Rick Ormsby
Well, welcome everybody. We're just kind of just shooting the breeze here as we're getting, we're getting ready to to start webinar. We're excited to be here today and I just give a couple of quick updates that I usually do on these on these webinars. First of all, shout shout out to all you podcast listeners and I I'm really thankful that you're listening on podcast the podcast. Is growing like a weed. And and so I'm thankful that you're going to be listening to this. You know, always feel free to reach out along the way to us at unbridled capital. You know how to reach me, Rick Ormsby. You know, Derek works for unbridled and we're excited to have Tom Ice here today. I think a couple of a couple of quick things I'd say, you know, general business update market continues to be a little bit slow, started to see a little bit of a pickup in the last couple of months at least from phone calls for. Clients wanted to either sell or refinance their business, but most of them the people that would be would be sellers, whether they're small, medium or large scale. You know, operators are franchisees or are or a lot of them are exploring the idea of of. Pursuing a strategy towards the end of the year or maybe in Q3 when they have a better trailing 12 month P&L, we had a bad 2022 most most franchisees. Did you know top line might look good, but, but profitability hurt was was hurt a little bit. So in the first and second quarters of this year, most folks are starting to see some meaningful changes in a positive direction. Of mitigating commodities and you know increasing sales, some of which are due to pricing, you know menu pricing, some of which are due to new promotions and things, so. I think it will. Mean that that the back half of the year and certainly in the beginning of 2024 will be a will be a a busy time. Now it's a little bit slow and quiet. The banking situations gotten a little more difficult. And so for those of you who are listening, you know bankers and you've. Heard me say. This if you listen and watch before bankers will be looking usually, and so a CPA's, they usually like 3. To six months, but typically three months in arrears. So they're gonna form. Their opinions, bad or worse, on something that's happened three to six months ago. So that meant that they were a little slow to adjust. Bankers were when we went through 2022 and what they're probably doing now is they're adjusting too hard for 2023 because we see the business conditions improving a little bit, right. But because of higher interest rates and because they're looking in rears a little bit more, they're seeing their third and fourth quarters of 2022 and they're seeing. Numbers that don't look good so. We're going to see some continued tightness, I think from the banking industry here for the next 6-6 months, maybe more. Who the heck knows? You know, we're all guessing here. But I would like to stop. Rambling and we'll start here. We're going to start. We're we're we're honored to. Have Tom ice. Here today Tom has got a variety of skills and backgrounds, but he. Used to be on the corporate counsel at stake. Shake so that that's a a place where we started his young law career. He's done dozens of M&A deals with, with us, with the unbridled capital team across probably a dozen or maybe 10 or so brands. And he's got several individual and personal clients that are kind of famous, well known people in in this great industry of ours known as franchising. So he's got a depth of experience and he works for Gray ice. So Gray ice. You know, I was. On a you. Know a cruise with my family over Thanksgiving and it was the karaoke night. And guess what? I sang, Tom. With the MIC in my hand.
Tom Ice
Ice ice baby.
Rick Ormsby
Yes, I did. Yes, I did. I and I. Got up there? I'll have you. Say I'll have you know. And I was and and and the lady who was like, you know, doing the, you know, getting all the songs program, she said you're the first person who's ever attempted ice. Ice baby on this cruise ship. And I said really this cruise ship's got to be 40 years old. So man I I rocked ice ice baby. About the third verse though. You kind of start losing wind, I mean cause it goes so fast and it's pretty, you know, you know, you gotta. You gotta be in shape so. We're honored to have you here.
Tom Ice
I lived that song for a number of years, so we're. Sure I remember.
Rick Ormsby
I'm sure I'm sure, but we're honored to have you. We're going to be talking just kind of filling back some concepts on what to think about from the legal perspective. When you go through an M and a deal. Let's start then. So the first one is several years out from a sale and Derek balls here with us and he's an attorney too. He, you know, a licensed attorney. Doesn't practice law on behalf of our clients officially, of course, but so he can pitch in with some legal ideas here too. Tom, what do you think? What should we? Be doing if we are a buyer or let's in this case probably a seller. For this question several years.
Tom Ice
Out from a sale? Well, each company when you form it and. While you're operating. Keep in mind that it's likely going to be. Solid at some point. Almost all of my clients go through some either emerge or sale or some sort of transition. So every company just to be. Set up in. That way and be mindful and organized in a way that makes it easier to do that. So you work with your accountants, your attorneys and everything to set up and organize and hopefully simple. Structure that will enable a a a transaction. To go through more smoothly so. I've had clients who had one client at 43. It's with 43 different companies and 40 about 35 to 40 different ownership structures in those. So selling it was an absolute nightmare because they never, never went through the process of trying to consolidate that. So we had to do 43 different meetings. Company meetings to approve a sale and go through all the various workings and that and that's an extreme. But it's things. Such as that organizing your documents, making sure that your lease is everything to the point, to the extent that it can be digitally stored, store them on your computer and organized fashion. So if you have multiple units, it's diligence you can provide to people. It's also making sure your employment. Records any other litigation is structured to the point where it makes it easy. Other than that, I mean, it really boils down. Just organization and a good. A good office manager or somebody that can do this, while because most of our clients that you know right are operators, they're not office phone. So getting people involved that can make your life easier at the end of the day, not only from a sales standpoint, just on a day-to-day basis. Is that after as restaurants numbers grow, administrative issues grow and the organization is the. Key to success there.
Rick Ormsby
Yeah, yeah. I mean, it's an interesting one about the about the different companies. I've, I've experienced this too. I used to own some real estate and we had them all in different LLC's, and we had different. Loans against them and and just. Living amongst that mirror can be very, very difficult, can't it? So I can imagine when you get on the back end of selling like a 50 unit business that has 50 different. Entities and some of these entities might have real estate separated from business within the actual unit themselves. So now we're talking 75. To 100 different. Entities it's it's first of all. It's not a trend. We see a whole lot anymore, right? But there's a lot of legacy operators who still incorporate that way, but the trend that clearly in today's world is to have like 1 operating company, maybe one company for real estate and to buy more insurance, right, and you know. Is that is that? Kind of like.
Tom Ice
Standpoint, I think it makes most sense. Most of our really large clients, they may set up by region if they are anticipating a sale of a particular region. So they may split. Up restaurants in that. Fashion, but they're they're going to be consolidated within a handful of companies and not on a side by side basis. It just becomes an administrative nightmare and I was on the phone with a client earlier today who was lamenting the fact that he had that many companies because of all the employment and other issues that that can materialize and he's constantly having to answer audits and. And other things and said this, it made it seemed like it made sense when we did this in the 90s, but now that I'm having to deal with another day-to-day basis, especially since the regulations and we've expanded our regulations, they haven't got smaller. And so just the administrative pass, we're taking care of that many companies is becomes unreal.
Rick Ormsby
Derek, how many times do you think? Have we seen? I mean we of. Course we we kind of have always specialized in the mid to larger scale independent operator first or second generation. So those folks by by kind of definition have kind of brought something along with their organizational structure over the last 20 or 30 years. Oftentimes once you got it fixed, you just don't screw with it, right, because it's a pain. And if you're like me sitting here operating a company, it's like you don't. Have time to deal with it. So how many of our clients though, come to? Us with C. Corporations and and then what you what? What do we you know, out of every hundred how? Many do you think we see that? And same with you Tom. They have C corporations and then you know it takes it's a five year window of switching from a C corporation to an S corporation to avoid double taxation and sale. It's still somewhat common, right? Right.
Derek Ball
No, we don't see it a whole lot. We see what Tom was just talking about, I'd say one out of every seven or eight deals, that's just an estimate. Where you've got a a seller who has every single one of their stores in a different. Entity and like Tom said, it ends up being a a bit of it can be a bit of a nightmare, especially organizations not there. From a seaport perspective. Honestly, I bet it's one out of every 21 out of every twenty of our clients I probably get. One a year. And you know, wish I had known and and tell if if you're a C Corp and you're listening right now and you have any interest in ever selling your company, even if you don't have interest in selling your company. Go talk to an attorney and CPA to potentially get that fixed. Cause like Rick said, it takes five years. You said you change it from. The Corp and sell them three years. The tax man is going to come back and get you anyway so. Go ahead and do. It you don't see it much anymore, Tom can probably elaborate more, but I I don't think there's really many advantages like there used to be a long time ago to having to see corporate begin. With so yeah, if you're listening and you have a C Corp, I'd recommend going ahead and changing it. Don't, don't, don't get to a sale and then regret. And having done that five years ago, you're gonna save yourself a lot. Of money if. You do it, yeah, most of.
Tom Ice
Our support clients are legacy corps. I just I.
Rick Ormsby
Most of them are.
Tom Ice
You know, we form a lot of businesses too. I cannot tell you the last time. I formed a seat, but I don't remember. That when, when that's been that's not long ago. I have no idea. Uh, we did get a question in on. A related thing though, does instead. Most restaurant companies also set up a separate entity for G and A. In my experience, those who set up a management company for GA are the entities that have multiple. The restaurant 1234, all in separate entities, so they have a management company that handles. Either a holding. Company or a management company that handles those operating entities? But if there's one entity involved that's not, that is the operating entity that doesn't, in my experience, does not normally have a management company associated with it unless it's managing multiple brands. Within the same.
Rick Ormsby
So if you own, let's say, a Taco Bell and a Pizza Hut company separately, you might have a management company on top, but you may have Taco Bell LLC. You may have Pizza Hut LLC and then. You might have like holding company or management. Company LLC on top. Of it is that what is that what you're saying?
Tom Ice
Being on top it could be. To the side, an affiliate that takes care of. The management and they'll pay a percentage or some sort of ongoing. Feed to take care of, but if you've got one concept that doesn't cross pollinate I and you don't have multiple entities within that concept, I rarely see.
Rick Ormsby
Usually within a lending scenario, you're going to have the the lenders digging in and cross collateralizing the two entities, right? So they're going to look. As one. So what's? The risk mitigation purpose of having. This separate entity either on top as a G and A or over on the side what is there any risk benefit from it?
Tom Ice
It's just managing managing the business more effectively and consolidating the GNA and that way you've got one entity that you're processing all those ecosystem.
Rick Ormsby
- Well, let's move. On to I've got like 9 questions here. We're on question #2 and I'm kind of eyeballing these questions. So general considerations. When selling, so we chatted about this, we did a little practice session, you know. Yesterday and so. What say you guys? What are some things that that, that listeners should be thinking about as general considerations before they sell?
Derek Ball
This isn't really as much legal in nature, but you know the first one is just have your front end expectations set properly. You know the biggest risk to a deal. Is you get out there and you. Get promised to the moon. And they can't quite get out of the atmosphere. And now you've got your deal out there. But it's not just from a price perspective. You know, if you go into it assuming you're not going to personally guarantee an APA, you're probably going to be disappointed. We've seen that a handful of times, maybe buyer attorney just misses it. I've seen that once before, too. But you know, personal guarantee on the APA certain indemnity terms or reps and warranty stuff like that which we'll get into later in this in this webinar. But just having your front end expectations set properly from a, from a financial and legal perspective. If or else you're going to be really disappointed and maybe upset, potentially blowing up the deal. You know, later on you don't want to waste all that time and money and energy to to not know what you're in for. I guess is the best way to say.
Rick Ormsby
What? What I what? I like to tell people is this like if you're back? In you know. I've said this before. I think back in maybe it was 2006. I I can't remember the year, but I was sitting in a hotel and I actually signed a deal on a napkin. With the franchisee, you know, I actually did, we put out a napkin and just I. Mean I was like, OK. And that's that, that that happened. You know, it happened a lot, you know, basically, here's the deal. Signed a napkin. The stores are yours. And it wasn't a small business, either. This was a. Big business, but in today's world where we're expecting. Prices, professional managers you know and like big lending platforms and all kinds of stuff, you know, private equity, family office groups and sophisticated franchisees who are paying like real multiples and real prices, not your three and four times EBITDA from your buddy franchising next door. But but like a real business. It comes with some hair on it. I mean it always will. Like you can't expect to get 30% more for your business and then have an easy, easy deal. That's not how it works. These large franchisees and large firms have professional CPA's and attorneys, right, Tom and so.
Tom Ice
And it's, you know, a lot of my we all call it counselors for a reason. A lot of our jobs are kind of walking people through, not only the. Nuts and bolts. Of the transaction. But what that? What kind of emotional roller coaster they can go through? I I represent or I I come from a a business. A family that's small business, family, but a lot. Of my family members at home. Businesses and I deal with people within our industry quite a bit who are multiple generation franchise owners. And it's, you know, Mom or Dad or grandma or grandpa, where the people who started it. And it is a very big deal to make that decision to move on from that, which is a legacy product or and it's some. And there was a a franchisee that we we worked on together who quite literally said he was frying chicken. Was his grandfather's kitchen five years old. We were we were going in there and he was 63 and selling and was in. Being committed to that and understanding the process is different. Than it used to. Be and that it is not nearly as. Is kind of person to person. It's usually a little more person to entity now, twice and so understanding it might be a little colder than your parents or grandparents have went through. But at the end of the day most people come out of these pretty. Restaurant Investment Banking.
Rick Ormsby
I think that was the point you made yesterday that was interesting is that you have you have yet to see someone even through all the difficulty. Of of you. Know the process. And it is a process hundreds of hours. It's a lot of. It's a lot of work, it's, you know, and it's also emotionally draining because because, like you say, it's something that's a legacy for you. But but you've said that basically no one has regretted it, that you know of. That you've worked with.
Tom Ice
Over all these years, right 1999 and I stay in touch with a good chunk of the people I've represented and I've yet to run across sellers remorse.
Rick Ormsby
Isn't that funny? What does that tell? You, huh? Well, it's interesting.
Tom Ice
They work hard, they feel something. Proud of it, but they moved on to the next phase.
Rick Ormsby
Yeah, it's hard to let go though, you know, think about it. Though think about like. You go to college for four years. Let's just say and you have the loyalty to your friends and the sports teams that you went to college to support, right? Like that stays through your whole life with a lot of furor and and excitement. You don't, I mean, like, go to the military and you go off to fight for four years and then, like, you see these guys. And girls, now I guess too, but you know, I think back to the World War Two general. And they're like, still going to, like, annual reunions for the next, like 60 years of their lives. So you just think about, like, what a really meaningful 4 year, three-year, two year experience can have in terms of an impact on? Someone's life. But now think about the dude who started at five years old frying chicken in the back of the house and. Now he's 63, that's 58. Years of all he knows. So it's a real raw point. Well, let's get into some more nuts and bolts. I mean, we would make a plug. And say that you need a strong M&A. Team, I mean for sure, right? You know our team, you know, usually has around a 90%, you know, closure rate of the deals we take and the reason why we do it is because we we treat you like you're. You'd be our family, but we give you advice that you know that we think is going to be true and accurate, you know, in. This industry, it's rife. With people who are going. To try to over promise to get an assignment. Hoping that they. Can grind you down when the price or the terms are worse than what we're initially kind of forecasted. It's no different than a real. Estate agent who? Might you know, tell you that your house is worth $1,000,000? Or. Might agree with. You when you say, could we get a million when really it's only worth 850? 3000 so I mean the expectations are important, but let's get into the first. Let's talk about negotiating a letter of intent and then after that we want to talk about some key elements of a purchase agreement. And I want to spend. Like quite a bit of time here because. These are areas. That, that, that become important. So when what? What are some key terms and considerations you guys might might point out when you're? Negotiating a letter of intent. Which would be the initial document. That kind of defines general. Parameters in a deal between a buyer and seller. How do you think about?
Tom Ice
Well, before we get into the actual Nets, I. Some people treat letters of intent as a as an opportunity to negotiate further after they're executed, and there are cases when letters content may be wrong and practical, and maybe things you get into a deal when you have to kind of deviate from them. But you can really destroy the trust in a relationship. If you execute a. Letter of intent and then pivot from it pretty quickly. So while they're non binding in nature, they should be taken very seriously. If you want to get a deal done. Then I I'm working with people and. Making sure they're accurate.
Derek Ball
That differs a little bit from maybe other industries and obviously I assume everybody on this on this call is is restaurant person, but you know other industries you might submit an LOI get to do 3 months of diligence and then sign an APA in flows and the LOI is just a real high level initial term sheet. In this industry, and this is at. Least how we look at. That LOI's were pretty firm, like short of something coming up during the deal. You know, if you put in a price for $50 million and EBITDA checks out and your diligence checks out that 50 million is a that that that's the number. It's not going to be 45 after you dig in a little bit more on the brand in two months and figure out. You don't like the brand as much as you. So we see that a lot with with people getting into the restaurant industry that that come from other industries, really it's not a. I don't even think of it as a dishonesty thing. It's just a. That's what you're used to, you know? So I try. Not to to you. Know take it too hard on people. But for people coming into this industry, if you put in that price. You know if. Even changes 10%, obviously your price.
Tom Ice
Is going to change.
Derek Ball
But you know the LOI is is like said non binding but take it seriously and if you put it in and then we trade it or in our opinion no reason it's going to damage your your reputation as a buyer pretty, pretty strong.
Rick Ormsby
Let me let me expand on that a little bit. It's a great point. I mean, you know specifically for anyone who's listening here and a lot of people podcast listeners here are going to be financial type of buyers like people in New York City with. Fancy shoes and no socks on. You know what I mean? Those those type of folks. With Ivy League educations, they're going. To be used to. The type of you know, 2 levels of diligence. The first level of diligence that they perform on the company is very, very basic and they. Put in an LOI, right? The LOI has. A range on it and then they go through a deeper diligence period and then they submit a final and the final I. Is going to be different than the initial. High and likely 10% less in price and then that's like 30 days in between the two and and look that's the. Way a lot of. Large institutional backed companies, you know, sell, but you need to know that against strategic buyers in this space, that's not the way it works. They already know the business. So they're going to make an offer. You're your competition. Buy an ask. That is going. To make an offer on a business, and their offer is going to be more like what we're talking about here. It's going to basically stand. So in the eyes of most of these sellers, especially in a market that favors strategics now, not financial buyers as much for the because it's hard to to borrow and the financial buyers are a little more skittish on. The interest rate environment right now. You just need to know that you've gotta conform when you're competing against strategics and you know for a for a seller's business, it's a it's a, it's a critical point, I think. So let's talk about some of. The some of the points of. An Li though, Tom what? Do you think?
Tom Ice
I mean I I I like to see how expenses are going to be divided if that can be decided on the.
Rick Ormsby
What do you what? Do you point out and how? Do you think about?
Tom Ice
Front end like the look on timing. If there are any specific issues the parties know, they're gonna have to address, such as remodels or restaurants under construction or any other issues condemnation, sometimes that happens. So addressing those things on the front end, so we don't. Get too much. Of them up on the purchase agreements, you know, if there's going to be finance. What's the reasonable expectation for that? Franchise Investment Banking. But over and above that I I don't like to try to negotiate reps and warranties and other things in the LOI. I think the bonds down the process that the language is naturally going to change when we get to the APA process. I'd I'd rather just let that go. And we'll deal with that in a in a later time, but. I'm sure you do, you actually. Do more realize than? You may have some. Other things, but that's those are the key things I look for.
Derek Ball
We have kind of two stages so. We have our. 1st and most of our deals not. All of them. But most of our deals go into kind of a second round process and we don't run a big long 2-3 month long second round process. That's usually just a couple weeks, you know and it at that point where you have say.
Tom Ice
Three or four.
Derek Ball
You know, bidders in the second round, that's where we're going to ask for a little bit more. Detail you know what's your? What's your escrow in the APA going to be? How long is? It going to. Hold for, you know, certain indemnity provisions like that, you know. In that second round process, we're going to ask for maybe a little bit more detail in your banking situation. Obviously, if someone comes in saying they're going to get something 95% finance, I want to know that before we sign an LOI. So obviously that's pretty critical from a business perspective. You know in that second round process, if you haven't already done it in the first round. We're we're generally looking for franchise or consent, it's not going to be formal consent, but we're just looking for red flag. Tax you know if if we call the franchise order and they say heck no, we're never going to let that person buy that business. Well, that's a problem. And we we try and knock that out in the LOI round. It might not necessarily be included in your LOI, but it's going to be at that phase. And then obviously if we have updated P&L's, you know if we're. On the market for four weeks. And then we go to a second round process. We're probably going to have another period of P&L's and we like to get those updated for good or bad. We like to have the most updated numbers. At the signing in the LOI. You know, for if they're good, being else for obvious reasons. Maybe the price comes up if they're bad. You know, buyers should know that now before getting skittish later. So at a high level, though, I agree with Tom, we we try to keep the LOI pretty high level. I don't want to spend 2 weeks negotiating it. We're going to spend enough time negotiating the APA so. That's kind of how we view.
Rick Ormsby
At this stage I'd just add about with financial buyers listening in here and I say this, I've said this to all blue in the face. If you're coming into this industry and looking at potentially buying a business in the franchise space, you know, do the diligence over a six month period of. Taking the entire. Universe of deals and locations and brands and shrink it down. Into two or three key brands in a certain geography and then go to those brands and and call them. Their franchise sales teams and get a preliminary approval, you know, submit a net worth spreadsheet and a background check so that when you make an offer on these businesses because you heard Derek say during the second round process, we're going to call the franchisor right and say, hey, is Joe Blow anyone you'd approve or disapprove and then you? Know what if Joe? What if, whatever corporate entity? Says we've never heard. Of them, you know it it so. So that's the piece that that I think is is is a little bit understated. That that you want to get out in front of it when you submit an LOI that you're just not some random name that that has no affiliation with corporate. It is true that these corporate entities, these franchisors, are getting more and more heavy-handed, their hands used to be like butter, or maybe maybe a little bit like soft wood, but now they're like concrete. So you know they had. A big say in what? Let's go to a couple of questions too.
Derek Ball
John, I was gonna John asked a question as a buyer or seller. Is it an advantage to have your lawyers to the first draft of the purchase agreement as you try and get the other side to do it the way this is just how I personally view. Usually I would say just mark, it would be buyers have the choice whether to do it or not. Generally speaking, I think going ahead and doing it is probably your best interest. But in general. If if you put forth the crazy APA, it's going to get redlined. I mean, my my biggest advice to people is. The APA is going to get dwindled down in the end to to pretty similar deal to deal. I mean there's not going to be an APA that is just so one sided at signing. I've I've had a couple that are more one sided than I want. But lead was something, you know, if you don't want to lead at the 50 yard line front football field lead at the 40. If you lead at the one it, it's gonna elongate the deal by a month or more.
Rick Ormsby
And won't end up and you won't.
Derek Ball
You know, take two to if you have a fair APA to start, it should take two to three weeks. Doing the schedules and you should be done. If you start at the one yard line. It's going to take two months. I've had apas take three to four months before because they were so one sided at the start and so my biggest recommendation is just just lead somewhere toward the middle you you can favor it a little bit toward your your side. But don't start at the one yard line because it's just going. You're adding six red lines and and 10 phone calls. And by the way, no offense to Tom. A crap ton of money from an attorney. I don't get paid by the hour. Neither does Rick. But you're going to pay Tom by the hour, or whoever your attorney is, so you lead at the one yard line and you're going to spend another 25 grand on an APA as well.
Rick Ormsby
Well, and my point.
Derek Ball
We get probably even better.
Rick Ormsby
Well, yeah, that's that's my point. My point is this, if you start off at the one yard line, you ain't gonna be getting to how many? How many football teams you see starting at the one yard line score touched in, you know what I mean? Very rarely, right? Usually punting. From the 30? Yard line, right? If you start at the 40 yard line, well, heck, you're only 30 yards away from a field goal. Know using the old sports analogy so. I mean, I see this time blue in the face on the front end. I could get a client that's like ohh. If it's worth 25 million. Let's price it at 30 million, you know and. I'm like, no, you know, a lot of a lot of our processes don't don't have a. Price in them, right? But if if it did. If you if you start at 30 million when it's worth 25 million, you're probably going to get 25 and a half million. If you start at 27 million when it's 25 million, you might get 26 million and you're going to do better. Does that makes sense? It's counterintuitive how people think. It's the same thing when negotiating a purchase. Agreement and don't. Be fooled if you're hiring like I'm brutal capital. I mean, we've done, we've been, we're not attorneys, we don't pay attorneys on your deal, but guess how many deals we've. Do we know? Like our last 30 deals? Exactly what's happened from indemnities and escrows and deposits and guarantees, and all this stuff. Well, of course we do. So we know what's market and Tom works on a lot of our assignments. I mean, clearly he knows what's market, he does it all day. Long every day so. Don't start at the one yard line.
Derek Ball
There's something soft. There's something softer to it, too, and people kind of overlook it when they're looking at the nuts and bolts of these deals. When you lead with A1 yard line APA. You **** that seller off. I can deal with it, I deal. With it all the time. That's my job. But you're gonna **** that seller off like no else. And it's not going to do well for you. They're going to be mad. They're going to think you're trying to screw them and they're going to be looking over their shoulder the rest of the deal and and almost scared of you. But that's not a good, good thing. That's that's a bad thing. And so goodwill in these deals goes a long way and just starting with something fair. Goes a long way, especially with these sellers like we talked about it maybe owned these stores 58 years. They're not financial guys. They're out there cooking chicken or making tacos, and they just want to retire. They don't want someone on the other side that they think is trying to screw. Them all the time. So the the goodwill piece I think is maybe even more important than the cost or the time or anything like that. Because goodwill in the deal. Is is probably the single most. Important thing to getting it.
Tom Ice
Done to go back to an earlier point when you're building your team. And you need to engage people, and it doesn't matter if it's in the restaurant industry and the tech industry to buy planes, whatever you may be doing. Hiring the right. People to do. That I'm not going to pretend to be a benefits lawyer. I know enough. To work through documents such as these, and I've got people I can refer to if I if I need something that's that's high or high level. But I know this industry. I feel like pretty. But if you hire people that don't and are maybe more used to something else, it's harder for them to manage expectations than to really understand how. These things go from. Cradle to grave and whether it's accountants, it doesn't matter. Whatever professionals you're hiring, those people like our driver. You have to hire people who always do.
Rick Ormsby
That's a great point. You know, does anyone know the answer to this question asked, can franchisees take advantage of QSBS designation?
Tom Ice
It on free board, yes.
Rick Ormsby
So as long as they're not.
Tom Ice
As small business stock designation you. Can't do it if you're.
Rick Ormsby
No other limitations that you know of I. Is there any kind of limitations?
Tom Ice
That gets into more. The the taxation side that I don't do.
Derek Ball
But I know.
Tom Ice
You can't do it through C Corp others are. Others are old.
Rick Ormsby
Well, one thing I would just say before we move on from the load at APA is is this standstill provision. So some Lois have stand still provisions in them some. But a 30 to 60 day standstill provision being binding potentially is not a surprise if you're a seller or a buyer issue, you know passing an LOI back and forth. You want to. Know if you're. Especially if you're in a heavily banked process like an, you know, an advisor is is finding multiple offers. It's not uncommon nor unreasonable to ask once all the dust is settled. For a little bit of time to get to an APA and and that's again, I guess the next the next point which is what are the key elements of a purchase agreement? First, the first thing and then I think we get this off the board pretty quickly. Stock versus asset sale. Just real quick comments on on that.
Tom Ice
Actually, I lied yesterday. I've done 2. In the last. 15 years I only remembered one yesterday. Stock deals are very rare in this industry. You're normally the stock deals. You inherit the liability of the predecessor. You have to build the the the deal differently. You don't want the tax exposure, you don't want the employment exposure, you want a clear line of demarcation that. Asset deals, for the most part, there's some some successful liability issues with asset deals, but you're more. Able to to. To put that line in the sand and say we're just gonna buy the assets and. On because as you know, most of the time the buyers don't take the contracts of the seller, they have their own their own deals usually, especially institutional buyers. So if it if you took the stock, you'd be accepting. All of the contracts. And everything else, unless you go through. The diligence and try to kill. That onion and that can be difficult. Usually as an asset.
Rick Ormsby
Usually it's an asset transactions, I guess someone.
Derek Ball
And bridled has done 0 stock deals. Now, I don't know if Rick Gifford did one before unbridled, but. Unbridled has done 0 so.
Rick Ormsby
One, one or two, one or two maybe? One or two, but but very, very, very uncommon. Very uncomment and and and for all those reasons. Right. Like, you know, liability except the liability, the big and maybe perhaps the bigger one. Because you can probably hedge the liability through documents, right? But it's the the big ones going to be the tax, right? You can't step up the basis of the assets. And taxes suck. So you know you don't want to pay, you know, pay as little as you legally have to, but you. Can you can about some of? The other items in indemnification.
Tom Ice
You can have you have a stock. Sale be deemed to be an asset sale for. Tax purposes, but.
Rick Ormsby
OK.
Tom Ice
You just don't want to go through the. The regular all. Through all of that.
Rick Ormsby
No, that's good. OK, so, so. So you can you can designate a stock sale as an asset sale for taxation purposes, is that? What you said?
Tom Ice
338.
Rick Ormsby
Well, there you go. OK, well, you. Know we haven't had to personally deal with. That a whole lot. But that's cool.
Tom Ice
It almost never makes sense. No reason I'm familiar with it because it does happen from time to time and almost, and it's not peculiar to restaurants. It's stock deals were much more prevalent when I was younger.
Rick Ormsby
Well, let's talk a little bit about like some of these seller indemnification items. This always gets a lot of attention. You know these seven or eight bullet points. You're in the middle of a deal. You're a busy person running a busy life and you're selling your company and then you get hit with these documents that. Have all these. Funky words in them that we. All talk about over and over. Again, so I guess we things like personal guarantee. Dollar caps listen to this. I mean, I sound like I'm talking. So I Healy here. Escrow, hold back amounts and time schedules, reps and warranties non solicit non compete contracts. Blah blah, blah blah blah. What do you think, guys? Let's go through them quickly and talk about it.
Tom Ice
So most of our selling clients. Are selling the entirety. Of their business, or at least that segment of the business. Which means there's not going to. Be their legacy or remnant entity, the capital. So more often than not, but not always, depending on people, the owners of that business, shareholder members or whatever are going to guarantee or stand behind the reps and warranties and other covenants of that selling. That can be. A bit of a shock for people that you know because you're talking about a deal that worth 304050. And they're they're being asked to personally guarantee that. You got to. Kind of walk through that process and just because there's no company left to identify. Than some some person. Or other entity needs to stand. Behind and it's almost always the individuals in the in the small business. If there are other. If there is a surviving entity which does happen from time to time, then yeah, we can. We can sometimes get away from that, or if it's a large a large. If it's a seller, there's a bunch of. Them and you may have. A another related entity that would guarantee it.
Rick Ormsby
Just to get.
Tom Ice
The personal guarantee out of it, but ordinarily. It's going to be.
Rick Ormsby
Makes sense to me, right? So if you have 100 stores and you have no nothing, you you own, nothing else and you sell 100 stores and you dissolve the companies and you move to Tahiti and change your. Name. You know that's that's a problem for a buyer, right? If you have 100 stores and you sell 20 of them in a market to somebody. You know you're. Not as much of A flight risk, so to speak. Right. You your entity stays around so. So the personal guarantee might not be as important. I mean so, so some other things tell. Let's talk about some other things. Else do you? See in the.
Tom Ice
Well, the next thing we have on our thing little. List here is the is. Cap ordinarily there's a limitation of liability in the agreements now that can fluctuate both in percentage of the purchase price and what you're actually what the CAP actually applies to. I can get a. Little bit in. The weeds but. We have the concept of representations and warranties, and that's a separate concept, although somewhat related of covenants and other pre closing liabilities. The CAP ordinarily applies only to the representations and warranties. Now you can sometimes negotiate covenants into that, and there's another flip side of this that we'll talk about in a second, but the so, and it's only a limited number of the representations awards, he says. Usually you're going to have fundamental representations and warranties with no capital. Such as taxes, title that you actually own what you're selling. That kind of thing. So. They're so that can. Be kind of scary for people when they're big numbers associated with these purchase agreements, but the reason those things are fundamental or there aren't caps is because of if they've proven to be wrong it it completely undermines what the deal was intended to be. In the first place. So if you didn't own what you're selling there. Shouldn't be a. Cap on, but if that if that there's a crack in the wall that you didn't disclose, maybe there should be a cap.
Rick Ormsby
So let's let's use. Let's use a person. An example of some kind Tom, even if it's a made-up example so you know to to track through like. Business sales for $100 million. Cap is what? What goes wrong that the. I mean, like, you know people.
Tom Ice
Most place purpose.
Derek Ball
Might be just sit real quick. And I've been on a deal where I've been on very few deals where sellers have been dinged for a dollar, by the way, and I've certainly never been on a deal where the CAP was in play. So just for all you people. Listen, I mean the the cap, I mean think about it this way. Like if you've got 20 stores that you're selling and the cap is, let's just say. 20% of the purchase price and we're talking non fundamental reps, let's say it's 20% of the purchase price I. Mean you'd have to have like.
Tom Ice
Four of your stores.
Derek Ball
Collapse into the ground, probably to even. Hit that cap, by the way. So the the risk of even going over it is is very minute it it's one of these that. Gets negotiated on every APA. And it pretty much never ends up applying. Well, that literally is a 0% apply apply rate on deals that I've personally done, but it's usually in the, I've seen it as high as 30%. I've seen it as low as ten. I've seen some people try and push for no cap on the non fundamental reps. I think I've seen it agreed to in one deal. I wouldn't call it market 10 to 30% is probably market. I think 20 is usually what I mostly see the plurality of what I see anyway, like Tom said, if it's fundamental, it's it's not going to have a cap or it's going to be capped at the purchase price. I've seen both of those. And I can't tell you off the top of my head which is more prevalent because again. I don't think it's very important by the way. I mean it's important, but it's like you have to be running your. This goes back to what Tom talked about earlier. For that to apply, ever, you've got to really be running your business with your head in the sand. I mean you. Just if you run your company well, you stay organized. You know your stores don't stick your head in the sand. And you'll be able to sleep well after.
Tom Ice
Well, I I could.
Rick Ormsby
Yeah, I'm sure you can speak.
Derek Ball
I think they're dying.
Tom Ice
You froze for a second there.
Derek Ball
Yeah, yeah, yeah.
Rick Ormsby
Go ahead, Tom, keep. Going yeah, yeah.
Tom Ice
To elaborate on that a bit, I I have been involved in a few a few allegations post closing. I've never had a client. Had to pay. I did have one. Tax issue that came up, that was kind of outside the parties control, no allegation of wrongdoing whatsoever. I don't really need to get into it, but that that's the only one where somebody actually been out of pocket. But that was only because of of a post closing adjustment that was made that again, no, no back. At all. Just. Kind of stuff. He had to pay it. What normally mitigates anything that's going to be paid in these is because. Of the diligence that the sellers do on the front end, working with unbridled in their counsel and whatever to make sure that they're everything's in order in the financially or or else otherwise. And then the the buyers are doing diligence. So unless the seller has stuck their head in the sand and the buyer hasn't bothered to look at the assets they're buying. Then usually the the risk of there being an actual post posing problem is pretty low. Again, it's only been a handful of never worked on so that's that's that's a pretty good track record. I did have one a long time ago where I was. Involved with one that was actually was. But that's very uncommon. It's not something I would even concern myself about on on the data.
Rick Ormsby
Well, I and I think also though that it probably happens more than we realize, but I know you established your practice this way, Tom, and we certainly do it on bridal. We try to represent like the highest quality clients you know I've I'll turn down. Three or four clients for every client we accept, either because of valuation expectations, not a right fit, or we hear something along the way that leads us to believe that there could be trouble with the, you know, in some way, you know what, I. Mean and so. We're just life's.
Tom Ice
Important for the the the people that are listening in when you're when you're interviewing.
Rick Ormsby
Too short, you know.
Tom Ice
So I would encourage you to interview. To multiple professionals and and making sure that you're comfortable with with the person that you are or entity that you would seek to engage you. And likewise, when I'm talking with someone that's not just them interviewing me, it's the other way around. It's got to be fit. If not it, it can be pretty toxic. For both parties.
Rick Ormsby
Yeah, yeah, really. Well set, really. Let's we're we're we're cruising through here. What do we want to talk about time limits and escrow holdbacks and amounts and times and quickly want to hit those. Tom and then Derek, if you have any.
Tom Ice
Usually you're looking at a portion of the purchase price that would be held back to to cover. The liabilities we just discuss. Yes, can be. It's gonna be a sliding scale depending on the the larger the dollar. The lower the percentage is. It's not usually something we don't take. A huge amount of. Chunk of but. Derek, you. I'm, I'm thinking. As low as two or three percent, then as high as seven or eight. I don't really want to.
Derek Ball
Go to 10, the highest I ever see is 10 which? I always push back on it. It's just not. It's not typically very necessary to have that much. Heck, I did 5 or 6 deals last year with 0. Yeah, 0 hold back. So market is a flexible term probably here, but I would say anywhere from 2 to 8% is market as a buyer. If you're looking to make yourself look a little bit more attractive to a seller, I would go with the low end. I mean, if you think the seller is going to. Escape, like Rick said to Tahiti. And change his name and and take all the money, then then maybe you and the business is a little risky. Maybe you're getting into a little bit of your initial diligence and you got some some heebie jeebies in your stomach and you don't know. What's what's real and what's not? Maybe push for a little bit higher amount, but if you're buying a a well run, well organized professional company, the risk of needing more more of that is is is low. So you know, if some some people just blindly say I want 10% and I'm going to demand it no matter what. That usually doesn't go over very well with sellers. So I would just recommend being a little flexible based on the actual seller and the deal. If you're able to to get that insight in terms of time I see anywhere from 12 to 18 months. If it's if it's paid out at 12 months, I usually see it paid 100% at 12. I sometimes see 18 months where half of it's paid at 9. You know with no claims. Have been made and the other half the other half at 18. I would say that those two options are are the vast majority of the deals that. I see and there are. Exceptions, of course. And then on the, the next one is schedules and this is one that just always. Gets shoved to the. Back burner schedules take a lot of time. If you're organized, it takes a lot less time, but schedules are effectively half of the buyers diligence. Really they get put into the the back or the schedules to the APA. Don't push those off. That might take you 30 days to gather that information as soon as you get the first draft of the APA, start working on them, or else it's just going to delay the deal.
Rick Ormsby
How many schedules we got here, I mean? What are we talking about?
Derek Ball
5 to 10 to 40, I think 40 is the record I've seen.
Rick Ormsby
What the heck we got on it? I mean, what? Do we put on a schedule with you got 40 of them. Our birthdays and our, you know, wedding dates. I mean, what is it?
Derek Ball
It's anything you could think of, but effectively don't. As a seller, schedules are annoying to put together, but they actually protect you. It allows you to disclose things that a buyer might otherwise potentially not like, but you disclose it in the APP. The buyer has a chance to review it and they can object if they want to. But as a seller, you know don't under disclose on your schedules. I would recommend over disclosing because if you if you.
Rick Ormsby
Who's bird dogging these schedules?
Derek Ball
Don't get you later.
Rick Ormsby
Who's bird dogging these schedules, man, it's. It's just sounds. Challenging for someone who's operating a business is this.
Tom Ice
Usually it's the attorneys. Will work with. We'll work with you guys, work with the client, work with the accountants. It's a team effort. We we'll put the we'll put the drafts together. Sometimes Derek will do us a solid and take a crack at the first little the 1st. And then we take it from there. But it's it is your get out of jail free card. It is the thing that gives you the coverage that you need because sometimes you got to disclose things. There was an. Environmental, very common and you've got multiple units. There's an environmental issue of one or two of them that you've dealt with usually. You've you've got some clearance letter or something else. That or there's a monitoring well, or something else on the property. Disclosing that means. That they really can't come back and. Claim against you. For it because you told them about. But if you stick your head in the sand with Derek said or. You take all of it. They're not going to. Worry about that. That's how you can lead yourself into some problems and that also because ordinarily if you. Stick your head in the sand. If they're going to find it anyway. And then they're going to. That's where the retrain comes. If you disclose it. Then you're very your chances of a retreat. On that are much lower.
Rick Ormsby
No doubt disclosure upfront is always the best policy. I mean, no doubt like. A billion percent of the time. Quickly here 30 seconds. Anything more with with reps and warranties or non compete non solicits.
Tom Ice
The only thing I have. On reps and warranties and they cause they they mirror the schedules is read them. Really, read them, ask questions to people. If you don't understand them, they are them. Yeah, they are your greatest source of exposure. In the event that something's wrong. That's why we work really hard to make sure we're right. So just read them.
Rick Ormsby
Give us one example, give us one example of a Rep and warranty.
Tom Ice
Assets is the easiest one. It's the one that's the most prevalent in terms of potential disputes. So the the fryers, the parking lot, the roof, knowing the condition of the assets and so there's going to be a representation that says the assets are in such and such condition. If there are exceptions to that, you need to know, it's usually going to be a parking lot or something like that. Especially if you've got a triple that you're responsible.
Rick Ormsby
OK.
Tom Ice
All of a sudden you got somebody coming back saying we've got this laundry. List of things we need to discuss.
Rick Ormsby
The grease traps are all collecting, and they're they're dysfunctional. The seller doesn't disclose that they're all broken and bubbling over. The deal is sold. The buyer hops in there and then all of a sudden, Wham, they've got 10 grease traps that they've got to spend 50 grand to store to jackhammer them out and run new piping. That's a $500 thousand.
Tom Ice
That is the biggest source. Of postponing claims this condition.
Rick Ormsby
And then they'll say, whoa, I didn't know this. You didn't disclose this. You know, there's a half million dollars and then we get into the other legal parts of the. Contract and say, well what? Am I of of that am I am I. Am I responsible for and for how long, you know? And those are some of the elements that are built into these. OK, what about close code? Close post closing guarantees go ahead.
Derek Ball
Need to move. We'll need to move a little bit. I think we want it here. In terms of, I'm just going to because we only have a few minutes left and we've got quite a bit left on this this sheet, but just running through some other APA things, you'll typically have to agree to a purchase price allocation. Some buyers will try to push that to a pre closing item. My personal opinion is 1. It's not necessary and two, I wouldn't recommend it. Takes any leverage A seller could ever possibly have out of the equation. You can, of course agree to disagree with the IRS and run the risk of. An audit as long as you agree, you're. Probably not going to get audited. But there's really no basis in my opinion, after the deals that I've done and and pushing that to pre closing. But it's been a request that we've seen recently cost splitting. Buyers and sellers are increasingly splitting 5050. A lot of these costs, you know, in the old days, the surveys and transfer fees and environmentals and all that good stuff. Usually the buyer paid it. But like Rick said earlier. Here, do you want three or four times EBITDA and have the buyer pay those expenses or do you want six times EBITDA and split them? Obviously the answer is the latter. So we're increasingly seeing the cost split more evenly throughout the deal rather than than burdened on the buyer as much like it used to be title company. The one that knows the industry is because some title company ran title on a location 10 years ago. That's not a reason to use that company. Use a use one that knows the industry. I'll just plug in a fidelity out of Phoenix Kelly boss's firm. They do great. We've worked with them on probably 50 deals now, never any issues. I feel like when I when I work with new title companies that I don't know, seems to always go poorly and 90% of the time. Use one that knows the industry. Don't use a little regional one.
Tom Ice
Yeah, exactly. So I mean.
Rick Ormsby
You don't want to.
Tom Ice
Have to train the title company to close the deal. Because these are different. Than a lot of other deals we do.
Rick Ormsby
Yeah, good, good. But transaction timeline, let's talk about. That quickly 30 seconds.
Derek Ball
You know each take 6 to 8 weeks to fully prep and work at a deal.
Rick Ormsby
What do you got?
Derek Ball
You know, APA negotiations historically took 30 days. That's almost to the low end. Now I've done some deals 3 months and that there's no need, no need for that. When you start with a fair document, it takes 30 days. When you start with A1 sided document, it takes 2 to three months. Start with a fair. Document at this time kills all deals. You're going to spend more money, you're not going to. Get any better result? And you're gonna **** the other side off. So take 30 days franchise or approval depends on the franchise or I've seen as little as one day I've seen it as much. As like a. 150 days average is probably 90 and it's not getting any shorter so. So 90 to 120 days post APA is average and that you can do the diligence within the time frame, the franchise or approving the deal, usually the longest lead time is just franchise. We're letting you close.
Rick Ormsby
So is it true that I've? Been hearing you guys talking.
Derek Ball
About the but the seller.
Rick Ormsby
Guaranteeing the royalties and advertising fees post closing. I mean, so I'm I'm buying 100 Taco Bell or whatever the brand is, let's just say 100, you know, subway shops or whatever, and I'm A and and the sellers got to guarantee that I'll pay the royalties.
Tom Ice
Yeah, that's that goes back to a point. So people really need to understand their franchise documents. So I've had a number of clients we get to the closing table, they get the transfer documents from the franchise or and there's a statement in there that the selling party is guaranteeing the payments due to the franchise or by the buyer for a period of time, year two years. And people go. And then I opened up their franchise agreement and pointed to the section that, that that applies to. It's just knowing your your documents and and that can go from franchise agreements, market build out agreements, relationship agreements, knowing what you're signing becomes important. That way you're not shocked because you're not getting out of it by the way.
Rick Ormsby
That's a big point. If you're listening here, listen up a little harder. I mean, you're you're gonna get some if you don't know this. You're gonna get surprised. You're gonna have to likely guarantee the buyers royalties for a part of for a part of time. So therefore, we'll listen to unbridled when it when, when you. Have three buyers to choose from. And we and and we have experience. With a couple of them. You you know what I mean? And and we. We you know, that's why you just don't pick the highest price and say, well, let's go have fun and we're going to get a big number. You you gotta protect your backside on these deals. And that's a it's a huge component of all this stuff. OK, franchise approval, legal considerations, Derek, you probably got a couple of things to say that. You can shoot off kind of quickly. What do you think?
Derek Ball
The biggest one for me is when you're getting into a brand. Know what that non compete is going to be. You know, generally speaking and it's going to be flexible, I'll just use them as an example and there's always exceptions. But if you're buying a young brand, you might have to sign a non compete outside of young. So if you want to go buy Pizza Hut but you have it in your back pocket. And you want to go buy Popeyes? You might not be able to do that, so you should know in advance if you're a buyer. What that non compete is going to apply to? And and get. It get it as honed in as possible. People, if you're a financial buyer, you know you're these brands are are pushing relation, they're calling them generally relationship agreements with a ton of terms that will include that non compete provision. But they're extremely tough to negotiate. If you can negotiate at all and you can negotiate a little bit, but they're not very flexible on these things. So knowing what is going to be in that relationship. Agreement is critical. It pretty much is what it what it sounds like it. It it dictates your entire relationship with the specific brand, potentially the conglomerate you know yam as well. So that's really a buyer consideration. As a seller, you want to make sure the buyer is willing to agree to those terms, because if you get into a deal and the buyer can't agree to that relationship agreement, guess what? The deal dies and you got to go back to market.
Rick Ormsby
And you spent 53 years trying to get the deal to that point and then it falls apart. So it's a really important, you know, consideration.
Tom Ice
That the relationship agreements created. And we couldn't get the deal done.
Rick Ormsby
Like, for one example might be the franchise, the financial buyer. You know, the brand is maybe not allowing financial buyers to not have a personal guarantee in the relationship agreement. OK, that might be one. And then the financial. Buyer sees that. And like no, I'm at, you know, you know. What I mean something like that. Might be an. What else we got, OK. Anything else you guys might say, how about this? Let's skip to the last question, and unless you guys got a comment on due diligence, let's skip to the last question was what can speed? Up or slow down a transaction.
Derek Ball
Biggest ones the APA. The franchise or diligence not being started on time and generally speaking, we're not seeing the banks slow down deals, they're they're pretty good about speed and they can get their stuff done through the diligence process, but I think. Franchise or in the purchase agreement are the two biggest ones.
Tom Ice
And and sometimes landlords. Land. Yeah, we've we've had. It's not as prevalent and. It's more prevalent years ago, but we've had some instances where landlords, quite literally on a deal. We had a landlord that said he was going to sign documents and then he died. That that went into probate. Before we got it signed.
Rick Ormsby
Yeah, get the surveys done, get the title, work done, get the schedules done. Accelerate the schedules to the beginning of the purchase agreement, not the end. Communicate quickly and regularly with your advisor or by yourself to the franchisor, because that always slows the and delays things and make sure your communication is weekly. The franchise or because? They hire and fire each other all the time and and and there's lots of people. That touch these deals. So I want to just thank everyone who's listening. Thank you so much for joining today. I think it's really good discussion, legal stuff we joke about is never fun as it it's kind of it kind of glosses over. And you're like oh. But you know, this is one of. These webinars and podcasts that you. Just save and then you like. Pilot back up. You know what I mean. When the time comes. So hopefully it's been good information. Tom's an excellent guy. Does a great job. As you can tell. Derek knows a lot of this stuff too. Please listen on the next podcast and we'll we'll have some good material and let's hope that this M&A market kind of starts picking up in. The back half of the year. So thank you, Tom. Really appreciate it. Thanks guys very much. You will be good.