As I look at Unbridled Capital's current deal flow of over 600 restaurants for sale, I think 2018 should be a great year for selling a restaurant company. Much better than 2017. Let me tell you why, and several reasons.
One is the hopeful stability in sales, traffic, and profitability. We expect a moderation in food cost inflation, which should stem re-trading seen in 2017 as financial performance declined in many brands.
Two would be a favor ability from tax policy changes. Sellers should benefit from lower marginal income tax rates when they monetize their restaurant investments. Buyers should be more aggressive if they can get tax relief and realize stronger after tax profits. Keep a watchful eye on impacts of tax favorability for pass through companies, reductions in corporate income tax rates, and reduced marginal tax rates on the wealthy. In my opinion, these three items should drive a stronger M&A environment in the near term, perhaps above levels that even bullish M&A experts are forecasting.
Three would be a reduction in corporate refranchising packages. Many franchisors have been selling corporate markets at a record pace, racing to the asset-light model that Wall Street currently favors. This trend should slow as their supply dwindles, enabling more eyeballs on franchisee deals.
Fourth would be moderating seller expectations. Deals were harder to close in 2017 as valuations edged slightly downward toward a likely two to three year slow retreat to historical norms. Sellers may have slightly reduced expectations going forward, and this should result in more completed transactions.
Fifth is a surging trend of new entrance into the franchise industry. There are a bunch of 30-something-year-old financial types getting into the franchise space. They want 10 to 30 units for the first acquisition and someone 50 to a hundred. I've seen such a pronounced trend in such a short time that it is unprecedented. These folks are driving up prices mostly in the mid-tier price point and in legacy brands.
Next would be a booming M&A environment in the Midwest and Southeast. The Midwest and Southeast are red hot sellers markets right now. Most buyers and investors want to run away from the coasts and other high labor markets. Midwest and Southeast deals are getting triple the level of interest as in previous years. If you operate in one of these markets, Unbridled can likely find you a dozen buyers in less than two weeks.
Another would be over-indexing of sellers in high labor markets. After a year of weathering huge increases in minimum wage, expect to see a rash of sellers in high labor markets going forward, and with good reason. If you operate in these markets, selling now is probably the best thing you can do to maximize your long-term value. Sell out of these markets and reinvest in the Midwest or Southeast and relocate to a state with no income tax.
The next would be the relative bargain of secondary brands that are for sale. There's pricing appreciation in the moderately priced tier one, tier two, and tier three brands, creating a very favorable environment for prospective sellers. Paying five and a half to six times of EBITDA seems like a relative bargain as opposed to eight times EBITDA, regardless of what the brand is.
Another would be larger sellers. They're hard to find. If you're a successful owner of 20 or more units in a brand comprised mostly of smaller franchisees, you can expect a big premium if you decide to sell your business. This includes brains like KFC, Arby's, and Popeye's, and among others. There is a continued availability of debt and sale leaseback financing in this market. Financing for franchise businesses should continue to be strong going forward, absent a macro event in our country. However, there is an increased reticence and lending to brands with struggling comps, traffic declines, and margin erosion.
We are happy to help any time as you navigate the complex decision of when and how to sell your franchise business. Our expertise will give you depth of insight into the pricing, timing, and strategy needed to sell in 2018 and beyond at the highest prices, the best terms, and with the least amount of risk.