Season 1 Episode 15: Impact Seen in Restaurants When Wage Hikes Occur



Also Listen On:

1. Unbridled’s Mid-Year Franchise M&A Update
2. Bessemer Investment Partners Buys 73 Taco Bells in Houston
3. Restaurant Sales Are Up in March; Traffic Still Lagging
4. Impact Seen in Restaurants When Wage Hikes Occur
5. It is Derby Week – Unbridled Wins the 1990 Kentucky Derby

Title: Welcome to The Restaurant Boiler Room Episode 15. I’m your host, Rick Ormsby, Managing Director at Unbridled Capital.

Today, in the Boiler Room:

Unbridled’s Mid-Year Franchise M&A Update
Bessemer Investment Partners Buys 73 Taco Bells in Houston
Restaurant Sales Are Up in March; Traffic Still Lagging
Impact Seen in Restaurants When Wage Hikes Occur
It is Derby Week – Unbridled Wins the 1990 Kentucky Derby

The Restaurant Boiler Room is a one-stop-shop for multi-million dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk money, deals, valuations, and risk – delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on an every-other-week basis. Feel free to find our content at Unbridled Capital’s website at

Now, let’s enter the Boiler Room:

A. Unbridled’s Mid-Year Franchise M&A Update

Franchisee make-up has changed substantially in recent years as consolidation is occurring at an increasingly rapid pace. Many operators no longer recognize many of their fellow franchisees! Most of this reduction in franchisee count has come through recent and accelerating M&A activity. And the M&A activity has intensified for several reasons:

Historically-high valuations for business assets and real estate.
A massive increase in family-office-backed operators and consolidators.
Sales and traffic fluctuations across brands – some are up, some are down.
Easy and prolonged access to debt-financing.
Increased capital needs to support remodeling and development.
Pressure on profits due to wage concerns and food inflation.
Aging of the franchise base.

Over the past few years, Unbridled has had the privilege of representing almost 100 franchisees in the sale, acquisition or financing of their businesses, with a total unit count approaching 1,000 restaurants. During this time, our clients have been achieving increased valuations across many franchise systems. Valuation increases have been largely buoyed by the introduction of new buyers and family-offices into a brand. Easy credit and great rates have helped as well. In some brands, the existing franchise base is looking to expand and has been competing for deals when their fellow franchisees look to sell. This has also raised valuations.

Who knows for sure, but we do expect valuations to remain at historically high levels for the next 12-18 months for the following reasons:

1. Buyers for restaurant businesses are everywhere, and demand is outstripping supply.
2. Family-office and private equity buyers continued to show a robust appetite for mid-sized and larger

franchise acquisitions.
3. Large franchisees are diversifying into secondary or tertiary brands at an increasing pace.
4. New franchisees consolidating fragmented brands by buying-out smaller operators.
5. Interest rates have taken a favorable and unexpected turn in the past few months.
6. Consumer confidence and spending remain strong.
7. Overall restaurant sales have been positive for 4 consecutive quarters, and even though traffic is down, the stability of the sales helps the industry from an investment perspective.

But along with the way, these transactions have become much more difficult to complete for the following reasons:
Extensive asset purchase agreement negotiations.
Heavy indemnification provisions and escrow agreements.
Financing due diligence and quality of earnings studies.
Store level inspections and price reductions for deferred maintenance.
Franchisor approval and development requirements.
Lease assignment difficulties and environmental concerns.
Fluctuations in business and real estate financing.

In the recent past, most franchisees would consider an advisor only because they wanted to get the highest price. And at the same time, most advisors didn’t have the financial, legal, and tax experience to solve problems and offer help throughout the various phases of an M&A transaction.

However, as the complexity of selling a franchise business has tripled in the past few years, the need for a world-class advisor is much greater than it has ever been, and trustworthy options remain limited. Unbridled is very thankful to be best-in-class at providing Wall-Street level investment banking expertise to the franchise industry in a way that was previously unavailable to most franchisees.

Bessemer Investment Partners Buys 73 Taco Bells in Houston

Background: Jonathan Maze recently reported that KorMex Foods has sold its 73 Taco Bells in the Houston DMA to Bessemer Investment Partners. Bessemer is a New-York based equity firm, and they acquired the locations through a subsidiary Mas Restaurant Group (MRG). The original management team will evidently remain as minority owners in the resulting company.

Comments: Taco Bell continues to be the darling in the franchise M&A world. Many legacy Taco Bell franchisees have decided to sell in the past few years, and Taco Bell particularly has evolved to become a brand of large, institutionally-backed companies. Groups like Flynn Restaurants, Pacific Bells, KMAC, Tacala, Diversified Restaurant Group, and others, now including Mas Restaurant Group, are large, well-capitalized, and growth-oriented groups that are acquiring, developing new units, and adding new brands to their portfolio.

Effects on M&A: We’ve recently sold three Taco Bell companies, and generally speaking, we continue to see Taco Bell multiples at 8X of EBITDA or higher. Larger deals garner the most attention from outside institutional groups; however, smaller Taco Bell businesses sell at high multiples too. Perhaps surprisingly, small towns and rural locations perform well for Taco Bell, and many smaller Taco Bell franchisees operate in these areas. M&A in the brand also continues to be strong due to the sizable sales and profit increases shown over the past several years. Taco Bell results in recent quarters have also been very strong, and the brand appears to be bucking the national restaurant trend of lower traffic.

Restaurant Sales Are Up in March; Traffic Still Lagging

Background: TDn2K reports that March restaurant comp sales were up 1.15% while traffic slid by (1.80%). Overall Q1 restaurant comp sales were up 1.0%. The industry has posted four consecutive quarters of positive same-store sales growth for the first time since 2015.

Comments: It was interesting to see that the strongest sales areas were the Southwest, Southeast, and Western regions, while the Mountain Plains, California, and Florida performed most poorly.
Effects on M&A: Sales appear to be buoyed by strong consumer confidence, while pesky declines in traffic continue to be concerning. I think we are sitting on a brewing problem with the over-saturation of restaurants due to zealous development over the past few years. If you are looking for positivity, keep watching for restaurant comp traffic increases. They still aren’t happening, so sales are going upward due to increased prices. This is not sustainable forever as the value equation tilts towards grocery stores and meals at home when pricing rises too quickly. Restaurant prices are certainly increasing to combat the increasing cost and decreasing availability of labor.

Impact Seen in Restaurants When Wage Hikes Occur

Background: Peter Romeo reported an article on results from a study. His article says that “...nearly 1 out of 10 restaurateurs in areas with a recently increased minimum wage have closed an operation since the cost hike, and 71% have attempted to pass along the rise to customers by raising menu prices, according to new research. The study, based on a survey of 4,000 restaurants and 112,000 employees, also found that 43% of establishments in areas where the minimum was raised have eliminated positions, and 64% have reduced employees’ hours. Roughly 1 in 4—26%—have turned to technology for relief, and 6% have opened commissaries with the expectation that centralized production will be more efficient labor-wise than preparation at the store level."
Comments: These results are interesting but not surprising. When wages increase, P&Ls get pressured. Restaurants already struggling could close. Almost all operators will try to raise prices if they can. Most will cut employee hours or try to find a way to reduce benefits to lower costs. The problem here is that it is difficult to cut hours and benefits when the unemployment rate is hovering around 3.8%, and other nearby retail employers are offering higher wages. Finally, I thought it was interesting to see 26% turned to technology when wage hikes occur – we all expect this to increase as real-time scheduling and automation become a bigger part of the franchise business in coming years.
Effect on M&A: Just a brief comment here since we have covered this topic frequently - from an M&A perspective, be maniacally-focused on protecting your EBITDA, or the value of your business will drop when wage hikes occur. And catching up by raising prices is difficult to do – it takes time, patience, and pricing power.

It is Derby Week – Unbridled Wins the 1990 Kentucky Derby

a. Comments: This episode will become available during Derby week in our hometown of Louisville Kentucky. The Kentucky Derby is always held on the first Saturday in May of each year. Our company is named for Derby-winning horse Unbridled, who won the 116th Kentucky Derby in 1990. In the fastest two minutes in sports, Unbridled, in post #7 as a 10-1 shot, won in stunning fashion after falling behind badly at the start. Unbridled later went on to win the Breeder’s Cup Classic and became the last Kentucky Derby winner to sire another Derby Winner – Grindstone in 1996. Unbridled is also the great-grandfather of recent Triple Crown winner American Pharaoh. Most experts would say that

Unbridled is one of the most influential stud horses in racing history. And for our company’s sake, the name has additional meaning - irrepressible, creative, unique, fast-paced, and inexhaustible. We love the name and think it describes us well!

Closing: Thanks so much for entering the Boiler Room today. You can find our podcasts on iTunes, Google Play, Stitcher, TuneIn, and Spotify. If you like these podcasts, please listen, rate, and review! I also encourage you to visit our website at for the best franchise M&A and financial resources in the industry. Our website includes podcasts, videos, white papers, and a list of our M&A transactions.

Disclaimer: Please note that neither Rick Ormsby nor Unbridled Capital LLC give legal, financial, or tax advice. These podcasts represent opinions that have been prepared for informational purposes only. We expressly disclaim any and all liabilities that may be based on such information, errors therein, or omissions therefrom.