Q4 M&A Update and Recent Convention Highlights

Webinar

11.17.2021

Rick Ormsby:

How about this? A couple of things. I want to give a shout out to podcasts listeners from the Restaurant Boiler Room. You guys will hear this in probably 10 days or so. The Restaurant Boiler Room podcast continues to grow, man. I'm really excited about that and thank you all for listening to it and being a part and participating. It means a bunch.

Rick Ormsby:

So you'll be able to catch this webinar on replay on our podcast in like 10 days or less and also on our website on unbridledcapital.com. We post all the webinar replays, so you can get it there. Everyone who's signed up, we'll also send an email to, so you can get kind of a YouTube copy of the webinar so you can have that for yourself as well and feel free to ask any questions along the way.

Rick Ormsby:

We'll kind of keep our eyes peeled here, down here at the bottom, under the chat feature. Guys, if you see any questions come up, let's just make sure to keep our eyes peeled and maybe we can address them in the context of this discussion. If not man, we can follow up on emails. So we're glad to do that too.

Rick Ormsby:

One thing before we get started and format's be a little bit different today, but one thing before you get started, and I'm really proud of this, man, I'm proud to announce this really. Unbridled Capital is... I've always been a very patriotic person. I love our country. I love to be an American, proud to be an American and I've been looking for a foundation and a charitable cause that supports our military and our veterans. Both of my brothers have fought, have done multiple tours overseas in the last several years. One as an army ranger and the other is a air traffic controller.

Rick Ormsby:

I've been looking and... I moved to Pensacola, Florida about a year ago and this is the center of Naval aviation. NAS Pensacola is we all Navy pilots come to train. There's a big military presence here. The Blue Angels foundation is the foundation that we're going to be supporting going forward with our deal closings. Just for another five seconds or so, I'll tell you kind of like the Wounded Warrior Project, the Blue Angels Foundation supports our wounded veterans.

Rick Ormsby:

There's a comment on the website that says, "Always remember if you have been diagnosed with PTSD, it is not a sign of weakness, rather it is proof of your strength because you have survived." The program aims to use inpatient and outpatient treatment to help veterans coming back who have been wounded and to help them with PTSD. It's very effective and they have four treatment centers in Boston, Chicago, Atlanta and Los Angeles.

Rick Ormsby:

I've met with the executive director of the program, really impressed with what he's doing. He's a former Blue Angel pilot himself and we're really proud to be able to support those who've given so much of themselves and their lives for our country. I'm excited to do that. We'll give a donation on each closing that we have going forward. If you have any questions or want to know anything about the foundation itself, please holler at us any time.

Rick Ormsby:

With that, here we go. Today, we're just going to go through 20 questions. We just kind of bang these questions out. You'll see me kind of turn my head a little bit over here as I kind of read them off and I'm going to ask... I'll kind of moderate the time. We'll end this thing in one hour and hopefully we'll get through all 20. Maybe we won't, but here we go. Ready? Question number one. 2021 M&A year end review. Why was there so much activity? Why has there been so much activity this year? Anyone want to give that a go?

Tony Petrunin:

Yeah, I think obviously having everyone rushing out the door to try to beat some potentially threatening changes to tax policy is one of the biggest drivers. I think secondary to that, you've also got a lot of fatigue that we're hearing from our clients. They're managing their businesses after going through, I guess, 24 months ago of surviving through COVID, having to manage through what felt like the end of the world at the time, to reemerge and deal with a labor crisis and now some inflation as well. I think the compounding of those two items has made for a really busy second half of the year and really full year 2021.

Rick Ormsby:

Yeah. Yeah. What do you say Derek? Do you agree?

Derek Ball:

I agree with what he said. [inaudible 00:04:23] Maybe a couple of more things as well on top of that. 2020 was a little bit slower. The latter half of the year picked up quite a bit, obviously over the first half of the year where nothing happened from March to pretty much mid-June last year. But there's... What is it? I think 6 trillion soon to be maybe seven and a half trillion dollars printed in the last two years that have flooded the market. That doesn't hurt when everyone's balance sheets are double, triple, quadruple or even more what they normally are.

Derek Ball:

A lot of franchisees have that this year, not only have they had record EBITDA, but the PPP was a big boom and you just got a ton of money in the market. And when you have a ton of money in the market, it's got to go somewhere.

Derek Ball:

That's kept prices strong and have kept sellers interested and selling their businesses without having to take a COVID discount that last April, a lot of people thought people would be taking. You still got cheap debt. Interest rates are rising a little bit right now, but still really cheap debt. Like Tony said, it's tough to run your business right now and the guys coming into the systems, they're a little younger and have less gray hair maybe, but it's a stressful environment. A lot of our clients are at that age where it's maybe a little bit less enjoyable than it was two years ago to run the business and it's just kind of their time to hand it off to the next generation.

Rick Ormsby:

Yeah. I think those are all the right reasons. So we said taxes, precipitating a big push in carry forward maybe of M&A activity. We'll talk about 2022, which I think we're going to see more of the same because the tax policy hasn't substantially changed. There's been... People are getting older. Heck, I'm getting older.

Rick Ormsby:

I used to be the youngest guy around, now I'm 47. Not the youngest anymore. I guess we have... A lot of franchisees are getting older and the valuations are high and the pressures are high and not many of the second generation want to continue to be in the business. When you have valuations are high and a lot of financial buyers are in the business, you just have the natural question of what's my legacy. We spend a lot of time talking about that with people these days. I think those are all good answers. Number two, question, you ready? Buyer and seller sentiment, what is going through their minds? I guess this is a how are buyers and sellers feeling right now know as they look at the marketplace.

Derek Ball:

I'll start. Somewhat piggybacking on part of my answer to number one, you've got sellers who are a little fearful of potential tax increases. Prices are still strong. They're not feeling like they're taking a discount and a lot of businesses, it's the opposite. EBITDA has increased and prices generally have increased. But you've also got the stress of trying to do a transaction and continue to run your business, which is pretty tough obviously. Running your business is a full-time job and you add an M&A transaction to it. And we do our best to help as much as we possibly can. But obviously we can't do 100% of the work in selling the business.

Derek Ball:

You've got that additional stress from current franchisees and the labor issues and commodity issues that everyone's aware of. And then you've got buyers who are somewhat equally stressed.

Derek Ball:

A lot of them are looking to put that money to work by the end of the year, a lot of deals trying to get done this year. You've got buyers saying, "Well, it's not looking like operations are getting any easier. What are we doing?" Well, you are restaurant people. You want to own restaurants unless you have a very short term outlook, it's going to be all right in the long term.

Derek Ball:

But I'd say there's a lot of stress. Everybody's stressed. You've got deals taking a little longer, lawyers, franchisors are taking longer, the survey people and the third party diligence are taking longer. There's a lot of stress in the market I'd say. If I had to boil it into one word, that's probably it.

Rick Ormsby:

Yeah. I've heard people say that what's the comment I've made. I don't want to be disrespectful to some people who may have not been in a situation, but many people are saying, "I've made more money this year than ever, but it's been so much harder than ever too." I understand that sentiment. There is a lot of stress, a lot of pressure with all the people supporting these deals. Tony, you have a quick comment and then we'll jump to the next one.

Tony Petrunin:

I think Derek hit it head on. Everyone seems to be high strung buying or selling for various reasons, but for good reasons, I suppose. We're just in a really weird dynamic where a lot of these franchisees have more sales than they can manage, but not enough people to fulfill them.

Tony Petrunin:

It's a really weird dynamic with shortening hours and tight labor, all the while M&A is as strong as it's ever been. A really interesting time, for sure. On the buy side, I say the sentiment is trying to get deals done as quickly as possible, especially with the speculation that interest rates are coming up here in the next second half of the next year.

Rick Ormsby:

Question came in here about SPACs within the industry. And there have been several SPACs that have been announced recently. A handful of them. We don't dabble too much in the SPAC industry, which basically raise in public funds and putting it in a vehicle, special purpose asset vehicle, I believe it's called. Tell me if that's wrong, but it's basically an empty bucket of money. You raise money with a management team, you go get investors, it's publicly traded and then they get a bucket of money that they raise and they go invest it in an asset of some kind or the stock of a company. We've seen several of those deals happening and happening at high valuations.

Rick Ormsby:

Since we play primarily with franchisees of mid to large size and franchisors with smaller size, I'm aware of several colleagues in the industry that have performed SPACs, but we have not aided in them as of yet.

Rick Ormsby:

I don't know if I have a good answer for that question other than SPACs are usually a sign of, this is my impression, of an exuberant market when people are investing in something that they don't... They're investing their management team with no assets. But they've been popular in the last 12 months or so. Thank you for the question.

Rick Ormsby:

Number three, what does M&A look like for franchising in 2022 and specifically in Q1? I'll start off with that and then let's just get one response here because I think we're a little behind. I guess I would say this, for 2022, it was a couple of months ago, I was fearful that we were going to be in 2022 at the end of this year and say, "Oh my goodness. It's going to slow down to nothing."

Rick Ormsby:

All this business has been pushed forward into '21 to get closed before the tax year end. Unbridled has a couple hundred restaurants on the market in the last just week and a half and we have like three or four other deals, four other deals that we're about to put in the market in KFC, Sonic and Pizza Hut, I think. I think from our standpoint, my comment would be that I think it looks like 2022 is going to be just as busy as 2021 at least the first quarter, maybe the second quarter as well. I guess if we get more tax changes in a negative way that we don't expect right now, doesn't look like it's... That we're going to have anything at the moment that's going to stop the M&A wave, like really incredibly high capital gains tax rates.

Rick Ormsby:

But I think that the operating environment's gotten more difficult, I think people's EBITDA might or might not be having difficulty rolling over last year as we move into 2022, just because of the state of the world. I suspect you're going to see sellers kind of think, "Oh, gee. I missed my boat in 2021, but it's still going in 2022. And so I raised my hand and I'm going to do it."

Rick Ormsby:

For that reason, I think we're going to see a big amount of business in 2022, especially in the first quarter or first half and I believe as we trail into the second quarter of 2022, we're going to see once we get some sort of lending attachment here, we're going to see the casual dinners and the fast casual companies start coming to the market.

Rick Ormsby:

We're already getting phone calls and emails from franchisors of casual dining concepts inquiring about selling. That's what I see. I think stay tuned, there's going to be plenty of liquidity and plenty of buyer and seller demand in 2022.

Rick Ormsby:

Yeah. I gather you guys will agree with that. So let's jump to number four since we're... Do you want to say something, Tony?

Tony Petrunin:

No. I just gave you a thumbs up.

Rick Ormsby:

Thumbs up, thumbs up. How about this? You guys tackle this one, what brands will and won't be active in 2022? What do you think?

Tony Petrunin:

I think if you've been following a lot of the transactions in some of these brands, you'll see that there's some them that took a lot of transactions that were going to cure next year or the following year kind of brought them all and compressed them into this past year. I think Taco Bell's certainly one of them.

Tony Petrunin:

I think to your point, Rick, I think we'll start seeing the reemergence of fast casual. Don't be shocked if you see more deals in Panera and other fast casuals have been sidelined a little bit through COVID. But I do think when we look out the world of especially Taco Bell, I mean, gosh, they've transacted over almost a thousand locations, I guess, in 12 months. It's hard to see that continuing going forward with that kind of scale. But I think fast casuals and the secondary segments that have been punished by COVID will definitely emerge with more activities, especially going back half of next year.

Rick Ormsby:

Yeah. Anything you want to add there, Derek?

Derek Ball:

I'll just add. I've been saying this for almost a year now. I'm pretty bullish on casual dining, the national chains. That doesn't mean go pay 10 times EBITDA for them, but I'm bullish and I think they'll do really well in the medium to short to hopefully long term, too. I guess I don't usually predict long term trends, but you've got sales that have bounced back to 2019 or better. A lot of brands better.

Derek Ball:

You've got Mom and Pops that have unfortunately still had to shut down and people are replacing that experience. I think with the Applebee's, Chiles and those brands. If we ever hit a [inaudible 00:15:10] or anything, money starts getting tighter, people are going to replace that $100 outing on a Wednesday night with a $40 outing on a Wednesday night. That again is not going to help those smaller Mom and Pops in town. I think you'll see more casual, obviously the price has to be right and make sense and the lending's got to be there.

Derek Ball:

We've talked to some lenders last week that are willing to lend on it within reason. You're not going to throw five and a half [inaudible 00:15:38] suggested on it or anything like that. But I think you'll see kind of a reemergence of casual dining in the market.

Rick Ormsby:

Do you think you'll see more people eating a bourbon street steak within Oreo shake and some whipped cream on the top up too?

Tony Petrunin:

About a 4,000 calorie meal.

Rick Ormsby:

What is it? Two straws, one check. Girl, I got you. My kids sing that song and love it, man. I asked the guys at Applebee's, I'm like, "What's this done to your sales?" And they're like, "Man, it's made a meaningful impact but we had to just get Oreo shakes in our stores nationally. We didn't have them." I was like, "Well, you better get them if you're going to be singing on the TV." It's funny, man. I guess I would just add this. Part of what you saw in the Taco Bell space this year and another large franchisees. Large franchisees are tax savvy and planning savvy and strategy savvy.

Rick Ormsby:

And they foam lots of millions of dollars on [inaudible 00:16:32] and CPA and the legacy planning and all the things that... All those things. Those are the ones who are more likely to have made planning decisions, buy-sell decisions during this year. The ones that are less likely to have done so are the smaller operators and the smaller franchisees who maybe aren't so planful and they're... Maybe envision yourself in a store with seven stores and then bouncing between stores and not having thought about it as clearly or as long. Those are likely the types of people that are going to be the sellers, I would say initially in 2022. Or the ones whose businesses have recovered, that hadn't recovered fully in 2021.

Rick Ormsby:

So regardless, they work in a sell anyway. That's maybe something to mention. Okay. Number five on the list was what is the year end push looking like on our Unbridled Capital deals? Well, I know we've got two Taco Bell deals closing today and a big Sonic deal closing tomorrow. And then we have like six or seven others that are supposed to close before the end of the year. All this darn pressure is in front of everybody. What would you say to that question? What's it looking like? Maybe paint a picture without talking about brands or specific scenarios, just kind of what we're going through. It might be helpful to the crowd.

Tony Petrunin:

Yeah, I think in a word, I would say hectic. We maybe touched on this in our last conversation, but all these third party providers are all trying to field all of these inbound requests to get a deal done by year end. That touches on attorneys, lenders, third party, real estate, diligence groups, call of earnings providers and different advisors.

Tony Petrunin:

If you can imagine, everyone's trying to chase the same puck and get something closed by year end and not to mention you've got holidays and personal time mixed in there that you always have. It makes for a pretty hectic environment to get things done. Maybe I had more hair before I started the year, but it's definitely been pretty nutty. Derek, I'm sure you would agree, it's probably one of the most hectic seasons we've seen.

Derek Ball:

Yeah, I think so. But as far as I can tell, things always happen in these deals but the clients that we kind of told we would expect to be able to close your deal in 2021, I think we're, aiming and we should probably be able to hit that unless things happen unexpectedly throughout the rest of the year.

Derek Ball:

And then obviously the deals we're working on now are not a 2021 closing guarantee at all. So, but I think we're going to be under the gun and get our deals done this year that we've told our clients should be able to.

Rick Ormsby:

Yeah. Yeah. Thanks for sharing. How about what's happening to multiples? What's happening to multiples in... I suppose we had a period of... I'm sure most of us did, but we probably had a period of about 60 days, maybe a little bit more towards kind of the 1st of August till maybe like now, where we probably had a pause. People had pretty much decided to sell in 2021.

Rick Ormsby:

If you didn't get it going by August 1st, it was going to be real difficult to do. So then you kind of had a drop off until the tax legislation became more clear or the lack tax legislation became more clear. And then now, I think people are coming back online. We're kind of feeling it out. We've got a couple of big assignments in the marketplace right now, but what do you guys think is happening to multiples right now? What's your viewpoint?

Tony Petrunin:

Yeah, I'll... Go ahead, Derek, if you want.

Rick Ormsby:

Looks like Derek's frozen.

Tony Petrunin:

He's frozen. He's frozen on my screen.

Rick Ormsby:

Yeah, go ahead, Tony.

Tony Petrunin:

I'll give him a second. I still think you've... I know we're going to touch on this probably next, but I think the real driver of analyzing multiples is always looking at what is going on with EBITDA. What you still have is this weird dynamic where some of these businesses in 2019 or 2020 achieved kind of "steady state EBITDA", I'm using air quotes because that's probably how most lenders will think about it. And then a lot of them had a massive bump going through COVID.

Tony Petrunin:

Now the question is whether or not you're retaining that EBITDA, are you retaining it or losing it and obviously depending on which side of the coin you are, your multiples could vary drastically from what they were before. We've got some brands that have been up 20% pre-COVID now.

Tony Petrunin:

And when you look at their multiples historically, yeah, it looks a little bit different. But what we're still seeing is that there's still an appetite on the buy side to fill in whatever hesitancy a lender may have to provide let's say less debt, but the buyers are still willing to fill that gap and achieve the purchase price that's requested. We haven't seen that dynamic change. You do have kind of two camps.

Tony Petrunin:

You have people who are still quite conservative and say, "Well, I can only lend to this amount and I can't reach that multiple. But we've found in our experience and I think we're successful at this is finding those groups that are willing to say, "Hey, I've actually hoarded cash for this reason. I've obtained PPP or I've got dry powder from institutional or outside investors and this is... We're willing to inject more into this capital structure to win the deal."

Rick Ormsby:

Yeah. Yeah. I think that's a great point. I think it's a great point. When I think about multiples, I think about multiple... The ultimate question is what is happening with valuations. When I think about valuations, they're usually comprised just from a simple perspective of EBITDA and EBITDA multiple. There's other factors obviously, but you have the profit in the business and then you have the multiple, you apply it to and then you come to evaluation.

Rick Ormsby:

We look at EBITDA and we look at EBITDA multiple and those things are always in flux more so now than ever in the history of this business. What is the EBITDA maybe the more kind of salient question. Many brands with good performance and a lot of buyer demand are able to fetch a current multiple of EBITDA on a current EBITDA to get a current valuation, some are not.

Rick Ormsby:

Some of it is just all about supply and demand. In this context, it's easy to confuse how the EBITDA multiple is changing if at all, when the EBITDA is changing so much. I guess my broad comment would be that the EBITDA multiples are kind of roughly the same. It's really the EBITDA that's been changing a lot. There are some brands where the EBITDA multiple has actually come up a little bit.

Rick Ormsby:

So for example, one brand might be... Like KFC is a brand. The KFC brand over the course of maybe the last two or three years has had an improvement, kind of a gradual improvement in EBITDA multiple, gradual improvement. I'd say the same thing has kind of happened for Pizza Hut.

Rick Ormsby:

I would say Taco Bell has kind of come up a little bit. The EBITDA multiple for a group like Sonic is kind of hard to say because the EBITDA has come up so much. But maybe the multiple is up a little bit too. I mean there are brands where the EBITDA multiple is dropping. I probably don't want to single anybody out and I won't do that, but if you think about a brand where the couple of year comp performance has been bad, the relationship with the franchisor and the franchisee isn't good, there's a lot healthy... There are other factors, maybe the management team has been... There's been some shakeouts and things a like that, those types of brands have seen slight EBITDA drops because maybe there aren't as many buyers for those businesses.

Rick Ormsby:

That's kind of how I'd say to answer that too. Let's skip down to number eight on the list guys. Okay. Derek, I see you're back with us. Why don't you take this one? On Unbridled Capital deals, are we experiencing new surprises and due diligence and how I'd like you to answer this question is this, assume everyone on this call is considering, I know it's not true, but considering they never sold anything before and might be an interested seller one day and they don't know. They think the buyer and seller shake hands and make a deal. What kind of new surprises are we seeing in our deals during due diligence?

Derek Ball:

I don't know if there's anything that's really new this year that we didn't see before. I think a lot of buyers are really pinpointing on labor. In a normal year, obviously you don't want to lose your people during a transaction. This year, you really don't want to lose your people during a transaction because good luck getting more.

Derek Ball:

So I think buyers are heightened on retaining everyone they possibly can through a transaction. It's common. Sometimes there's attrition, but I'd say in a normal year, often times there actually isn't a lot. But now you've got employees that know they can pretty much go anywhere because there are millions of jobs out there that people would be happy to fill. I wouldn't say it's really a surprise, but it's a heightened focus on the people, part of the business and wanting to make sure that they retain everybody and then I'll just, again, the new surprises are just things coming up with heightened levels of stress. Deals are never easy and when people get stressed, they get harder. I wouldn't say that's necessarily a surprise, but maybe that wasn't a great answer. Tony, anything from you?

Tony Petrunin:

I would just say, this isn't across the board by any means, but we have some of these brands that did experience a massive explosion in sales and price was maybe pegged at the top of that kind of bell curve and in some of those cases where the sales are coming down and kind of stabilizing, there have been some reconsiderations, right?

Tony Petrunin:

Again, it's not across the board, but once you're in due diligence and you see some changes in underlying performance, that obviously results in some price adjustments. Again, I wouldn't say that's necessarily maybe not categorized as a big surprise. It's kind of the course of doing business regardless of brand, regardless of timing, but having these weird COVID lapse certainly doesn't help.

Rick Ormsby:

Yeah. I would say this. I mean for those of you listening or watching, I guess my comment would be most of the deals that we're seeing now and I guess we've got, well like 25 deals or so going. Almost all the deals are being bought by people, not all, but almost all of them are being bought by buyers who are backed with institutional money of some kind, whether it's family office money or private equity money. Those seem to be the people who want to buy these assets during these COVID times.

Rick Ormsby:

The comment I would just make is that they have a pretty regular playbook, a lot of them, which involves longer due diligence process, inspection of the assets, quality of earning studies and pretty professional and often difficult legal representation.

Rick Ormsby:

All these things that kind of come alongside the transaction that most people might be unfamiliar with. I usually tell people this, especially clients that are thinking of hiring us. I'm like back in the good old days, when you did deals on napkins, they were easy to close, sure but the price was probably 40% less.

Rick Ormsby:

If you want to get a market price that's really at a all time record for this industry and buyers are willing to pay it, you've got to expect it to be a difficult and time consuming and laborious transaction. And that's just what it is. People aren't going to be investing other people's money without looking under every crevice. That's my comment. I guess is just by the nature of having more financial buyers, there's just more due diligence than there ever has been. Every deal, even the smaller ones.

Rick Ormsby:

So if you're a smaller franchiser who has 10 units, you might say, "I can sell it to the nearby neighbor." Well, the nearby neighbor is going to pay five times EBITDA for it. So you're probably not going to sell it to the nearby neighbor, you're going to sell it to somebody who has a big old family office attached to them, that is going to ask weird questions that you never heard before.

Rick Ormsby:

Here we go. Number nine, timing from a deal, start to completion. Any comment on that and how it's changed? Maybe there's some comments about the franchisor here a little bit too. What do you guys think?

Derek Ball:

A lot of franchisors like everyone have just backed up on deals. They're just taking a little bit longer. But it's every step, it's not just franchisors taking a little longer. It's like Tony said on a couple of questions back, you've got the real estate diligence, it's trickling in taking a long time.

Derek Ball:

Anytime you have to deal with the local government, it's going to take a long time. Permitting is taking a little bit longer, getting the licenses, the lenders are backed up. Every is just... There's no one bottleneck in these deals. Lawyers are doing all sorts of deals and there's only so much time in the day.

Derek Ball:

In Q3, Q4 deals have taken a little bit longer simply because of all that, and it's just the nature of when you put a couple of years of M&A into two quarter, that's what's going to happen. I'd expect it to change come Q1. I think we'll stay busy in 2022, but I think you'll see things pick up a little bit. Franchisors will get a lot of Q4 deals off their books. Lawyers... Everybody will get a lot of deals off their books in Q4 and things will pick back up again, I think, and move a little quicker.

Rick Ormsby:

I wonder if we're all going to have this period of time for like the first 10 days of January where we all just go incognito. Do you know what I mean? Like we do in the Hobbit, like slide the ring on your finger and you just kind of wander around invisible for 10 days because of the fatigue of getting it all complete. I don't know. Something tells me though we'll just be right back at it on January the 2nd.

Rick Ormsby:

I guess I would just say the same thing. We usually tell people six months from the time we shake hands with them to the time the deal closes. I think maybe this year, it's probably been another month on top of that maybe. Maybe seven months. There have been a couple of things that have changed. I think the franchisor... A couple years ago, most franchisors went from corporations to LLCs and when they did that, they changed their timing on their right of first refusal and transfer approval.

Rick Ormsby:

It used to be like 30 to 45 days and now, they seem to be in the 45 to 60 days or more. We're just seeing typically the franchisor adding another window of maybe 30 days beyond what they typically have. I guess I'd make the other comment that the franchisor is also... When you have financial buyers, you have to remember that these financial buyers don't have training in many cases.

Rick Ormsby:

So training, but it comes a material part of the discussion. If it's a new buyer that's coming in, the new buyer sometimes is going to have to negotiate a relationship agreement in addition to the franchise agreement and how that's going to govern the relationship between this buyer and the franchisor.

Rick Ormsby:

That document contains lots of information on how much development is needed and all kinds of other things. That takes a while to negotiate for the first time. So when you're dealing with the first time financial buyer coming into a deal, there's just always going to be probably a 30 to 60 day increase in the time.

Rick Ormsby:

Now, that may be totally worth it if they pay 5% more on a hundred million dollar price. Of course you'd wait for it, but that's a consideration that's becoming more prevalent because you're seeing more and more of those types of buyers buying these assets. Any comments on that? Tony, you got a comment on that?

Tony Petrunin:

No. I think that's spot on. I think things will start simmering down here beginning January onward and we'll all kind of take a sigh relief and maybe things will be easier to manage. There won't be this huge thrust behind everybody trying to get something done by year end.

Rick Ormsby:

Absolutely. Okay. Let's go to number 10. Some of this is from RFTC. When we were out at RFTC last week, I mean, these are our views, but they've been informed a little bit and updated a little bit from what we heard at RFTC. So hopefully you might find this as a cliff notes to RFTC a little bit. The next one is, how are lenders looking at QSR right now? What do you think?

Tony Petrunin:

I think QSR is still attractive as ever. I think some brands have different nuances associated with them. I think the brands that have extreme EBITDA volatility, you're going to see lenders looking at pre-COVID numbers and making decisions off those.

Tony Petrunin:

Other brands where it's been maybe a little bit more stable, I think there's been a little bit more aggressive lending or somewhat similar to what there was previously this year. And then obviously fast casual. You can never really get a clear cut answer from a lot of lenders, how they feel about it. But it's definitely still being figured out, but I think there's a growing appetite once performance comes back.

Tony Petrunin:

Some of our fast casual clients, we've looked back at their numbers and they're just now starting to get back to where they were. I suspect lending will pick up in lockstep with the amount of franchisees who are exiting those brands as well.

Rick Ormsby:

Yeah. My comment is I'm continuing to hear from these, that the credit analysts and the risk management guys are getting a little bit more cautious in scrutinizing the PNLs during these deals a little bit more, since we're past the COVID wave.

Rick Ormsby:

Do you all want to hear something funny? I just got an from somebody. He said he saw me a couple of years ago when I sang the Humpty dance at the Taco Bell Cantina. Which of course, those of you who have seen know that I was as a high school kid, I looked a lot like the guy from Digital Underground.

Rick Ormsby:

And so I would sing the Humpty dance every time at a party for like years. So I kind of got a good going with that and he says next time he's going to recommend to a big Applebee's franchisee that I sing Fancy Like with the bourbon street steak. I don't know, man. One's a rap song from the early nineties and this is a country song from 2021. That would mean that I'm kind of an adaptable guy. I don't know. But that's funny. It's funny. Maybe I'll do it.

Tony Petrunin:

[crosstalk 00:35:45] People here who might not even know what that is, Rick. I think...

Rick Ormsby:

Yeah. Yeah, totally. The guy actually said, "I'm calling Greg Flyn and I'm going to see if I can get you in one of his Applebee locations." That's funny. That's really funny.

Rick Ormsby:

Okay. Number 11, how are deals getting financed? And particularly, I want to talk a little bit about earn outs and seller financing and alternative capital structure, because over the last four or five years, we haven't really seen much of that at all. Our industry has been an up 1%, down 1% type of industry. Typically, seller financing and earn outs and kind of some of these creative ways to finance deals don't come into play as much in our space unless we have periods of extreme ups or downs or volatility or uncertainty.

Rick Ormsby:

But we started to see that a little bit in our transactions. I know Tony, particularly, you have a couple of assignments where you're seeing it. Why don't you speak to this question a little bit?

Tony Petrunin:

Yeah. I want to couch my response first by saying, luckily none of these variants to financing actually stuck and were actually included in the go forward transaction. We've had offers with earn outs and seller financing, but I think kudos to us in a biased way that we haven't had to actually accept those terms.

Tony Petrunin:

I think most of our clients say we fight tooth and nail to make sure that we don't have something like that for various reasons. There might be occasions where it makes sense, but we try above all else to avoid that where we can. I've had a couple of transactions where that became part of the overall process and something that was included in purchase price.

Tony Petrunin:

Luckily, we were able to negotiate those away, but the fact that they've emerged so much recently to us is a clear sign of where things might be going as far as how people are interpreting deals in a level of risk. Now, I should caveat this, that the brands that we've seen this in have been brands that are a little bit more troubled. If you're kind of in a blue chip well-performing business that did great through COVID, you're likely not going to see this. And if you do, you probably have more leverage to select a bit or a buyer that's not going to include these type of. Whereas some of the more troubled businesses, you're probably going to see more of this.

Rick Ormsby:

Anything in particular? Any particular comments like of particular deals?

Tony Petrunin:

Yeah. I try to avoid being so specific with such an audience here, but in those cases, for us, it's always really important that we understand the terms to the smallest piece of minutia. In particular, guarantees are crucial where you sit in the subordination stack versus bank landlords, et cetera, in the case of something happening.

Tony Petrunin:

But ultimately at the end of the day, it's a unique paradigm. When you do seller finance or earn out, you take the seller who is supposed to ride off in the sunset with proceeds and now they need to underwrite their buyer. It's just a very strange dynamic. You just have to perform your own kind of quality of earnings and due diligence on the buyer as well. We're averse in navigate that as well.

Rick Ormsby:

Very good. Let's see capital structure on franchise deals. It's kind of a similar comment in question. Derek, do you have anything you want to add there? Capital structure, franchisors. Maybe specifically talk about how these things are being capitalized. Pick five or six deals in your head that you guys have been working on. Let's talk about them. How are they getting capitalized, just broadly speaking.

Derek Ball:

One of the themes is I think you all made have talked about it when I was frozen. Sorry about that. So I don't know. Lenders are underwriting EBITDA a little bit tighter than they were maybe six months ago and they're not all necessarily taking peak EBITDA at a five and a half lease adjusted and saying, "This is your debt." In that case, you're often going to get maybe a 65 to 70% financing. It obviously depends on the deal, depends on the brand, what kind of multiple you're paying.

Derek Ball:

If lenders start hedging that a little bit and hedging EBITDA and trying to give you a five and a half fleet suggested maybe on an EBITDA that's a little bit, than maybe where the seller actually is, well, naturally that's going to increase the equity that you need to buy that business at the same price.

Derek Ball:

Generally I think most of our deals are seeing a little bit higher infusion of equity into them. A lot of buyers are willing to do it because they have balance sheets with masses of amounts, millions and millions of dollars of cash that they are actually want to put the work. In order to win deals, if the prices stay stagnant or have gone up, naturally, they end up putting more equity into these deals if they can't get additional debt.

Derek Ball:

That's one of the kind of themes that I've been seeing on most of our transactions.

Rick Ormsby:

Well, some of the bigger ones now that we're working on, we see the real estate being financed separately through kind of say a lease back, kind of a wholesale [inaudible 00:41:06] lease back to a REIT at closing and then the operation side being taken down by either a consortium of lenders plus equity or one lender plus equity, depending on the size.

Rick Ormsby:

You all probably know that one lender will typically only take 35 to 40 million roughly, no more than that, of any type of a loan before it gets too big and they start calling in other banks to help them. I would make the note that these real estate rich deals, the cap rates on the sale lease back market are still really strong.

Rick Ormsby:

We don't see any of our clients really asking us or getting involved in doing single one-off sale lease backs as we're selling the operation. But oftentimes the business and operation go together. The real estate ends up being financed by the buyer through a wholesale sale lease back to a REIT. And then the business gets capitalized with an infusion of debt and equity.

Rick Ormsby:

That would be kind of something you see on bigger on many bigger transactions. We still see the ones where the buyers are buying the business and the real estate too. But again, the financial buyers, again, their playbook is typically not always but typically going to be real estate is an underutilized asset and it's easy to finance it.

Rick Ormsby:

That would be a kind of a prevalent viewpoint. Here comes a question in here. Do you see any trends in timing for obtaining landlord consents to assignment of store leases in M&A deals? You guys want to take that one?

Derek Ball:

I don't know if...

Tony Petrunin:

I was going to say, I'm not seeing any delays with landlords, like I am with some of the other, I guess, the other cogs that are in a transaction. You have typical things where people are on vacation or it's held by a trust and the trust officer's in Florida and good luck getting ahold of them and they're holding up the deal, et cetera. But for the most part, it's been kind of steady state. I can't say that there's been any movement positively or negatively in that regard.

Derek Ball:

Yeah. I wouldn't say any trends. They're just slow, like always. I don't think they're trending any slower or any faster. It depends on the landlord obviously and the type of landlord it is. But no, they're as slow as they've always been.

Derek Ball:

There's always 10 to 20% of the landlords that are going to be difficult. You're going to have a couple few landlords that ended up trying to hold up a deal at the end. But otherwise, the majority of landlords are friendly enough, good enough to work with. We've always got that percentage that are tough.

Rick Ormsby:

And to that point, because we always know that 10-20% are going to be difficult whether you've got a hundred stores or five stores, that means you've either got what? Like 10 to 20 or one to one or two. But you want to get out in front of it as soon as you can once the purchase agreement is signed. And everyone agrees. It's just... Because it does drag towards the end because you have several bad actors and absent people among the landlord community.

Rick Ormsby:

Maybe that helps. Okay. So let's check this. The next one would be, are the buyers changing? That's question 13. Let's pass on that one because I kind of already mentioned that. The buyers have... We still see kind of the same... We see maybe an acceleration of the family office and private equity world by making offers on these businesses now.

Rick Ormsby:

They're not really changing as much. I think the family office structure is way more consultatory to the franchisors, the FTD and the relationship agreement as a buy and hold, not necessarily buy and sell type of a buyer. The private equity groups who are on this call just continue to realize that you need to get checked in with the franchisor and get approved by the franchisor because there is that stigma out there that you guys can't get deals closed in QSR because the franchisor was going to say no because your charter has you selling at five years.

Rick Ormsby:

You need to kind of make sure you can get over that hurdle. But private equity hasn't been overly involved on the franchise side until you get to the really big unit counts. But we'll see more of it. I know we will.

Rick Ormsby:

Let's see number 14. Any opening in M&A for casual and fast casual? We touched on this too. So I'll just make a quick comment and say I don't know that I believe the Derek's comment. I know he is not lying, but I don't know that I believe his comment that the lenders are saying oh, they're open to lending casual dining companies.

Rick Ormsby:

Because I believe that the lenders probably were telling him anything they wanted to tell him to try to get some deal flow. When I ask lenders right now, I just say, I still hear negative in crickets with casual dining and fast casual. I do believe, like Derek does, I don't know if Tony said it, but I think Derek did that we're going to see a resurgence in casual dining in 2022.

Rick Ormsby:

I do believe that. Most of these PNLs have had like six months, seven months, eight months of performance that's been great. And they're kind of sort of getting back to 2019 levels in many cases, but I don't think we're there all the way yet. I know all these lenders are doing these deals in QSR right now.

Rick Ormsby:

My opinion is regardless of what they told Derek in the hallway, they're still probably not fully committed to casual dining, if not committed at all. I'm hoping in listening for better lending terms and I think we're probably going to find it. I hope we find it before the end of Q1 of 2022. Once that happens, I think we're going to see just a litany of casual dining deals that come to the market.

Rick Ormsby:

Fast casual, not so much. Fast casual in a lot of cases was like a hundred unit franchisee of Wendy's who owned eight whatever mod pizzas or something like this. It's just kind of less consequential in the overall marketplace. This is going to kind of happen and trickle out. Okay. You think I'm wrong about that?

Tony Petrunin:

Time will tell.

Derek Ball:

I'll be interested to see which lender, what you call a liar [inaudible 00:47:42] for lying to me.

Rick Ormsby:

[inaudible 00:47:47]. If you ask any lender, "Hey, are you lending money to asbestos sites?" "Oh yeah. We'll take a look at that." You know what I mean. They'll say anything. It's just the nature of the beast, man. I love them no matter what.

Rick Ormsby:

Is consolidation a continuing trend? Any comments on that?

Tony Petrunin:

Heck yeah.

Derek Ball:

Naturally.

Tony Petrunin:

Yeah. What's interesting though is I'm seeing some of our historical clients who've been really active in some of the more mature brands are really taking an interest in some of these kind of newer up and coming kind of tier two regional brands with 2,000 to 3,000 units. Especially in brands that are owned by Inspire, I'm seeing and hearing a lot of that. I think that's going to be the next wave of consolidation.

Rick Ormsby:

Well, let's talk about that a little bit. I know we kind of... It's another question down the line, but a couple of things. We're all seeing people wanting to get into the coffee brands, these new drive through coffee brands that you can pop up for three or 400,000 bucks, get a little quarter of an acre with a drive through and the thing does a million dollars in sales at a 30% EBITDA margin.

Rick Ormsby:

That's kind of filtering through all the large franchisees right now, several buddies of mine and clients of ours are looking at those types of startup brands that are doing that. RBI just announced, obviously that they acquired the... Come on, help me here. Firehouse Subs. Firehouse Subs out of Jacksonville, out of good old Florida.

Rick Ormsby:

That's been a space that other than Jimmy John's with Inspire has been fragmented by a lot of franchise wars have kind of been these tier two, 800,000 unit concepts. And then they have a lot of small franchisees within them, but we're starting to see that as a consolidation. And I think that'll probably continue.

Rick Ormsby:

From our standpoint, the sub shops, we're just kind of... We don't do a whole lot of business with them because they're usually smaller and they have smaller franchisees and no real estate and the deal sizes just aren't quite large enough for us. But they don't compete with a lot of franchisees, other businesses.

Rick Ormsby:

I've seen a lot of our clients and friends get into that Jersey Mike's world too. And you got to imagine that those subs shops will probably start consolidating here. It's going to be a difficult road to hoe though for them, because when you're trying to consolidate one and two unit franchisees, that's a patient man's game. What do you guys think? Any comments on the RBI acquisition of Firehouse Subs, number one or coffee or anything else that you saw?

Tony Petrunin:

I think it raised a little bit of an eyebrow, but on the same token, there's a part [inaudible 00:50:34] that says well, what else is there left to buy where you can kind of scale your infrastructure, your franchisees and give them something else that's attractive for them to invest in. Right. So if you look at almost each segment, there's not a lot left with scale to acquire the franchise or [inaudible 00:50:53].

Rick Ormsby:

Yep. For sure. For sure. Derek, you got anything to say?

Derek Ball:

No. Nothing else.

Rick Ormsby:

Yeah. Yeah. I guess the issue is the non-compete. These brands are trying and to put together other brands that don't compete with them. So if you're a franchisee and you are a franchisee of RBI as an example, well, you can go into their portfolio of brands and you can buy burgers with Burger King, you can buy fried chicken with Popeyes, you can buy donuts and coffee with Tim Horton's and now you can buy Sub sandwiches. They all are kind of complimentary brands.

Rick Ormsby:

On the franchisor and also at the franchisee level, the Deli sandwich or Subway sandwich type of model is one that doesn't naturally compete with anything else that is big on the national stage. It becomes a natural to add a brand like that to your portfolio, which is what inspired it too, when they bought Jimmy Johns.

Rick Ormsby:

Okay. Anything else? Let's talk about the franchisor for a few minutes. We just have about eight minutes left. To me, this has been an area of big change. I'd probably say in 20-ish years of doing this, prior to this year, I'd seen hundreds of transactions and maybe only one where a franchisor exercised the right of first refusal.

Rick Ormsby:

This year, I've seen... Personally, we've seen it on guys, maybe three of our transactions and then we've also seen it on other deals in the marketplace on a couple. That would amount to fivefold increase times 20. What is it? A hundred thousand fold increase of franchisor right over first refusal over my experience in this business with it. It's been a pronounced change, a pronounced change. How do you expect that to... What do you think about that? What do you think about the franchise? Any comments? We're not making positive or negative comments, we're just making comments. Any things you see?

Derek Ball:

I think generally they're just taking a little more bigger role in these deals, trying to guide where they go a little stronger. The Rofer is one of the tools they have to be able to do that. That's the more straightforward tool for them to be able to exercise their Rofer as every franchisor has. I don't know if it's something that's just happened this year or is going to continue, well, like Craig said until six months ago. I personally have never been involved with a deal with a Rofer attached to it.

Derek Ball:

This year, I've been involved with a few and heard of a couple of others through the market that we weren't representing. I think it's just the franchisor taken a little heavier role in these franchisee to franchisee deals generally.

Rick Ormsby:

Yeah. Fair enough.

Tony Petrunin:

I think maybe it's twofold. I've seen it executed one for strategic reasons where they wanted to operate a core market, and then secondly, where there's a little bit of a hedge to prevent kind of a too big to fail scenario. I think some of these franchisors have seen in other brands where franchisees get so big that it becomes a systemic risk. I think in those cases, they're trying to manage away from that.

Tony Petrunin:

I think those... That might be the thrust of what we're seeing, but we'll never really know fully what franchisor is thinking. But it's definitely something new to us or newer to our transactions, I should say.

Rick Ormsby:

Yeah. Yeah, for sure. Okay. We've got a couple of more questions we can answer. What about RFDC this year? Do you guys have any impressions that you'd like to share with the group?

Tony Petrunin:

I actually thought it was going to be less attended. I was actually shocked. It was buzzing. It was really buzzing, but I also saw a lot of brands and franchisors that were smaller in scale out there, more than I've seen in any other year where they're basically out there understanding there's a lot of capital and liquidity out there and they're looking for people to build de Novo, which haven't really seen that. That was an interesting update for me.

Rick Ormsby:

Yeah, yeah. I would say the same. They were quite a big crowd out there, bigger than I would've expected and a lot of small franchisors, yes, who are looking for options. I thought that was interesting too. A whole host of small franchisees. I think for those of you who've listened, I've talked about this in the past, but I think we've seen a couple of big transactions this year where big franchisees have bought small for franchisors. We expect to see that trend continue.

Rick Ormsby:

The economics of buying a small franchisor are actually quite... If you can build a case for the health of the brand and the expansion of the brand, controlling the concept can be a very profitable thing and not having to pay royalties and advertising.

Rick Ormsby:

I think that we're going to see that maybe as a progressive trend in our industry going forward, little by little. You'll start seeing big franchisees say, "Well, heck. I've bought enough of these in this brand and built enough of these in this other brand. Let's try a small franchise over and see what we can do."

Rick Ormsby:

Okay. Last... Well, I'll make a comment about non-franchising. I do think we did see out at RFTC a couple of clients and friends talk about getting into non-franchising or pardon me, non-restaurant franchising concepts. It's particularly in the gym and health and wellness space, as COVID kind of gets past us and we see those concepts kind of return back to normal and people be okay, sweating next to one another and having services performed and things like that.

Rick Ormsby:

I think you're you're are going to see those brands continue to push. I did see Planet Fitness just come out with a really bullish new unit development, kind of projection for their brand. So they're pretty bullish on the future here. I expect, you'll see, as we have more financial buyers in our space that they're going to cross across the restaurant aisle into the non-restaurant franchising now going forward. There seem to be a lot of car care brands going on as well. That's an interesting space to watch because as you know, the push for electric cars is going to affect that industry greatly over the next five or six or 10 years.

Rick Ormsby:

Watch for that, it'll be an interesting trend. Any other comments you guys have? I guess we'll leave with this is the role of technology in the future. Everyone's wanting robots for the back of the restaurants, as fast as they can get them because this labor problem is not going away, is it? It doesn't look like anyone's expecting wages to go down once the job market goes back to normal. Everything only goes up from here. Any comments on what I just said or any final comments that either of you want to make before we finish up here?

Derek Ball:

It's a matter of time. The government wanted $15 an hour wage and now they're getting it in a lot of places without having to do anything. Robots are already being tested. You've got burger flipping robots, you've got wing making robots under test and you're only going to see the labor pressures speed that process up.

Derek Ball:

If it was two years ago, it might have been a 20 year in the future thing. Now, it's probably five. So we'll see what happens, but I think you'll see that be a priority over the next half a decade.

Tony Petrunin:

Yeah. That'd be interesting too. I also think in the future, the big adage isn't just labor savings, it's actually reduced waste and cost of sales is going to be incredibly tight to manage.

Tony Petrunin:

But in the meantime, I feel like it is a ways away, but you've got brands who are embracing technology with ghost kitchens. You've seen probably all over LinkedIn that inspires kind of rolling out some dark kitchens with all the brands under one roof. You've got Sonic rolling out EV charging stations.

Tony Petrunin:

Hey, what better than getting some free electricity and picking up a corny dog and some tots? I think the future is going to be earned by the brands who are really going to embrace that technology and make small investments today that could pay off in the future.

Rick Ormsby:

Yeah. It's exciting an new world we live in, I guess. Thank you guys for listening and watching. Again, if you have any questions, please reach out to me afterwards, I'm glad to help you if you didn't get your questions answered.

Rick Ormsby:

Hope you found this valuable. Like I said, it'll be available on our Restaurant Boiler Room podcast, on our website and then we'll send you a copy too. Best wishes. I guess I would say happy Thanksgiving. Can you believe it? We're at another year. I can't believe we're almost at the end of another year, but happy Thanksgiving to everyone and good luck in the Christmas season, good luck finishing your deals, closing your businesses out for this year. God bless you. Thank you all so much and thanks to Derek and Tony.

Tony Petrunin:

Thanks everybody.

Derek Ball:

Thanks everybody.