the experts in that who will introduce themselves in a.
00:02:18
Minutes. But let me just start. We're gonna do a little check on where we are in the world. So last year when we had this panel, we were just starting to feel better about the state of hiring in the restaurant industry. Not a lot better, but we're a little bit better. Things have gotten a little bit better. The great resignation had kind of slowed down. It was getting easier to staff.
00:02:39
And then the whole commodity thing hit and performance went out the window for literally a year, the Fed started raising rates in March. So that was the backdrop to we had gone through I think at that .3 rate increases when we have this.
00:02:54
Conference. So the Fed was starting to do its work. We're starting to kind of work on that inflation factor, but we knew it was going to be a long, slow grind to get the prices up in order to kind of get that middle of the P&L right with where commodity inflation was.
00:03:10
And it was a little bit of a downer. Last year, performance was off. I tried to be optimistic. I told this crowd and I was going to pick up as soon as we got to the beginning of the year. We started rapping over those bad results.
00:03:24
And we have seen that not enough, but we have seen that performance is back, top line is hanging on and margins are maybe not where they were pre COVID because that was really a peak in the industry but not bad. So where do we sit today? So interest rates now they sit at a 22 year high across the board.
00:03:44
The borrowing costs most of you are floating rate borrowers. Most of you are short term three to five year borrowers. The index for that kind of loan is up about 200.
00:03:54
210 basis points, but also the risk premium is up. Most banks are charging 25 to 50 basis points more so that cost of capital has increased significantly over the last year. That's a factor when we're looking at transactions should be the biggest factor. I've never seen a transformative successful deal.
00:04:14
I'm done because of borrowing costs.
00:04:16
Yes, easy for me to say, right? I'm.
00:04:18
A banker. So let's just start there. The story is probably more long term rates. The 10 year hit 5% not too long ago, but it's come down about 4 1/2% as unemployment ticked up, we had a nice inflation report come out today. It's not at the Fed target yet.
00:04:36
But it came down from 3.7% to around 3.2%, so moving in the right direction, the hope of us off landing is still a possibility. The stock market liked it a lot from what I saw before I left my hotel room this.
00:04:51
So we're we're in pretty good shape there. The American consumer seems to be hanging in there.
00:04:56
Buying a lot of fast food. We're happy about that. We've seen a little slowdown in traffic, but the top line is still.
00:05:04
Was either first signs of brands or wobbling a little bit in their strategies? Maybe a little bit of discounting starting to come back into the picture as we see customer traffic.
00:05:15
Right. But overall consumer is pretty good. Consumer debt has risen, so that's concerning. But in general, I think it's a pretty good start to where we sit today to see deal activity start to pick up. I do wonder some of the latest headlines are we really starting to worry about this new class of weight loss drugs affecting?
00:05:35
Consumer habits in fast food. I can't decide if taking a pill to stop eating fast food is unamerican or very American.
00:05:44
All I know is I'm getting too old to worry about stuff like that, so why don't we go from here? That's the backdrop. Like I said, the panel is an acquisition path to.
00:05:53
Growth. I'm Nicole.
00:05:54
I'm from MUFG bank. Many of you have never heard of us, even though we're the 7th largest bank in the world. That's embarrassing to you that you haven't heard.
00:06:00
Of us? No, we.
00:06:01
Don't do a lot of advertising and then.
00:06:03
I'm going to turn it over to the panelists. Let's start.
00:06:05
On the far side with Rick to introduce themselves and then we'll dig.
00:06:09
Into the questions.
00:06:14
Capital. So we're investment.
00:06:17
You know people in the.
00:06:18
Sale and financing of their businesses.
00:06:21
But it's been all doom and gloom.
00:06:23
Right. So someone was telling me someone was proposing.
00:06:30
That the world was.
00:06:31
Going to end in 10 years because of climate change and I'm thinking what?
00:06:34
The heck where am I?
00:06:38
So maybe we can pump.
00:06:39
A little bit of optimism into this room.
00:06:41
I don't know. Glad to be.
00:06:42
Here. Thank you.
00:06:42
Very good. Thanks.
00:06:45
Good afternoon or good morning, I guess. Appreciate everyone's time today to have a hopefully engaging discussion. And my name is Barry Dubin. I am the co-founder of a businessman of KBP brands, which is a about 1000 unit QSR franchisee in the KFC, Taco Bell and Arby's brands. We founded the business.
00:07:04
And 2011 and at the time, it was about 60 restaurants and we've completed about 90 acquisitions in the last 12 years and also have built about 80.
00:07:15
During that time as well. So we operate in 32 states, we have about 20,000 team members. One of the larger franchisees in the United States and it's been a, it's been a wild ride the entire time, especially in the last couple of years. And to Rick's point, I think it feels like there's a lot of doom and gloom out there. But you know, in our business, so we're feeling.
00:07:34
Better about what 2024 is going to look like and and also the prospects to be able to start.
00:07:38
Growing via admin.
00:07:40
A which has really been a very dormant market, at least in our sectors for the last 12 to 18 months. So great to be here.
00:07:47
Hi, I'm Clay Harmon. Thanks for having me here today. I'm with Roark Capital and Rourke is in some ways a traditional private equity firm, but in a lot of ways, we're untraditional.
00:07:56
We're a focused.
00:07:57
Firm. We have a couple of key areas.
00:08:00
Restaurants being one of those, we're one of the larger investors of restaurants in the world. We love the QSR space, we have fast casual. We have some casual dining as well. We also love the franchise business model and and those two obviously intersect quite a bit and we, you know, I'm here to also talk about some platforms. We we built companies up and acquired.
00:08:20
Those through platforms and we also do standalone investments in the space as well. So thank you.
00:08:26
Very good. Thanks Rick. We're going to start with you with the state of M&A from your perspective.
00:08:30
What are you seeing in deal flow?
00:08:32
Yeah, I'm glad to. That's kind of where I spend most of my time in our companies time. I I would say you know.
00:08:37
Just to go.
00:08:37
Back just a little bit, we had you know.
00:08:40
2021.
00:08:41
Was big tons of volume. Everyone kind of sold in 2021 or bought in 2021-2022 just to give you some perspective of our business. I mean, I'm guessing our business was down probably 70% in 2022.
00:08:54
Over 2021, probably 50 to 60% over.
00:08:58
A5 year moving.
00:09:00
2023 our business is you know you probably can hear this from anyone but me, but so specific our business probably going to be about 15% in 2023 versus 2022 for 2024, I don't know, but I would say if I'm putting a stake in the ground, I'd say it'd be flattish to slightly up to 2023.
00:09:19
I've got a couple of concerns, obviously, that there'll be more deal flow because people in 2023 have a full year P&L.
00:09:25
That's going to be a little.
00:09:26
Stronger. My fear is that some of the deals will meet the market and won't clear, so we're going to see what happens because very fluid with the financing market and and the buyers that are entering into the.
00:09:37
Space. Let me give you a couple of other things that you might find interesting. The amount of strategic buyers that we're selling businesses to in the last, it was like 33% of our deals in 2022 is almost 60% this year and we think it'll be 60% or more in 2024. Interesting comment, right? So financial buyers.
00:09:58
You know, they they love multiple of invested capital. They're going to like things like low borrowing costs. They're going to like things like high unit development and increasing same store.
00:10:07
Skills and that's how their offers get get stronger, but strategic buyers who have reasons to be in the markets and build these businesses, they're probably going to become more in favor. I think as we move forward here in the next 12 to 18 months, we're starting to see institutional sellers sell their businesses. And so we're getting a a number of those types of deals which haven't been quite as readily available in past years.
00:10:27
So I think that will.
00:10:28
Weapon more brands on the market, you know, usually when we see a cycle, we'll see like this brand has like 10 deals going on in this year and this brand has 15 deals going on. But what I'm kind of seeing now is that there's more deals and across more brands, maybe this this corresponds to your thoughts. And I guess lastly, I would say.
00:10:49
It's harder to get the deals closed now. It's probably taken 7 to 8 months where it used to take 6.
00:10:55
Diligence is harder. Attorneys are more difficult, franchise orders are more difficult. Buyers and sellers just aren't as friendly as as they were. And so it's taking a little bit longer to do so.
00:11:04
I know you wanted to say thanks are more.
00:11:06
Difficult, but I appreciate that.
00:11:08
Kept you.
00:11:08
Off, yeah.
00:11:10
You want to be on.
00:11:11
The panel next. Yeah, that's right, please.
00:11:16
So Speaking of strategic buyers, Barry, you said 90 transactions.
00:11:20
In your confirmation.
00:11:20
I see him nodding over here like he's licking.
00:11:22
His chops when I make that.
00:11:23
Comment you know.
00:11:25
What's harder today about finding a deal and getting it across the finish line from your perspective?
00:11:31
Yeah. So it is a starting point.
00:11:34
I think if you go back through the last couple of years to Rick's .2021 was essentially peak earnings and peak multiples that that were being paid.
00:11:43
For businesses and so there's a lot of sellers who are sort of lingering to or clinging to the hope that the dollar level valuation for their Business Today would be comparable to what it was in 2021. And in almost all cases, earnings have been impacted by labor and in many cases food as well although that.
00:12:01
A shifting trend here as we I think are starting to get past the inflationary period, but nonetheless dollar level of earnings are down and you know multiples I would say.
00:12:10
Have sort of.
00:12:11
Remained in in a similar range to where they were previously certainly in in our view, relative to where rates are, because we think about we're buying a business.
00:12:21
Think about.
00:12:22
So the cost of borrowing and effectively we'll put together a a model that would show the expected return on investment, which is partially linked to what the cost of borrowing is for the component of the purchase price that's being financed.
00:12:34
With that, and as the cost of borrowing goes up, you know, all else equal, the returns from an equity point of view decline.
00:12:41
And so one would expect that there'd be a right sizing of multiples to effectively adjust for those hurdles that equity investors would typically be accustomed to and be seeking and. And we have not seen that. In fact, I would say that there's almost the opposite that's played out given the relative scarcity of assets out there.
00:12:58
In particular, the the top forming brands most sought after brands, well run businesses, good geographies, good fall, well economics and what have you have have actually in fact started to trade at a premium on a multiple basis to where they might have traded in 2021. And so the biggest challenge that we're seeing is I guess maybe twofold #1, there's just less.
00:13:19
That's and partially as a result of there being less assets in our opinion the the valuations and therefore returns are actually worse today than one would expect in in a period where you would probably argue that the level of economic uncertainty kind of casting forward 234 years feels like it's higher today than what you might have thought it would be a couple of years ago.
00:13:40
So that to us is the.
00:13:41
Biggest challenge that we're seeing.
00:13:42
Right now.
00:13:43
And you see that recalibrating or is that just sort of?
00:13:45
A built-in challenge.
00:13:46
I have not seen it. Rick, you probably you get you see a lot of transactions. We have not to date seen it recalibrate. I my personal opinion which is you know maybe not worth a lot but I do think that as we get into 2024 the feeling of a sustained higher cost of capital environment that we're in.
00:14:04
Then may start to cause those multiples to contract, but there's some conflicting things out there that would offset that. For example, the private credit market is very, very hot right now and we think there's a lot of people that are going to be launching fund during launch funds. And so the availability of debt is surprisingly stronger than you might think, which would, you know therefore result in there and being an offset and and.
00:14:24
You know, if people are, if if that if that is relatively abundant, which I don't, wouldn't say it is say but it feels like there could be some, you know, new players coming into the market.
00:14:32
In our sector, at least, there's some offsetting factors. So I my personal belief is, is that there will be a reset, but it probably won't be that substantial as we get into 2024. If you have an.
00:14:40
OK.
00:14:42
Opinion of well, I you know I do. But I'm like you. I'm. I'm not sure.
00:14:46
You're just trying to.
00:14:46
Sell stuff as much as possible.
00:14:47
Just trying to sell it as much as I.
00:14:48
For a visit, this response is not credible here so.
00:14:48
Can sell it for it, right?
00:14:52
I would say.
00:14:52
Quickly I would say like it's it's flight to quality would be clearly true. I mean this year we've sold several companies at over 10 times EBITDA, right, like WOW. But there's been a huge flight to quality on some on some.
00:15:03
Assets and then the second thing I would say is supply and demand is a big deal. So when you have you know if there's more supply in the marketplace, you know then the demand may moderate and then all of a sudden.
00:15:15
Pricing could change.
00:15:16
So we'll we're watching that because I think 2024 people will naturally.
00:15:21
You know, think I've got a decent P&L, maybe I missed the 2021 window, but maybe I'll sell this year. It might be more inventory.
00:15:29
So Clay, we're all curious, we'll work.
00:15:33
Got the white whale this year and and I think everyone wants to hear a little bit about that, but I'm very curious when you think about how real art goes about its acquisition strategy, you have platform companies, as you said, you also have independent acquisitions where you keep companies on their own. How do you make those choices? How do you think about doing a deal?
00:15:53
Of platform, do you think about valuation differently? Do you think about the integration risk differently? Maybe tell us a little bit about your philosophy around those things?
00:16:03
Yeah. I mean, we like both. We have done acquisitions that are standalone companies. We continue to do that. We also have our platforms. And so when an opportunity comes up or when we're.
00:16:12
Facing one we think about it through a couple different lenses and and so there's a lot that goes into it. One thing with the platforms is that it's really important in our view to have platforms that have companies that are of somewhat equal size. So size does play a role here. We, we we don't want to put a small hyper growth brand into a big global scale platform.
00:16:32
Because the attention is not going to go where it needs to go, so that can be a distraction.
00:16:36
But I think the biggest thing we think about is for a brand, what what are the things that the platform will do for the brand to accelerate its growth. And then the other piece of it that doesn't get talked about as much as what does that brand bring to the platform that can make the platform.
00:16:50
Itself better. Both of those lenses.
00:16:52
Have been used.
00:16:52
For in the restaurant space for us, for Inspire brands on the larger side and for focused brands.
00:16:57
On the more mall and snack based side and so you know what does that mean exactly get specific. So it's you know cost synergies are are a part of platform investing they they just are but we do cost synergies as sort of like that's how you get the deal done. The cost synergies help you pay for the deal to help you beat others who might be competing on price. But it's really the revenue.
00:17:18
Synergies that are the magic for a platform, what are those kind of things? Well, does the platform help the the target company open more units faster?
00:17:26
Does it help? We had the panel on here before was talking about investing in digital platforms and in loyalty. Does it help accelerate that? Those things are really expensive, right? And for one single brand to do that on their own, there's a time element. There's a there's a, you know, get it installed element and there's a big cost element being part of a platform can accelerate and help all of those things.
00:17:46
So we really do think a lot about that.
00:17:48
So you know that's the revenue synergy piece of it is really where the magic happens because you're getting can you get more customers to spend one more dollar, can you get one more new customer to come there and can you get people to come in one more time per month and those kind of systems that they're investing in in platforms really help do that. So we think about it, it's always great when.
00:18:07
You can go.
00:18:08
Into a platform, but there's a lot of companies that.
00:18:10
And be stand alone and be successful. The target you mentioned is big enough to make those investments on their own and they.
00:18:15
Don't need to be part of a platform.
00:18:17
So Rick, I'm. I'm just curious when when you think about negotiating deals on behalf of your sellers, I want to talk a little bit about financing and you were dancing around the banks, but are you asking for your sellers expecting financing to be committed more often now than it used to be? Are they more worried about the execution of financing? Is that coming into the?
00:18:37
Future more readily than it than it.
00:18:40
Used to. Yeah, it's a great question. It's always a concern, right? You're always worried about like financing. You're always worried about corporate approval, you know, and you're worried about kind of can you get the purchase agreement signed and negotiated properly? Those are some of the big hurdles in the deal.
00:18:53
Well, I mean, so you're always.
00:18:55
Worried about that? But I but I.
00:18:56
Do think now?
00:18:57
It's kind of an issue of quality.
00:18:59
Kind of in the vein of what Barry was.
00:19:00
Before you know you have.
00:19:02
Kind of like a bucket A and.
00:19:03
Bucket B and bucket A. You know, we're working with a client that has an awesome brand with high AUV's and a great area of the country.
00:19:09
And they remodel their restaurants. That type of a business.
00:19:11
Has lots.
00:19:12
Of interest and lots.
00:19:13
Offers and you don't worry so much about financing the the the capital is available, there's.
00:19:18
Plenty of people that have.
00:19:19
Cash that are wanting to buy businesses like that, you're happy and you're satisfied sellers can usually get comfortable that the financing may not be committed per say when they make the offer, but that it is available and the deal will ultimately win bucket.
00:19:33
B, which is a a fairly decent bucket is the, you know, maybe languishing brands or bad areas of the country or or or. Or maybe, you know, AUV's aren't aren't as aren't as good, or they haven't invested in the.
00:19:46
And when those businesses come up for sale, you typically are attracting maybe lower capitalized buyers or you're, you know or you're maybe you're coming after independent sponsors or maybe you're coming back to people who have a track record of dropping deals and not completing them. And oh, by the way, we know that, you know, like all those probably know the people who who make offers on deals and don't close deals. So.
00:20:06
Those types of buyers when they come into the market on a business because the business isn't the best business, those are the types of deals we're.
00:20:12
Very worried about the financing.
00:20:15
Of course I'm.
00:20:15
Hugely worried about it, but in those types of deals, sellers are not really able to be all that ******** about demands on the buyer.
00:20:24
Because their business isn't.
00:20:26
You know overly.
00:20:27
Powerful. So you kind of have to work with it and you kind of have to work with with the terms and the conditions and and. And there's more risk that you have to take in those types of transactions and the financing, you know, you know in our deals right now some of the financing terms change along the way you know and it's happening in real time so.
00:20:46
I think I think prudence and patience and then B in bucket a don't.
00:20:49
Be in bucket B I'd.
00:20:52
Who's changing financing terms along the way?
00:20:53
Yeah, yeah, yeah.
00:20:55
Yeah. Listen, couple of.
00:20:56
Them the the deals that does you're you're all over the map from the very large transactions that we will not mention into more mid sized transactions you're dealing with banks. Sometimes you're dealing with capital markets, you're dealing with securitization.
00:21:12
What are you?
00:21:13
Seeing across the the larger capital markets landscape today.
00:21:17
Yeah, we we do play in all those markets and we've actually seen those markets shift around a lot and we've had to shift around with them. So they're constantly moving one month or one year. It seems like the securitization market is the most attractive and then it's the banks, then it's the.
00:21:33
Private credits and it just changes. But what what's been consistent with all the groups in recent months is in in last year has been a focus on the free cash flow of the business.
00:21:42
Right. And you know, franchise or businesses look great in that regard, but there's a lot of others that are operating companies that are operating restaurants that have really great free cash flow profiles as well. They pay attention to their working capital. They have, you know, great effective tax rates, whatever it may be. And it's interesting to see the banks focus on that because it's something we we have always been.
00:22:03
Hyper focused on as an investor, so we we actually are very much aligned with that. But to your point about terms changing, we've seen lending groups and banks sort of.
00:22:11
Tweak terms a little bit around keeping cash in the system or or keeping it to go pay down debt versus letting it sort of float around or fly out of the system. So I think strong free cash flow businesses you know can be tough when you're when you're growing in hyper growth mode, but a big focus on that is really important in this environment and for us it will always be important.
00:22:30
Have any banks ask you for deposits?
00:22:34
Every bank.
00:22:36
That's the first question we get is deposit. So the treasury.
00:22:41
We can talk.
00:22:41
A little bit more about that, but you you mentioned private credit. I'm very interested here and this is a little bit of a lead in for you, Barry, because you've used that market almost exclusively for the last, you know, several years, there's been a boom in private.
00:22:56
Not. Not everyone in the room maybe knows what that is. It's sort of a an ill defined category, but it's basically a group of unregulated lenders, finance companies.
00:23:08
To generally speaking, we'll finance that terms a touch more aggressive than what banks will do and a couple touch is more expensive than what banks will do, but allowing some flexibility, particularly in an acquisition scenario to take on a little bit more financial risk to make a really interesting acquisition work. And you've worked with that.
00:23:29
Very for a while. What? What do you see? How? How well is it work for you and and.
00:23:33
What are the pitfalls?
00:23:34
For folks in the room who are thinking about going down.
00:23:37
That path? Yeah, absolutely. Yeah. So just a bit of background. In 2011, we originally established the business. We had a lending relationship with a regulated bank and everyone would know their name. And we grew to a several Member Syndicate. And then in 2015 or 16.
00:23:54
After being with them for four or five years, it was a really great partnership. Our business had had grown to a size where we would started thinking about financing alternatives.
00:24:03
And the impetus of us making the change is, I think ultimately the value that we've seen through it, which is is.
00:24:09
A these you know, unregulated finance companies will tend to be much more creative in the structure of a deal, but it it is, it comes as an expense and they are creative in several regards. The reason that we initially made the changes we were looking at acquisition.
00:24:24
Where TTM EBITDA was $1 million, but we knew it was going to do 9 million upon it being integrated into our system and getting that level of credit is is a is a harder thing. It's sort of a little bit of a bespoke deal and I think harder for those that.
00:24:38
You know, having to manage with regulators to sort of justify and adjusted earnings for purposes of calculating covenants. And so given the the sort of the, the traumatic sort of difference between the TTM earnings and the expected earnings upon us integrating the the deal, we made a switch at that point in time and and that is one of the things that's been most.
00:24:59
Helpful to us and.
00:25:00
This new structure, it's a structure that now it's not new, it's we've been doing it for partnering with the group for seven years and it's now 11 banks. We have about a $650 million credit facility. So it's a, you know relatively large facility and you know the biggest advantage for us is is that we are quite acquisitive and we have an arrangement whereby.
00:25:20
The earnings of business is generating prior to our acquisition are something that everyone looks at and and and helps in the in the review of the business. But really what's important for the for the covenants is what we expect everything to be going forward. And I think for us.
00:25:34
Having the velocity of transactions we've had even prior to doing the the transaction with this group, we had a we have a wealth of data that suggests you know if there's a $1.4 million KFC and here's what minimum wage is in that market here is about what the margin should be. We always say we have to verify three things, revenue, rent and royalties, the three R's and then the balance of the P&L.
00:25:55
We construct ourselves under our own operating.
00:25:57
Model and this credit facility allows for us to gain pro forma credit, which thereby allows for us to finance a much greater percentage of the purchase price with debt versus equity which is you know very accretive from a an equity returns perspective. And so that's the the number one thing and you know throughout the credit agreement there's otherwise you know some other pretty substantial advantages.
00:26:17
Level 1% annual amortization versus what would typically be kind of a 10 year mortgage style amortization. So we retain a lot more of the cash relative to paying it down for principal. We retain that cash in order to you know have ammunition to go buy or build additional assets.
00:26:32
So those are a couple of the points that have been really helpful for us and very much particular to our business have made sense.
00:26:38
The biggest challenge in doing this is biggest downside is the cost, and generally speaking you'll get more leverage. You'll get more flexibility, but the pricing of a private credit deal is going to be, I'd say 2 to 300 basis points higher on the risk premium side than what you'd see in a pro forma pro rata deal, I should say, which obviously is a quite substantial.
00:26:59
Number you think about someone like us with $600 million of debt outstanding using rough numbers?
00:27:04
And you have two to three basis point it's points. It's a real number. So you have to look and say are we in a year going to you know on average gain enough utility from this borrowing arrangement that will be in a position to sort of more than return on that incremental cost of capital and in over the years it certainly has panned out for us. But I I don't believe that our credit. So first of all.
00:27:24
We probably would need to be at 15 to 20 million of EBITDA to likely attract this market. You have to be larger, but I would also say that unless you are really a big part of your strategy is to grow the business and wanting.
00:27:36
To kind of utilize levers to do so, I would say that you'd really be cautious about whether it would make sense to to pay that premium because you know, if you're just sort of running your business day-to-day without much M&A growth, it probably doesn't warrant the premium that you would pay to be.
00:27:50
Into a structure like ours. Sounds like you need.
00:27:53
To buy something so.
00:27:56
We're ready.
00:27:56
You ready to go?
00:27:58
To your conscious supporter, there's some risk involved, particularly the cost there was recently in the Wall Street Journal just this week, as S&P did a.
00:28:06
That the of the private credit market trying to understand the risks a little bit.
00:28:10
Better they looked.
00:28:11
At I think it was 2000 borrowers and 400 billion of debt and ran a stress test. So not particularly difficult stress test, but a 10% down on earnings and a half a point increase in.
00:28:22
And interest rates and they found of that sample of borrowers, 46% could not make their debt service payments with free cash flow. So there's a.
00:28:31
Risk to the.
00:28:31
Business and Clay, I'll, I'll, I'll.
00:28:34
Turn to you because you guys have used the private credit.
00:28:36
Market as well.
00:28:38
Not certainly. Not exclusively, like Barry, but here and.
00:28:41
There but.
00:28:42
For borrowers are out there.
00:28:44
Who don't have the experience and sophistication that you guys have, how do you think about them taking that kind of risk with their business?
00:28:52
Yeah. Well, we're still, we we really like them a lot. They are, they think a little bit like equity in some cases which actually brings a lot more diligent scrutiny. They ask really tough questions which is actually a pain but can be helpful lot of times they're taking equity, they want to do some debt and they want to throw a little bit of equity in to have some upside. Sometimes they even ask for board seats which is those kind of things.
00:29:13
And add some challenges to it so you have to think really hard about who you're going with. The other thing is that I've noticed.
00:29:18
That if any of them have invested in the restaurant space and had a bad experience with one or two investments, they might be out of it, right? Whereas the bank might think about it a little more holistically and longer term, I think there's individuals at some of the private credits that say, well, I'm not putting my name on another restaurant. So then there's also some that have had great experiences. So it's it's an interesting dynamic. Then the last thing is.
00:29:39
They hate revolvers, they do not like revolving credit facilities. They like to put all the money and fund it. Their funding mechanisms are a little bit different. I find banks to be a lot easier to deal with to make a phone call and be a little more flexible on that. But they they lack the flexibility there sometimes. But the better ones are getting a lot better at it.
00:29:55
Barry, any thoughts from you on that?
00:29:57
Yeah, I mean I I all that Clay said is is true a few really good points. I do think maybe a little bit of emphasize the point. They are more partnership oriented, which I think generally is a good thing and and least of what we've seen and I say partnership oriented, it doesn't mean that a traditional lending institution is not of a partnership.
00:30:16
Mentality. I mean, they maybe better say that they they're probably easier to align in a sort of a the investment thesis of we're going to grow this business and and you know thinking a little bit more in in a parallel path view to that they are much more actively involved in due diligence on.
00:30:33
Front end but I have found and this may be just based on the relationship we've established with our our our partner that we've now completed probably I don't know, 60 of the 90 acquisitions have been with them or or somewhere in that number that they also have come to really trust what we what we're saying and there's like sort of a little bit it was initially a lot more due diligence.
00:30:53
Now that the relationship is is grown to where it is, there's actually a very low touch relationship we have and I don't say that that they're hands off or they don't care. They truly are very intelligent investors, but there's I think a little bit.
00:31:04
More of we've got 20 portfolio companies to manage. These guys have been with us as long as anyone and they've proved through their track record they kind of know what they're doing. And so we'll just kind of step aside and you know kind of get the five things we need for every acquisition and ask where the wire should be sent. And you know for what amount. And so it's become a very, very efficient process for.
00:31:23
Us to to be working with the Group of working with.
00:31:26
Rick, I'll switch gears for a minute and thank sort of strategically for the folks in the audience who.
00:31:30
Might be thinking.
00:31:31
Our future is to find a platform and build on it and how to identify what the right platform is. Brand choice management teams. Your practice is mostly in the sales are we use and buy side searches too and.
00:31:43
You certainly work with a lot of those.
00:31:46
Strategic buyer.
00:31:48
If you're starting out down that path, what kind of advice do you have for folks about what's the right platform to identify and start with, and how much should they pay?
00:31:57
For that platform.
00:31:59
So that's a big question. I actually answered this question probably if I answered it hundreds and hundreds of times, you know.
00:32:05
Get a lot.
00:32:06
Of these phone.
00:32:06
Calls. I'd say the first thing I would say is you're going to have to trade in your Gucci pants and high water pants for some for some non skid shoes and get in the.
00:32:16
Back of a restaurant, you know.
00:32:17
I mean.
00:32:18
Our industry has been it's been kind of the new entrance into the industry, have been kind of anti that right and hopefully we'll see in a reversion back to to people who actually you know are going to be inside the businesses and watch the businesses and participate in the businesses themselves. People call me and ask this question all the time.
00:32:35
And so.
00:32:36
I'll say what you want to do is you want to sign.
00:32:39
Up to, you know, get involved in seeing some deal flow from people and learn.
00:32:42
A little bit about.
00:32:44
The brands through the deal flow that you see, you'll learn things like unit economics and remodel schedules and royalty rates and consumer information on the brands.
00:32:53
And then I'd say within six to nine months, you need to have narrowed your search to two to three brands, no more people who come to me and.
00:33:03
Say oh I.
00:33:04
Would be interested in anything, anywhere and 99 times out of 100 I can predict that they'll never buy anything.
00:33:11
And so it's it's it's, it's.
00:33:12
An it's a weird uncanny.
00:33:13
Statistic but but, and I'll even tell him that when I talk.
00:33:16
Like I would, I would buy any brand anywhere for the right deal. I got plenty of money like that kind of message which you hear all the time. Then I said I'll tell them I say, well, that means 99% chance you're not going to buy anything.
00:33:28
So you want to skinny it down to two or three brands. Then you want to go get approved at A at corporate go meet the management team at corporate and find out what the brand's about, what the requirements are. Too many people coming into these, these types of platform investments don't look at personal guarantees, relationship agreements and non compete issues or they think oh golly Gee, I can work those things out with the franchise.
00:33:48
So when I get down there and they.
00:33:50
They can't, and each brand has a different approach to these three big issues that could have a big impact on your future growth potential. Once you've done that though, then you can make offers and if you make an offer on a business that we're selling and you don't have any, you haven't had any discussion in the brand that, that, that we're selling, what do?
00:34:08
You think a seller is going to say to that?
00:34:10
So we're going to take your offer, right? So tons of risk.
00:34:13
So you want to get narrow, you want to talk with corporations. And then I think I I'm starting to see a little bit of pushback on the legacy brands, which is where we've traditionally, you know, held a lot of our volume and a lot of the deals that we've done, I've started to see people talk a little bit about maybe some of these third inning or 4th inning brands that may have 500 units and there there isn't, there is a platform to get into on the franchisees.
00:34:35
Side, but there's also a nicer runway to growth and maybe a little more open minded and and more entrepreneurial type of franchise. Or so I I've been fielding more questions and calls like that recently. Obviously the big reason why you'd get one of the major major reasons you get involved in the legacy brand is there's tons of deal flow.
00:34:53
You can quickly get to a scalable business.
00:34:55
It's a very predictable business and we all like, you know, the the recession proof nature of business like like like ours. It's really a bet on Americana, isn't it? Like it's a bet on the American future which, you know, I don't know about you all, but I still make that bet every day.
00:35:11
Other than those weight loss drugs we're doing, yeah.
00:35:12
Other than those?
00:35:13
Weight loss drugs.
00:35:15
So. So, Barry, you, you're the core of your business started in the KFC brand. You've added to that, you're probably always thinking about one or two more when you kind of.
00:35:25
Look out on the.
00:35:26
Horizon, what do you like to look for when you identify a brand to go into? What are the key factors?
00:35:32
Yeah. So if.
00:35:33
We look at the variety of things, but some of the key ones you list off, we look at the ownership of.
00:35:38
Your brand and you know, want to be in a position where you've got a an owner that you think is stable, thoughtful. You know we're going to be hopefully relatively predictable and how they manage through you know the different, you know factors that you manage through during a time of ownership or the three brands were today are owned by Young Brands and Inspire inspires, it's owned by the work folks.
00:35:59
Yum's public trading company, but what you have is you have these multi you know, multi brand platforms where our view is there's a lot of synergy of establishing a relationship all the way up through kind of the most senior people within an organization.
00:36:11
Management and ownership and really trying to leverage that relationship across a couple different franchise or relationships as opposed to hopefully having to go and get to 1/3 or 4th or 5th franchise or so. That's something we look for as we think about brands to invest in management of those brands. Obviously you can see the historical results etcetera, but.
00:36:31
You know, and kind of understand the four well economics that's kind of the I think the little bit of the easier part of the analysis is pretty easy to understand how Taco Bell economics work versus KFC, it's arithmetic and then it becomes more of an art to project.
00:36:43
Where the future of the brand is going to go, but in addition you think about what our strategy is, which is one of being a you know we're we're of pretty significant scale today and want to be a consolidator. So for us to be attracted to a brand that needs to have substantial scale such that we think we can grow to be a decent size and they got a rule of thumb.
00:37:03
Generally would be. If you're predicting that you're going to be more than five or 10% of the system, you've really got to pause and say, is that really realistic to think you could do that? So we're about 20% of the KFC system in the United States. We think it's very unlikely that you'd replicate that in another brand.
00:37:16
And so you have to look and say, OK, Taco Bell is 7000 units, they have a cap, you can get the 250. What does that translate to from a revenue and profitability perspective? Arby's got has a little over 3000 units, you know, in, in kind of looking at that construct and saying, OK, well, we want to make sure this is going to be a big enough opportunity for us because we want to buy into what it would eventually become a corporate orphan.
00:37:37
Just by virtue of the size of that business compared to the balance of our business. So that's a very important thing.
00:37:42
And we look at the the makeup of the franchisee base or the ownership base of the restaurants and try to, you know cast forward. Is there going to be substantial opportunity to buy into this business? Is there how fragment is a franchise based as corporate owned stores, what's the likelihood of one or both of them thinking about selling over the course of time if they do sell, how competitive will the process be?
00:38:03
What's a way to differentiate ourselves visa vie being able to, you know, acquire these assets at a level that's really accretive for our shareholders going forward. And so that's a big component of what we look at as well just given what our strategy is and.
00:38:14
And being a consolidator.
00:38:16
But I think we're.
00:38:17
Short on time now, but I did want to leave an opportunity for questions from the audience.
00:38:21
We've we've got a lot of expertise here and I don't know if I covered everything that people are interested in so.
00:38:26
Are there any questions?
00:38:29
There's been a lot of talk about that.
00:38:31
I've I've had a lot of questions like that and certainly I think we're going to see more of it. You know, if I look back in, in our deals in 2023, I would say most of you know, I'm struggling to remember one deal where we had that component of seller financing in place. We have seen a little bit of a switch up to where.
00:38:49
Maybe it wasn't the right time to sell the real estate because the cap rates have moved in the wrong direction, so we'll keep a little bit of real estate aside and just lease it to the buyer.
00:38:56
Instead and then.
00:38:58
Maybe work out some?
00:38:59
Option to buy at a later point in time. I do think the seller financing piece and the earn out piece is probably something you'll see a little bit more, especially if the lending you know the lending environment worsens at all. And I do think you'll see it with some newer brands. You know, I was just talking with someone a few minutes ago who has a really exciting.
00:39:17
Concept and has new units and is building, you know, a bunch of new units and if they go to sell that business and they have a bunch of new units.
00:39:24
There we have to come up with a.
00:39:25
Construct of what the?
00:39:26
Value of the brand new unit that's only been open for 30 days is as a component of the entire price of the business, and that can suggest some sort of earn out or seller financing. You know over time.
00:39:38
I completely agree, and I've seen that was going to be my biggest watch out for the group is when you're buying a platform it.
00:39:43
May have things in it that have been in it for four or five.
00:39:46
Years. But the things that were acquired in the last six months, nine months, 12 months a year, you really have to question those things. And I've seen a situation where a big accounting firm put their name on a run rate number. You know you're buying this today, but it's going to get to here next year and it didn't materialize. And it turns out that they counting firm was just taking the sellers numbers and feeding them in and putting.
00:40:06
Their name on it so.
00:40:07
It is a big watch out in an area where I think pushing for earnouts is a really, really thoughtful idea.
00:40:13
I would say as we talk about it a lot and then you get to the point of realizing the complexity and we've generally, as we've talked about them with with sellers have concluded it's not worth the complexity in most cases it it just feels like there's for every one of those that gets done that you've talked about 20 times and people ultimately conclude it's often more complex than what you might think.
00:40:34
And I think often we find that if you know the bid ask spread is you know 1,000,000 to 1,000,000 three, you say, how would we give you a million one or a million 150 and eliminate this kind of contingent component of the consideration that would be using fake numbers that but that would be kind of a common outcome that we.
00:40:49
Would see in those discussions rapid fire.
00:40:52
Everyone wants to hear what's happening in the next year.
00:40:54
What's your outlook for deal activity?
00:40:58
All of it rapid fire.
00:40:59
Yeah, yeah.
00:41:00
I mean, you know, we're still way below deal flow that that you know Barry alluded to it. I think we'll see higher deal flow in 2024. I think it will happen in the first quarter to the second quarter when operators missed the boat in 2021. But when they strip out 2000, twenty 21 and 22, they're going to look at.
00:41:18
The rest of their 2019 and 18, and they're going to look at 2023 and they say their business isn't all that bad of shape and now is the time to do it. I think we're going to have some hard comp rollovers in 2024 generally because of we're rolling over kind of elevated sales numbers with high.
00:41:32
Pricing think we're going to see a fair amount of deals have trouble getting closed, so be cautious at the deals you look at and make sure you're working with advisors and buyers and sellers that that have reasonable expectations. But I do think we'll see an uptick. It's going to be hard.
00:41:48
Year though I.
00:41:48
Think it could be a.
00:41:50
Hard year again next year.
00:41:51
Cautiously optimistic, Sir.
00:41:52
Cautiously optimistic.
00:41:53
Yeah, I would say in the last 90 days, we've already started to see an uptick and I think that will carry through to 2024. So I agree with.
00:41:59
Like the on the outlook thing, a point that Nick made earlier is I think from a consumer perspective there's, you know, a bunch of caution out there. And I do anticipate you'll see some very value oriented LTO type activity, especially as you get into the first of the year where consumers have exhausted a lot of their savings and spend a lot of money over the holidays and are gonna look to kind.
00:42:18
Of tighten their belts from a financial perspective.
00:42:20
So I anticipate a lot of the brands that you know the brands were in and and brands that we know well I think are going to be launching relatively aggressive Altos and the game there is try to get people in the restaurant and then switch them to buy something that's more profitable. So you know a lot of those might be like smaller add on.
00:42:34
Type opportunities for that purpose, but I that would be one thing I would anticipate, but I do think the consumer continues to be in better shape than kind of the headlines would cause people to think that they are.
00:42:44
Yeah, traffic's always going to be a question it is ever in the past and will be in the future I think next year there's an added wrinkle of how much price our restaurant brand is going to take because this year they took a lot and actually took a lot for good reason, right? It they were matching inflation. What's that going to look like when it actually comes back down to Earth a little bit and are they going to take?
00:43:02
The historical average of price a little below a little more.
00:43:05
I think that's one big.
00:43:06
And then on new unit development in brands, sort of you know it's really great when you have a nice pipeline, if you're an acquirer like me, you love to see a nice pipeline of what's going to open the next 12 months. Pipelines are not as dependable as they used to be. I think landlords are are building slower, permitting you all hear about the experience, the nightmare of permitting.
00:43:26
I think that kind of stuff takes a little bit of the certainty out of those pipelines. And so seeing I think early in the year that people that show that they're hitting them, I think that's a really good sign for your busy.
00:43:37
Yeah, I'll give my 2 sensors on the bank outlook piece of it because I think that's definitely part of the puzzle for M&A activity. And you know as we've seen, there were some bank failures in the last year. I don't think banks are going to get easier to work with next year that the regulatory expectations around mid sized banks are going to change.
00:43:57
And those banks are all adjusting to new capital requirements. So the request for deposits, the tightening of credit standards, the increasing of credit pricing that all have a little bit of an impact unless you're working with MFT then.
00:44:11
It should be fine.
00:44:13
But I do think that that part of the market will be a little bit tighter.
00:44:17
That's your.
00:44:18
All right. Thank you everyone.