Season 2 Episode 14: The Franchise Industry and a Hopeful Outlook



Also Listen On:


Welcome to the Restaurant Boiler Room, season two episode 14. I'm your host, Rick Ormsby. Managing Director at Unbridled Capital. Today in the Boiler Room, I'll be doing a year and M&A review for the franchise industry, looking back at 2020 and forward to 2021. Happy New Year everyone. The Restaurant Boiler Room is 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 a monthly basis. Feel free to find our content at Unbridled Capital's website, at Now, let's enter the Boiler Room.

Well, it's been a crazy year for the franchise M&A industry and for the entire industry as a whole. Any kind of franchising, whether you're in restaurants, or gyms, or automotive, or health and beauty, or any of the other types of franchise businesses out there, and really any business in general. I look back with a lot of thankfulness and a lot of blessing here, because while I know a lot of people are struggling throughout the country and throughout the world, we've been at a place that was really dark starting around March the 11th, wasn't it? And we've managed to somehow make it through.

Our shoulders have been strong enough to make it through to the point where we are now in many of the clients that Unbridled Capital has have actually been doing great during this time. And so we never want to celebrate one person's success at the expense of someone else's failure. But I just point out that there are many blessings here for those of us who felt so very fearful and scared when March 11th hit. Remember where you were. It's almost like how I felt when I saw the 9/11 or the space shuttle blow up when I was a middle-schooler back in the 80s. Those are places you just don't forget where you were and how you felt at that very moment. That kind of stuff you can't unsee and unfeel, and it sticks with really your whole life.

Now, thank you guys for listening as we sit here at the end of the year, and just let me reminisce for a little short time here about kind of where our franchise M&A industry has been this year. We started the year in January, 2020. By all means it was going to be probably a status quo type of year. We all knew it was going to be a presidential election year, but we looked at probably at that time between January and maybe March the 11th sales and profits were pretty much flattening and flat over last year. Like any time, the good concepts and good brands were strong and the ones that were struggling, were struggling. We were really worried about things like competition and overdevelopment and franchise or with egregious development requirements.

We were worried about years and years and years of too many restaurants being built and sales flattening, and what that would do to traffic. There was a really some pretty negative traffic patterns, as you might remember throughout the first part of the year, and even into late 2019 sales across many concepts in the industry, if they were flat or slightly up were driven almost entirely by pricing and not by traffic. The financing market was tightening a little bit. There was probably at the time in the beginning of 2020, maybe let's call it four or five or six of the 20 or 25 franchise lenders. The main people that you hear about every day and we use in our business, had kind of started to quietly fold up their franchise practice because of just the risk reward profile for them wasn't strong. And maybe they had made investments in some of the Tier 2 and Tier 3, kind of the secondary and tertiary brands that had been the ones that had been performing poorly.

And so it wasn't really effecting the liquidity, but you started hearing this kind of slow and quiet drum of lenders saying, "We're tightening our lease adjusted leverage. Things aren't going to be going as well. We're not going to be looking at deals quite as aggressively as we have in the past." We started seeing a lot of our clients and good friends' businesses, their margins were slightly under pressure, in many cases. This isn't typical of all of our friends and clients, but some of them. Their margins were slightly under pressure. And that was going to be a concern heading into 2020, which kind of felt like at the beginning of the year, that 2020 was going to be like the last year.

We were over the hill of all of the best years from an M&A perspective, but we're just slightly over the hill. We were kind of the little engine that could. We're going up the hill and '15, '16, '17, '18 we might've hit the top of the hill at the end of '18. '19 we were just kind of cruising along the top of the hill. And we kind of expected, maybe if I could characterize it 2020 being just a really soft and subtle landing that wasn't going to have much of an impact in M&A pricing and financing, but maybe it would be down just slightly over 2019, '18. And certainly the pace that we saw in '17, '16 and '15.

Our company had just closed and it actually closed two days, I think. Or a day before the actual March 11th is the day I kind of think of pandemic breaking out. But we had just closed the Big Mo's business that was for selling franchisees across Florida, all the way up to the East coast, along the Atlantic ocean there. It was a big 60 or 70 unit, most transaction, we were really excited about. I was down at receiving. I was really thankful to be receiving a Dealmaker of the Year Award from Franchise Times, Unbridled Capital. It helped in the sale of 100 or so Pizza Huts, in primarily the North Carolina area and we brought a group out of the Los Angeles area to buy that business. It was a big transaction. It was probably the biggest transaction in the Pizza Hut space for many, many years. And so we accepted award for Dealmaker of the Year, really thankful for that.

But while I was down there, and March 11th wham. Wham. The major part of the pandemic started and we started seeing all the shutdowns. Up until that point, I guess I could describe the M&A market as being fairly strong. Again, with the analogy of the little engine that could, we were probably right at all time highs from an M&A perspective in terms of valuations and pricing and EBITDA multiples and cap rates. Maybe slightly over the crest of the wave, but not much, historically. And then there were lots of buyers in the market. I would say there was probably pretty good equilibrium between buyers and sellers of businesses. The pace of sellers to the market was pretty strong at that time. And it always is strong at the beginning of the year, usually between February 1st and maybe April 15th or May 1st. That's when a lot of people get their year in P&Ls and they start making plans with their families and their partners to make actions happen.

Equilibrium was good. Buyers and sellers fairly strong. There were a lot of buyers in the market. There still are. That's where we were up until about March the 11th. Then March 11th hit. Think about how you felt. I know how I felt. Our kids' schools got shut down. We were in Kentucky at the time. It was nice and cold there. So we came to the beach. So we could at least be outside in the warm weather. We were fearful. People were hoarding toilet paper. We didn't know what was going to happen.

If you're listening to this and you're a restaurant franchisee, I mean, how did you feel? Did you think your business was going to be totally impaired forever? I mean, I didn't know what was going to happen M&N. My initial reaction was, "This is going to kill the M&A market. There's not going to be financing. Sales are going to drop a 30 or 40 or 50% across all these concepts. All the deals will freeze. All of our..." We'd probably 15 to 20 deals going in our business with all of our employees and all the different transactions across different brands. All these deals are going to be put on permanent pause. Revenue's going to drop to nothing in the M&A business for awhile.

I mean, we've seen this happen when we hit the recession in 2009 and '10 and '11. I mean the M&A... it wasn't just the deals themselves slowed down. It was the pricing of the deals, either got re-traded or when they came out, they dropped by 30 or 40%. The financing wasn't there. The valuations came down the deals themselves, some of them fell apart. So this had a net effect that might be... Each of those little buckets could cause a 20 or 30% decrease in deal volume. But collectively you could see in the M&A world, like a 60, 70, 80% drop immediately. I don't want to overextend my comments here because we care mostly about our clients, which are the franchisees. They're the ones who all of a sudden, no one's going to the dining rooms.

And when this thing started, the pandemic started in March. Our clients were panicked. Thankfully we put all of our deals on pause. What we immediately did, I had an internal meeting and I said, "Okay, we're going to take two weeks. And we're going to kind of go on pause, and then we're going to call all of our clients, buyers and sellers, and we're just going to extend, and pause 30 days. Extend our due diligence periods. Extend our LOI and purchase agreement negotiations. Any weekly meetings that we're having deal related during due diligence, we're going to extend them, delay them a little bit. We're not going to make any rash decisions here, unless you just watch and see what happens."

Revenues were dropping across all segments, not just QSR, but obviously casual dining independence, fast casual. And again, there's a lot of fear. Wasn't it there? We start hitting early may. The PPP program becomes widespread. Unbridled Capital, we turned our attention and focus to helping franchisees and friends navigate through all of the red tape related to the PPP program. Which by the way, ended up doing, if you may listen to this and agree with me, it ended up doing its job in a weird governmental sort of way. I mean, I usually don't trust the government to really do much other than get in the way of progress, but the capital that was infused and the money that was infused into our country and our economy through the PPP program, I think it was legitimate.

And I think it's fair to say from talking with a lot of franchisees that a lot of them were saved by the PPP program. I can think of notably of a couple of really struggling brands that really... I mean, probably PPP felt like for the franchisees in those brands, I won't name them, but it probably felt like a steroid shot. You know what I mean? It got them going again. It helped them capitalize their business. If you remember kind of back to that, we were all really concerned. I mean, was it going to be forgivable? How do you figure out that forgiveness calculations? What can you use the money for? And what can't you use the money for? How do you get it into the hands of the franchisees? Banks were freezing up and not able to service clients. So there had to be like a second round of emergency spending as you'll remember.

A lot of banks, the national ones especially that were just normal lenders too, a lot of our clients were disappointingly acting slowly and not involving themselves in the PPP program. So we were going to regional and small banks trying to find money. I'll pause here for a second and just comment for those of UPE guys and family office guys who are listening here, and franchisees. I can remember how I felt. Maybe you guys can think back to this. I was a little bit upset with the national banks. And it made me realize that the regional and community banks, that relationships really do matter.

And so that's something that I'm going to take out of this pandemic. Maybe you see people fleeing the big cities for smaller communities and for lower taxation, clients like we did in Florida, personally the Ormsby's. Or if you see this kind of phenomenon happening where people are getting out of the big and cold and dirty and dangerous and slow, that was kind of how I felt about the banks at the time.

I saw too many of our franchisee clients have to call me and say, "Rick, I can't get a PPP loan out of XYZ bank that does commercials everyday on TV." And we had to steer them towards local community banks or regional banks that are in their markets. Okay, enough of that. So here we are in May. The PPP was working well. People got money in their hands eventually. It was a money grab. We had to do a second round through the government. We started noticing during that time that QSR sales started coming up. It was quiet at first. It was kind of looking around and quietly and saying, "Okay."

We had one big Sonic deal. We ended up closing that it was McClain Sonics, and we closed it at the late summer, early fall this year. It's like almost a 70 unit Sonic deal that was Florida, Alabama, in that area. A really landmark deal, one of the largest franchisees in the system. But the point was that Sonic, we started noticing because we were involved in that deal and we were doing the deal calls and the due diligence calls, we started noticing that Sonic, and this was just... a lot of brands are doing this, but Sonic sales are up like 35, 40, 45, 50% every day over last year. And we're like, "What's happening here?" We start finding that the same thing is happening in other brands too, on the QSR side.

So as the restrictions kind of get lifted after the first wave of the pandemic, people are coming back out to eat. They got to eat, but they aren't going to dining rooms. And so for our casual dining clients and our fast casual clients, they're hurting bad. They're hurting bad. Fast casual is coming back a little bit. Casual dining is doing terribly especially in some of the markets where there's heavy regulation and kind of more difficult politics where they're cutting the dine-in capacity and not bringing it back to normal or even up to 50%.

But our QSR clients are doing great in May. And I'm talking about... I mentioned Sonic, but Wingstop is killing it. Pizza starts killing it. We start seeing QSR chicken really do great over last year. And we're starting to scratch our heads a little bit. I mean, I used to work for KFC. So I know that KFC's products are easily transportable. So you can actually drive it through a drive through. You can pick up their chicken and sides and you can take it home. And if you don't eat it, you can put it in the fridge and you can heat it up for the next day. So it travels well. So we see QSR chicken picking up. Delivery and carry out is killing it all of a sudden.

And then you see Burgers Tacos within the QSR space, they're kind of lagging a little bit. They're still down some. Overall you see huge increases in check. Huge increases in checks. Sales are up. Check is enormous, and transactions in many cases for many brands are down. Some are up, but most are down in down significantly. So what's happening is, you have people... either where two people driving through the drive through ordering food before the pandemic and their check was 10 bucks, and now there's four people driving through the drive-through and their check is like $30. And they're eating it and they're taking it home to their family. So the number of transactions actually in this simple example, in many cases, they aren't really going up that much, but check size is enormous. Is enormous. And because of that sales are up and profits are up too.

Okay, so that's May. We hit to June, we start noticing our deals start to resume. Buyers start coming back to the table. Everyone starts to kind of catch wind that the QSR industry, which is where we do 90% of our volume is, at Unbridled Capital is in the QSR industry. So we're sitting here our deals start resuming quietly and slowly buyers start coming back to the table. The lenders are starting to communicate that they're jumping back into the deals. Maybe putting their toe in is a better word, not jumping back in. But the fear level starts to drop across our industry a little bit.

We have a couple of deals that have closed now that really started coming back. We sold all the Pizza Hut in Tucson, Arizona, there's like 30 units. That deal comes back pretty quickly because their sales are huge. Because it's pizza and pizza delivery is up and sales are up and dining rooms are mostly closed. So profitability is high too. There's not as many people cleaning dining rooms, they're just doing delivery and carry out primarily. We end up getting back in the saddle on the Taco Bell deal in Colorado Springs, which is almost 30 units that we ended up closing a couple of months ago. We sold all the KFCs in Los Angeles, 70 units. Well, actually we were representing the buyer in that case. They bought it. There was a group from New Zealand and Australia, a really exciting publicly traded group in New Zealand that bought the business as a beachhead to the United States.

But these kinds of deals start kind of re-engaging and buyers and sellers start coming back together. We start working on those deal. A little bit of optimism returns to our business. We're not sure what's going to happen though. We're thinking internally, will our valuations going to stick? Or surely they're going to re-trade and we're going to be down. If someone was paying $50 million for a franchise business, they're going to come. The buyers are going to come back to the table mid deal and say, "I'll pay you 40 now. Lenders, aren't going to allow us to borrow as much money we're concerned about the future. This is pandemic. What's going to happen to our world."

But with sales increasing and lenders starting to get a little more comfortable, what we find is that, our deals are not getting, re-traded. Just as a matter of fact, deals... some of them are actually going up mid deal in value. I say that again, some of our deals are actually going up in price during the deal. Because starting in June, July and August, like in many of the concepts, sales are up huge. Now, if you're a QSR franchisee, again, I remind you to think back to how you felt in March. And here we are in July and August. And we're just like, "Wow! What a change."

I don't want to belittle the fact that a lot of other restaurant franchisees who we know and we care about, critically, are not doing well. Are not doing well. So a shout out to them and hope that they do better. Even now, they're not doing well. But sales are strengthening in QSR, people return to dine in a little bit. Right over the summer, you start seeing kind of less talk maybe, relative to now on the COVID pandemic and people get a little more comfortable eating in restaurants. It's warm outside. I mean, I don't know, this is just my observation. I don't know if it's fully factual or not.

You start seeing bankruptcy start getting announced and accelerating in the casual dining market. So you start seeing big franchise brands hitting bankruptcy or getting acquired for pennies on the dollar. Right now, here we are at the end of the year and there's more restaurant and franchise bankruptcies than really what we've ever seen, I believe.

We start though in July and August hitting new deals at the market. Kind of ever so quietly. So what ends up happening is, some of the sellers who were sellers already look around and they said, "I was going to sell in the next six to 12 months and I missed it. But my business is up in sales, and my expectations are probably a little bit less than they were prior to the pandemic because I'm scared. The supply demand curve is pretty much in my favor in July and August. There's not a whole lot of people selling businesses right now, but it is true that there are still buyers in the marketplace for these businesses. And so if I put my business on the market, it's a good business and it's up in sales and there's no competition, this may actually work out in my favor."

And indeed that's what we started telling our clients ever. So slowly, you can listen back to prior podcasts this year. And that's kind of the commentary that we had. And it ended up being true. We had, maybe five or six clients who put their toes in the water and decided to put their businesses out there for sale in the late summer. Some people might've been whispering, "That's crazy. Why would my neighboring franchisee or my buddy, or this person do that?" It ended up being a smart move. So what we would notice was probably 30% of the lenders were gone. Another 20% of the lenders were maybe really conservative, but still that leaves 50% of lenders. And there were maybe 25 of them or 20 of them in the industry, whatever the number is, there's 10 or 15 lenders out there that are still lending in this summertime period because they're seeing the trends too.

And so that came back. I mean, let's just take a number, if there were 10 or 15 buyers for every one of our deals that we were kind of selling across this industry, some of the buyers went away. Especially some of them were private equity or family office groups that had big investments in other sectors that weren't doing well. Maybe they're getting more conservative, but some of the other guys, man, I mean, they're like, "Hey, I like this business. I like it even more. If you could see me right now, I'm raising my hand as if I'm a family office. I like this business even more and not only is it recession proof, but it's also pandemic proof."

Maybe there were 10 to 15 offers before, now there's seven to eight or 10 or whatever. But there's still enough liquidity amongst the buyers in the market to where there's great outcomes. We've put these five or six businesses on the market in the late summer period, and they get a lot of interest. Prices are the same, if not higher. Especially in some of these brands that I mentioned earlier where sales and profits are up a ton, we're actually probably getting offers on these businesses that would... Get this. They might look like a six times EBITDA number on the enterprise alone of current trailing 12 months financials through the end of the summer. That's what it might be. But if you were to look at it based on 2019 numbers, it would be like a 10 times EBITDA offer.

So the multiples haven't really changed, but maybe they've even gone down ever so slightly. But the overall prices because of the acceleration of sales and profits, the prices are higher. Quite a bit higher in some cases for these businesses when we put them on the market. I just think it's an unexpected phenomenon and really good news for our industry. It shows the elasticity, the liquidity. All these good things. The resiliency maybe is the best word for our franchise M&A industry. And I'm just unexpectedly surprised and glad for all of you who are listening who are franchisees. And for you buyers too. Because financing rates are absolutely ridiculously low. I mean, I think I borrowed money for a house late this fall. Like a lot of us did, we were buying and selling houses. The craze in housing has gone on this fall and winter. I mean, I was borrowing money like two and a half percent interest rates. I mean, it's crazy.

We helped a couple of Taco Bell franchisees borrow money, sub 3% fixed rate money. I mean with no personal guarantees or prepayment penalties. I mean, pretty easy covenants and reporting requirements. I mean, it's really, really unexpected. Then we move into kind of the September, October timeframe, we just noticed the prices are still high. Financing is available. We start seeing towards the end of October and the early part of November, obviously dining rooms are still mostly closed. We start seeing the pandemic tick up, which I'm unhappy about and sad about for all of us. Shout out to any of you who have had it, or who have had a loved one who's been sick. We hope this thing gets over soon. I know as you listen to this, we have vaccines that are already getting rolled out. Good news.

Okay. One of the things, the election has people on pause. What's going to happen in the election. So in October, November time period, you see kind of a lull in M&A again. Unbridled launches a couple of deals. We had two new deals that get launched right around the presidential election with the same idea that sellers are like, "Okay, there's no volume of deals on the market. So maybe my deal will get more eyeballs." And so that has indeed been true. We've got one kind of Tier 3 franchisee of a large... the largest franchisee and a maybe sub thousand franchise brand. We put his business up for sale and it's had double the interest that we normally would have expected.

You guys who are listening, especially people who sort of her selling things, think about supply and demand. Think about that as much as you think about the timing of selling with your business. Like, "Is my EBITDA perfect?" Or, "Can I time the tax changes just right?" Think about supply and demand. I just tell you, it's a bigger factor than many of you realize. So there we are. We are in November, December, it's trending towards the end of the year. The election ended up in the hands of Joe Biden. It looks like we're probably going to have a split Congress, although we have a January 5th Georgia runoff. If those two seats go Democrat, then you're going to see some pretty sweeping changes that are going to be pretty negative, I think for franchisees. I'll just touch on a few of them.

One would be, ordinary income taxes will... tax rates will go up. There's been a state of policy from Biden campaign about big capital gains and increases. And so that is a huge thing for people's net proceeds when they sell franchise businesses. So watch that number. I mean, some really smart people that I know are saying that if that does indeed happen, it is unlikely that it will go retroactive to January 1st, 2021. But I mean, who knows? Who knows? I've also heard recently a lot of rhetoric that there are some blue dog Democrats who are not going to vote for tax changes that have been suggested by the Biden campaign. Most notably one of the senators in West Virginia. So we have some comfort there potentially.

Obviously, if Georgia has at least one Republican that wins out of the two seats then the Senate will be held by the Republicans. And hopefully they will then be locked down. We can't implement a lot of changes, which regardless of what you think and I think, my comment will be this, I'm not very political in nature. I think that we all function better when no one can make decisions and changes at the government level. Because whenever there's a decision or a change, it ends up creating red tape.

Maybe that circumstance ends up. If it doesn't, I think you're going to see some... As we push into January, February, obviously there's been a lot of rhetoric about $15 minimum wage at the federal level. And so that could have potentially the biggest impact on our industry. And I think everyone listening should watch for that. I will note, it's an interesting comment to share that after Biden declared victory on Saturday, I don't know the date. It was Saturday sometime in November.

On Monday, I had a dozen calls. Literally a dozen calls from 30 unit or higher franchisees. All of them were in the Southeast and all of them wanting to talk about selling their companies. Why was that? Because they probably saw Florida pass on the ballots, in November. Passed minimum wage increases on the state level. Now it's graduated over, I think till 2026, all the way up to $15 an hour. But I think a lot of States in the South saw that, with Florida. And saw the national rhetoric and the presidential campaign and are worried because if you take... Most of our franchisee friends are at a total wage, like a wage of $10 an hour or 10.50 an hour, depends on the state, man. Of course you're out in California, in New York, it's going to be higher.

But most people are paying above minimum wage. Some States where you can get cheap labor or paying at minimum wage or close to it. But most people are a couple of dollars above minimum wage right now. But if you were to layer in even a changed from $10 an hour as your average wage for your hourly employees to $12 an hour, I mean, depending on your staffing levels and your profitability, your restaurant, I mean, you're talking about probably a 20% drop in your overall EBITDA. Now, of course that's not including pricing changes. And what people don't realize is that when you increase the minimum wage, the cost of a taco, a pizza and a burger go up to compensate.

But what I've seen over the years, especially in Seattle, when this happened back in 2000, and I think it was 18, we had a deal up there at the time a big pizza deal. And you know when the minimum wage changes hit, I saw that business lose 70 to 80% of its EBITDA in the course of a week. And then you can't keep your customers and price to compensate for all the minimum wage increases. It just doesn't work that way. So you have to plan fully do it, gradually over time. And you're going to take a hit in the process.

So some of these things are starting to go through the minds of our clients. I just know because I've been on the phone with them and shared a lot of conversations with them over the years. But I think there's probably some kind of quiet optimism that a lot of the policy changes will be somewhat muted. That a lot of the tax increases on special on the capital gains side will be somewhat muted, that maybe the minimum wage situation may happen at a state by state basis. And it will happen for those of you who are in low wage States. Don't put your head in the sand. They're going to happen, but maybe that it may not be as dramatic as what you're hearing on the news. But we don't know. Do we? We don't know. And I think those are some of the defining trends for 2021.

As we look into January and February of 2021, I expect... January is usually a slow month. I don't know that it's going to be any different this year. But I do think there is some pent up M&A demand. There just is. I don't know how it's going to manifest itself in 2021, but I'll share with you some thoughts and then I'll end. And thank you for listening. Will sales stay strong as the pain worsens in the face of the vaccine? Here we sit at the first of the year, I mean, what's going to happen? I don't know. I don't think anyone does. Who's going to get vaccinated? How quickly it's going to happen? I mean, a lot of rhetoric I'm hearing is, at the end of the first half of the year, maybe everyone's going to be vaccinated. Maybe this thing will be mostly behind us on a national level.

But it may be a cold winter. And a lot of people are dying and a lot of people are getting COVID. A lot of people I know are having friends and family getting it. So what's going to happen to sales during that time? I don't know. Is it possible that QSR sales stay really strong or is it possible that kind of we stall or actually things turn negative for a few months? I don't know. We have this talk about emergency government spending a new plan, getting approved up in Washington. And there's unemployment benefits, more unemployment benefits, potentially. Maybe a second round of PPP stimulus spending and some other goodies out there that may attempt to stimulate our economy and get in the hands of the average everyday person who is the person who eats at some of these restaurants and goes to some of these auto places. Some of the places that are just kind of part of our everyday average, everyday economy, how what will that do?

The first round, last summer really had a positive impact. And we saw it immediately in our client's P&L's. Will that government spending boost sales and profits during the winter time, help the franchisees and the business owners and the average American worker? So I don't know how that's going to kind of work in the face of the pandemic worsening until we get the vaccine in place. I think there's a lot of psychological fatigue. That's another point that I just like to point out. And I think everyone listening here can nod their head. There's a lot of psychological fatigue.

It's been a rough year. It's been a rough year. Families have been cooped up. People have been sick. You can't see loved ones. A lot of my friends who've had a parent or grandparent die, can't go to the funeral. Can't see them in the hospital. I mean, it's... Kids are not going to school. There's a lot of psychological fatigue. And I think it's creeping into business owners and franchisees who are good friends of mine. I can hear it in their voices, man. You know what I mean? I just can. These are guys and gals who are looking at the ceiling at three o'clock in the morning, and they sometimes feel alone on an Island. They're a little bit scared. I mean, who wouldn't be? They've got all these employees and all this net worth of theirs tied into these businesses. And they don't know what the future is going to be, and it's been a really rough year.

And so I think psychological fatigue may start to set in early 2021. And I think you might see people just raise their hand and say, "You know what man? I got to worry about my legacy. You know, I'm 65 years old. I don't know what the future looks like. We've made it through this hopefully. It's been a blessing that everyone's safe and secure. It's time for me to sell this thing." I think you'll start seeing that. What's going to happen to valuations in the spring. As we move into February, March and April, I'm not sure. My guess is that valuations will decline slightly, but hopefully with consumer spending and with a big COVID turnaround, that sales will get stronger to compensate for that.

Now, that's just one man's opinion. I got no idea if that's the right opinion or not. But that's kind of my thinking. Again, think about the supply demand curve. I think we're going to see more supply once we get into February, March and April of next year. I think you're going to see people selling in greater quantity than they have this fall and this winter, of 2020. And so when there's more supply and the demand is going to maybe stay the same or maybe go up a little bit, I think you're going to see valuations maybe get challenged a little bit. But maybe the P&L's are going to be stronger.

One of the things I want to tell anyone who's listening, who's a seller is, a lot of you are looking in the QSR space and I'm talking to you if you have big sales and profits right now over last year, "Oh, I'll hold onto this business and I'll hold onto it until we roll over the end of COVID and in maybe April or May, and then I'll have a perfect P&L and then I'll try to sell my business." Well, man, don't be thinking that way. If you don't think that starting in June of next year, over last year, you're going to be lapping your sales and profits, because if you're not, buyers are go... You put the business up for sale and buyers make an offer on a perfect P&L, and then in June and July and August, when you're in due diligence, the sales and profits are down, the deal ain't going to close without being re-traded. It's like catching a falling knife.

And I think a lot of clients of ours have an unrealistic expectation of what's going to happen in June, July, and August of next year. It is true that if you're one of these brands, and I mentioned Sonic before, that's really been killing it and seeing a lot of new customers because of your delivery platform, you've earned the right to win their business over the longterm. Maybe [Joe Blow 00:34:18] is going to come back to you more and go to other places less once the pandemic is over.

But I think we have to be realistic too, to say, "Hey, some of the demand that has been created here in some of these drive-throughs, is probably going to come down a little bit, once we start rolling over these big numbers and the economy starts opening up again in the back half of 2021." If that's the case, delaying to sell your business when you have a perfect P&L is not going to result in a better outcome, because it's all going to be re-traded during due diligence when your sales and profits are down.

So we're having that conversation a lot with people. And every time I have the conversation, no franchisee has thought about that. Only thing they think about is, gee, my sales and profits are up. So be thinking about that. If you're a buyer, if you're a family office, a private equity group, I mean, I would say you're going to have some opportunity in 2021. There'll be some good businesses for sale, if no other reason, because of this psychological fatigue that I'm talking about.

And also maybe some of these older franchisees looking at maybe longer term horizon for taxes and for minimum wage and saying, "Maybe it's time to sell my good company. If I sell it at the same price I would have sold it for at the beginning of 2020 or the end of 2019 as now, am I okay with that? Maybe Georgia splits one Republican, one Democrat, and so we don't get much taxation change, am I okay with similar net proceeds?" And the answer is yes to many of these people who are fatigued and fearful about the future. Okay.

I think there will be opportunities, good opportunities. I've already told you here that the buyers are still there and they've come back in force with strong prices. Interest rates are low. Banks are coming back into the space. The deal market is actually pretty strong. And a lot of these family office, private equity groups are looking at the thing and saying, "Like I said earlier, it's pandemic proof. It's recession proof. This is a great little asset to have in my portfolio. When I'm looking at other businesses, I may own an airline company that's really just dying when in demand right now."

So I think there will be a good a return to equilibrium with buyers and sellers. Maybe that means valuations come down a little bit. Maybe for strong businesses, the cream rises to the top. The P&L's are strong enough to offset it. And valuations overall prices stay really strong. And so that's kind of how I feel as we move into June and beyond in 2021. I mean, I say this, this is my opinion, and everyone else can have a different opinion feel free. It's just my opinion. But I would say, you get into this back half of 2021, and then you get into 2022, I do think we're going to see some longer term trends that are not going to be favorable for operators of franchise businesses or for sellers or people financing franchise businesses. I just don't.

I think we get past this pandemic, maybe there's a big boost in consumer spending. Maybe things kind of reach an equilibrium and things start moving at a decent pace again, and businesses recover. But I think the policy changes that are likely going to be in play in the back half of 2021 and then in 2022 are not going to be very friendly. And again, I point out taxes. Taxes have never been really, I mean, someone can challenge me on this. Not that I know of. Have taxes really ever been this low before? And I'm not talking just about capital gains, ordinary income taxes. Look at the estate tax. The exemption is like what? 11 and a half million dollars for an individual and 23 million for a couple? I mean, wasn't that a state tax like three or $4 million, just five or six years ago or four, three or four years ago? Trump put that change in play.

I mean, that is a big number for people thinking about protecting the legacy. And so that's another thing we're seeing at the end of this year, as tons of our friends and clients are putting their businesses in trusts. Irrevocable trusts with their kids so that they can pass the gain of this business, whether it's the business itself or the proceeds from the sale of the business, whatever year it is into the hands of their trust and into the hands of their families without having to pay such high state taxes on a lower number, if it gets enacted. I'm rambling here, but I just think that the future beyond the summer is cloudy. I don't know how cloudy. It makes me a little bit fearful about the M&A market. I think there'll always be people who buy and sell things, but I do think there is some cloudiness.

If you're a buyer of a business, this doesn't necessarily impact you as much. I think you're going to have opportunities. Opportunities will be there. Just keep your eyes open. Reach out to us. If you are a seller, I would say this, if your horizon is five to 10 years or more, then who cares? You'll see another up cycle. You'll see another political change you're going to have to live through minimum wage increases, taxes going up and down. It's okay. You have a good business? Continue operating it. Whenever it comes time you sell it. If you are someone who's considered selling inside of three years though, have a hard time looking at the near term future and saying that it's a good idea to hold it for a year or a year and a half, and then attempt to sell.

I mean, you're coming through the end of a pandemic sales. I'm speaking mostly to QSR operators. If I'm talking to a casual dining operator, my rhetoric is way different. It's like, "Hold the business. Hope for the turnaround. Shed what you can. Close doors that aren't profitable. Manage your P&Ls as strong as you can. Work with your lenders and your landlords to defer payments or to eliminate payments or to reduce payments permanently, and then hope for the turnaround. Hope for the vaccine and wait for hopefully a big kickup and consumer spending, and then give it a year and then potentially sell, with a P&L that's stronger and more representative of what the future might look like.

But if you're a QSR franchisee, man, you're sitting on high sales likely. Maybe some of it is artificial. Maybe it's not, but you're sitting on high sales, sitting on high profits. Dining rooms in many places have been closed. In many of our client's situation, the labor is down 200 basis points over last year. So not only are sales up, but profits are up even more than sales are up. If that makes sense.

I mean, you're sitting on a looming tax and minimum wage increase environment here, and you've got low interest rates for the buyer. And there are a lot of buyers out there who want to buy these businesses because they are mostly pandemic proof on the QSR side. The value of the drive-through has never been higher. I mean, I look at this and I say, "If you are planning in the next three years, you would be unwise not to be seriously considering accelerating your timing." Especially with the idea that if you go through due diligence and your sales and profits are down later in the year, you're going to be given up a lot of the gain on the initial price of your business as it gets re-traded. So be thinking about all of that.

Overall, I think I am optimistic for our future. I'm optimistic for the linchpin of this country, which really some of the best entrepreneurs and some of the best businesses and some of the biggest backbone of our country have come from this beautiful franchise industry. Not just QSR, all the different facets of it. It is a linchpin in our economy. It's something to be very thankful for. We will continue to persevere and succeed. There are just great smart people who care about their customers.

And if I could leave you with anything it's this, have a little pep in your step right now. I mean, think not of yourself, but think of others. Think of your customers. Be thankful that you have people coming to your establishment and be positive even in the midst of what's been a tough year and a lot of kind of sadness, be positive about what you have. Be resolved to go out there in 2021, and now I'm speaking to myself and my employees who are listening to this from Unbridled Capital, it's like, "Focus on your customer. Make your client, your number one. Put yourself in their shoes every day, all the time. Know how they feel, treat them like your family. Always be honest, always work hard. Do the things that your grandfather told you 25 or 30 years ago. Work hard. Your word is your bond. The hard way is the right way."

And those kinds of things when done consistently over time will be a blessing and a boon for your business and for mine. Okay? Rock and roll. Thank you for the great year in 2020, take care.

Thanks so much for entering the Boiler Room today. You can find our podcasts on iTunes, Google Play, Stitcher tune in 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 webinars, podcasts, videos, white papers, and a list of our past M&A transactions.

Please note that neither Rick Ormsby nor Unbridled Capital Advisors 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 emissions there from.