Season 2 Episode 3: Optimizing the Franchise Sale



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Welcome to The Restaurant Boiler Room, season two, episode three. I'm your host Rick Ormsby, managing director at Unbridled Capital. Today in The Boiler Room, number one, we'll give a coronavirus assurance from Unbridled Capital. Number two, we'll talk about a recent webinar that we did, entitled Optimizing The Franchise Sale. You won't want to miss it. And three, some ancillary comments. The Restaurant Boiler Room is a one-stop shop for multimillion 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 franchise owers on a monthly basis. Please feel free to find our content at Unbridled Capital's website, at Now, let's enter The Boiler Room. Obviously, the last few days, and really weeks, but as I'm taping this here on the 14th of March, we're really finishing the first major week of shocking news to the system with the coronavirus.

And first thing I'd like to say, is that our fervent prayers go out to all those who have been, or will be affected by this virus, and I am hoping and praying that it is short-lived with as minimal impact to our economy and to the health of many people as possible. So my prayers go out to everyone, and I have been keeping a close watch on it, and I wanted to give a quick update about what you're hearing from me and our company, Unbridled Capital, and what we're prepared to do for clients. So number one, we expect a hundred percent reliability for our clients, so we don't slow down during this time. Years ago when I designed Unbridled Capital, I did it with technology and the human resources to operate and M&A practice nationwide, with full remote capabilities on a permanent basis if needed.

And so our team is beginning a phased approach of working remotely away from the office, to maximize our ability to serve our clients with a hundred percent reliability. The second thing I'll just tell you real quickly is, a hundred percent redundancy in key roles. So in the event that someone at Unbridled Capital were to get sick or forced to miss work, we're fully trained with at least two or more employees in all key functions, including our deal execution work, valuations, business development, marketing, finance, and administration, and so our clients should expect continued continuity in all areas of our company. When I designed this company, I'm proud of this, I believe we've got the best online M&A platform out there, and one that generates and executes franchise deals. So make sure to check out, like I say in every podcast, our podcasts, our series of videos on our website, and I'm really excited about a new webinar platform that we just started last month, I'll tell you a little bit about that in a bit.

And then catch us on social media, LinkedIn, Twitter, and Facebook. So we're going to continue to invest in our online platform and our process of selling a franchise company, or helping someone finance, capitalize, or place debt for a franchise company, is intentionally designed to have less reliance on buyers, and sellers, and lenders, to travel to see one another. Our processes don't necessitate travel in these cases, and that we've designed them that way, to be virtual for our clients, and it's been that way from the get-go. The last two things I'd say is, we're going to continue to accelerate our investment in our online virtual presence, to augment what has traditionally been known in our industry as conventions and meetings where people see each other.

So two years ago, and I'm telling you this like crazy, I actually predicted that the NCAA would start playing basketball in stadiums or gyms with no fans. And I just kind of got lucky, but I knew that would eventually happen. For those of us who go to basketball events, and football events, and have seen the attendance drop 15 to 20 to 25 percent at times. And then a lot of it's because of the tax deductibility that's been taken away for luxury boxes and things, and then you see the quality of the video content and the TV content that's put out there now. I have a father-in-law, for example, who has tickets to sweet basketball tickets to the University of Kentucky, Rupp Arena, and even he doesn't want to go to all the games and get out and do it and be in front of all the crowds.

A couple of years ago, I said... I committed to making Unbridled a virtual platform, and so just keep watching because we're going to show our excellence and our M&A work without any fans in the arena, so to speak. And then the last thing I would just tell you is, our industry closing rate is almost 95% now, and that's 95% of the assignments that we take. That's pretty darn awesome. And so just rest assured that our company, through this time, will provide the best closing team in the entire industry, and really at a time when the best is needed. Mediocre or above average, won't be enough in this business if some of these concerns persist. Again, my prayers go out to everybody involved here, thanks for listening.

Now the second topic for today, is going to talk about a webinar. So last month, we did a webinar called Optimizing The Franchise Sale. And I invited Round Table Wealth Management, out of New York and New Jersey onto the line, and also General Capital Management, which is a private equity group, out of New York and Florida, who owns now almost 300 restaurants. And we just tried to do a holistic view of what a client, a buyer, a seller, but a franchisee might think about, when they're staring up at the ceiling at three o'clock in the morning and saying, "Well, how do I begin the idea of monetizing my investment, but not just what my company is worth and how to sell it, but these other things, like estate planning and where to put your money and how to make it tax efficient." I'm not an accountant, I'm not a tax advisor, and I'm not your attorney, so this is just for informational purposes only.

But I'll take you through the webinar, and then I'll just say also, if you go to our website at,, you look at the top right corner, there's a yellow box that says, "Join our database." So we're going to be accelerating the investment in our webinars, because I think I can bring in some top quality talent, some people who are at the very, very, very top of this industry, to talk about big topics that are going to relate directly to the life cycle of a franchisee, a franchise investor, a private equity group, family office, and interested in franchising, a lender, people in the real estate business that invest in this space. So I'd encourage you to join our database if you haven't.

Just to give you a little bit of a background on the presentation, okay so, Bob Davis came to us from Round Table Wealth Management, and then GenRock was Matt Ailey, and Matt created GenRock as a special purpose vehicle, raised in early 2017, to invest exclusively in the American restaurant industry. And they have now... I don't know, maybe close to a couple hundred Pizza Huts, they're an Arby's franchisee, and they just closed, which we helped them with, almost 70 unit Moe's transactions, so it makes them have three legs of their stool. And they're a large and upcoming group that represents a new type of investor that's coming into this business. And so that was kind of the thrust of what we were doing. And we talked about the life cycle of the sale of a company and a franchisee's life. And there's really five steps, pre-transaction estate planning, then that's the first step. The pre sale prep, that's the second step. The third is, the sale process itself. The fourth is, getting to closing. And the fifth is, any post-transaction planning, investing, and maybe the 10/31 market.

As you look at the return of your life, you are a family investor now, if you sell your company and you have assets that you are looking to protect your family through generations. So we talked about those five items, and for the pre-transaction estate planning, Bob hopped on the line, and I'm just going to read a couple of the slides from the webinar, so it'll sound a little formulaic, but he kind of said, "Why do pre-transaction estate planning?" And he talked about the rules of estate planning, he said, "11.58 million dollars, a state tax exemption for individuals, and 23.16 million, combined for couples as of 2020. The lost sunsets and January 1st, 2026, then what?" I think there was some discussion that it may change, depending on the political landscape.

And so it'd be aware of that. And a question came up, "Should you do some planning now in case things do change later?" And then they talked a little bit about estate tax issues. In New York, it was a 5.2, 5 million dollar exemption, and then an estate tax cliff. In New Jersey, the estate tax is phased out. In Connecticut, it was a $2.6 million exemption, and then they gave a fourth example, Florida, and then they said, "No estate tax and warm weather." So go figure why people want to retire in Florida. That was just the first slide. He talked a little bit about some of the highlights of their strategy in a pre-transaction process, and they talked about the grantor retained annuity trust. They said it was a tax efficient mechanism to transfer wealth to the next generation, it allows a business owner to transfer shares of his or her business to children without the use of the $11.4 million federal estate in gift tax exemption.

That was the first point, and then the second point... And again, this is not my specialty, okay, I'm just reading from their slide. And if you want any more information on this, reach out to us and we can plug you into him or anyone else. The second point was, when the business is sold, the appreciation can occur outside of the estate of the grand tour, and thus save the associated estate tax later in life. And their third point was, that during the term of the grantor retained annuity trust, which is called a GRAT, the grantor receives annuity payments, and at the end of the GRAT, the assets are transferred to individual trusts for the benefit of your children.

Another idea they had, was the installment sale to intentionally defective grantor trust, and intentionally defective grantor trust is disregarded for income tax purposes, so that when a grantor sells the assets to the trust, no capital gains taxes are payable. A couple of things, number one, the trust is recognized for estate tax purposes, so the appreciation of the business can grow outside of the estate. Number two, the grantor can take promissory note in lieu of upfront cash payments. Number three, payments determined by selected annuity rate and time. And number four, the grantor can request payment acceleration. Lastly, the trust can have generation skipping tax protection. Talked a little bit about the need, in this case, of an independent valuation, and I will say, as I talk through this, just a couple more points that, this type of grantor trust is not going to be wide-scale applicable to a lot of people. It may be applicable in some cases, in some unique situations, but for many of you listening who are potential sellers of your business, it won't apply.

But it's just kind of a creative idea, and another item in the toolbox to talk about, and maybe to consider. We talked about the need for an appended valuation, so determine your fair market value, the minority interest, a lack of control so buyers pay less for a minority interest because he or she cannot control decision-making. And then we talk about the lack of marketability and the discounts that are supported by the court precedents, but they vary due to conditions specific to the asset valued. And all of that kind of comes with this grantor trust idea. Another idea is, and a good one is, the use of donor advised funds, and personally I have one of these and I think the world of them, but the idea behind a donor advised fund is to take a bucket of money and give it to a company. So basically, call it the XYZ charitable donor advised fund.

You set it up under your name, let's say you're going to sell a business for $20 million, and let's say you're going to give $4 million into that charitable bucket. You give it to the donor advised fund, which is set up by a number of different companies, Fidelity and Vanguard Charitable, and all kinds of places. And you get a current year tax deduction for that entire amount, but you don't actually give the money to the end use charity at the same time. So as an example, you could give that $4 million, in this case, to the donor advised fund with wherever, Vanguard Charitable, or wherever it's located. And it sits there, you take the tax deduction and then you can planfully decide when and how to give that money away to any qualified 501c3, over time. And while the money is sitting with this organization, it can be invested in the stock market, in an array of mutual funds and ETFs and stocks.

It can gain a return. You can schedule reoccurring donor requests and you can set up a payment schedule. And so it's a really nice way to take a big tax deduction in the current year of a huge gain, but to not have to give all of the money away within that same tax year, but to be charitable over time and really create a great legacy for charitable giving over the course of the remainder of someone's life, and even into their next generations lives, because you can't take the money back, the money's already been given to the donor advised fund. So at Unbridled Capital, we function kind of that way actually, so when we close deals in a particular brand, we actually give donations from my charitable donor advised fund into the brands that we support, their foundations, their legacy funds, their...

I'm just thinking of the Taco Bell foundation, the KFC foundation, the Pizza Hut foundation of Wichita, the McLamore Foundation for Burger King. We just did one in Moe's, to support children who are hungry. There's a lot of reasons why this makes sense to do and to think about if you're a charitable person at the very day or the very year, I should say, of selling a company in the same tax year. Now, for pre-sale prep, which is the second phase of thinking about a transaction. Couple of points I just made here and I'll make them now, is that you should strengthen your management teams because most of these... Especially if you have a mid-sized or larger franchise business, most of these family office and private equity groups that are looking to place a platform investment in a brand and to do consolidation in the brand, they want a strong management team.

Strengthen your management teams. Number two, tighten your reporting. All of these guys that are paying big prices for these assets, they are adept and very good at doing very detailed financial analysis of the business that they make an offer on. A lot of them do quality of earnings studies on the businesses, and when you do that, they're almost with a forensic microscope, come into your business and look at everyone and your numbers. And so you need to make sure that not only your reporting is solid, but that the quality and method of getting the financial information is solid as well, because there will be scrutiny. With these high prices come scrutiny on your company's financials. And of course that's what Unbridled does to help along the way as well, but you want to optimize your P&Ls.

Number three, look at your labor food costs and controllable costs. No one is telling you to skimp in any area, to cut everything just to have higher EBITDA and get a higher price because people see through that number one, and number two, it's just not ethical. But I'm also, at the same time, telling you if you are running fat on labor or on food cost, or things are a little bit out of line in your P&L, it's time to maybe step back before the sale and work on those a little bit. Those matter when it comes to getting the highest purchase price that you want. You have to questions about whether to remodel or not. Those are big questions. If you have upcoming remodels that are due, do you do them before you sell or do you not do them? Or if you're in the middle of one, how do you handle that?

Those are questions that need to be answered, a lot of it... My general canned answer with that and new builds, is to probably not do them and be in the middle of one while you're selling, if you can avoid it. But if you are going to do that, we need to understand a little bit about the expectation of sales increases for new development, what do you think the new location will do in terms of sales and EBITDA performance? And then we use reasonable performance to show buyers what will likely occur. Sometimes that indeed means that a purchase price negotiated between the buyer and seller, depending on how many folks want to buy this business, would have to have a portion of it that's contingent and earn out, or just paid over a delayed period of time if there's substantial construction or development, that's not seen in the numbers themselves.

And a lot of that depends on the brand and the success of the brand. And then in a pre-sale prep process, you want to think about hiring an M&A advisor. You don't want to get them on board one minute before you decide to sell, you want to get engaged with them several weeks, a month or two, beforehand, to help get everything ready and prepared to go. Much like if you were selling a house that needed to be remodeled and needed to be straightened up before you sell it. And the last thing I would say in the pre-sale process is, prep your family and business partners. These transactions take three or 400 hours to complete, and every single one of our clients over the last 20 years I've been doing this, almost 20 years, says the same thing, "Rick, you forewarned us over and over again at the front end of how taxing this is. We didn't realize. It was more than what we thought."

It's the most universal thing I've heard in this business since I started. You want to prepare your family and your business partners for what's going to be a long process and one that has some ups and downs. We like to say, we take probably two thirds of the hours and time out of your, as the business owner, your investment and involvement from an hours perspective in this process, allowing you to run your business effectively. But we don't take all of it away, and there are a lot of decisions that have to be made and a lot of late nights and some emotional ups and downs, for those of us who own businesses, it's just the way it goes. We talked a little bit then about the third step of the process, which is just once the sale happens or has started.

Typically, our transactions are lasting about five and a half to six months, soup to nuts, and all of them are different depending on size, brand, whether it has real estate or not, what type of buyer we have and their financing structure. There's a number of items that could delay or accelerate a sale process, but essentially, in day one you sign an engagement agreement with an advisor. In our case, it takes about seven days to pull together a valuation of the company and then put together a SIM for review, a SIM is a confidential information memorandum, it's a book that we use to sell a business like anyone's franchise business. By day 10, we've developed our list of buyers, and lenders, and we're ready to approach the market on day 14. By day 40 let's say, we have the bids are due, so our businesses stay on the market a little less than a month, all told. And it depends clearly on the circumstance, it may go a little longer, a little shorter, but something like that.

You go into a process with a buyer with a signed letter of intent, and it takes maybe 35 to 45 days to sign a purchase agreement, so in our little example here, we use day 75, you have a signed purchase agreement. And then for the next 45 days to 60 days, you have corporate who has to approve the transaction. Do you have any training requirements for the new buyer and their operation staff? You have financing that has to be completed with the lenders. Due diligence from a legal perspective, and from a facilities perspective. Lease assignments happen, and that's always a booger that takes longer than people realize. All of these things take, day 75 to a hundred, to 120, maybe up to 150.

And then typically we see in the last 30 days or so, you have final facility inspections, final management meetings, the loan is finally approved, the franchisor gives the thumbs up, the new store numbers are transferred, all the accounts are set up and transferred, inventory is scheduled to be counted, cash on hand and all of these things. And then the transaction funds and encloses in a typical six month transaction. Now, as franchise companies are cutting their resources, and for any of you who are franchisors, or presidents, or top level executives at franchisors, you know this to be true, as you're constantly under the gun of reducing your GNA expenses, the franchise departments are getting thinner and thinner. And the transfers and the M&A activity has been high, and so you know that there's a backup sometimes and a log jam.

And so the franchisor can oftentimes throw a big monkey wrench in the timing here and extend it by up to 60 days. You can see the due diligence process sometimes uncovers things that are unsightly, or that need to be renegotiated and discussed between the parties, and that can extend a deal. You can sometimes see leases, so if you have a 50 unit... I don't know, whatever, pizza business and two of the leases are owned in Podunk Town USA by Granny Smith, and Granny Smith is a 90 year old lady on a cruise in Cabo. And it's the winter time, so she does four cruises in a row and she's unreachable for a month. So in those kind of cases, it becomes difficult to transfer leases when you have a bunch of disparate landlords and some of whom are difficult to reach, some of whom are difficult to negotiate with too.

Lastly, I'd say some of the other things that come up would be real estate diligence. So let's say there's real estate involved and you're sitting underneath an old dry cleaner, or a laundry mat, or adjacent to an old filling station from the 1960s that wasn't environmentally protected in the right way. Those things have to be further researched and typically take further surveys, some other considerations to be solved. I'm sitting here talking, I'm thinking, "Man, this has been long so far." But I hope you've enjoyed it. Talked a little bit about business valuation, and I'm not going to spend much time here on that, suffice it to say. I've talked about this in the past, but over the last nine or 10 years, we showed several graphs of how the EBITDA multiple for each type of category within just the restaurant industry in this case, has been trending upward. You've seen a little bit of a fall off maybe in the pizza area, but in other areas, generally speaking the curve over the last nine years has looked pronounced upward in a great way.

But valuations are obviously affected not just by the brand, but by the geography. The AUVs within a brand, which can swing widely between... You might have a... Well I don't know, you might have a sandwich shop location, 20 units in Ohio that averages $750,000 in sales per store, and then the same thing in Texas averages 1,000,002, and those businesses then are way different in terms of the way they're valued. The number of units affects the valuation, the condition of the assets, and like I said before, the management team. The stronger the management team, the better the buyer, the bigger the buyer and the more people are going to want to come into it because these outside groups are looking for financial investments. We talked about cap rates and how they affect real estate valuations, and it's basically a simple formula of taking your rolling 13 sales, taking an implied rent percentage, and then dividing it by a cap rate to get a real estate value.

And that's what you would get, essentially, in the value of selling your real estate in exchange for a triple net lease that you would have to pay to the buyer of that real estate as your landlord, after you do the transaction. And cap rates are clearly also very highly variable, based on the number of units, the method of the sale, whether they're sold to a REIT, or on the 10/31 market. The tenant strength, if you sell your business to a buyer who has 10 other restaurants, or you sell your business to a buyer who has 2000 restaurants, and you're looking to sell your real estate too, but to sell it to a third party. A third party will pay you a higher price all things equal, if the buyer of your business is the 2000 unit franchisee, because their guarantee is much better.

The tenant strength is important, and the geography affects the cap rates, the rent coverage ratios, basically the profitability of the units, affects the cap rates and the AUVs, affect the cap rates as well. Talked a little bit about franchise ownership timeline, just basically in your mind, look at how back in the 1980s we had mom and pop franchisees, and today we have a lot of sophisticated buyers and institutional groups that are in the business. They're very few franchise systems that don't have at least one or two private equity or family office operators, and buyers, and consolidators in them anymore. And that's changed in a huge way in the last five or six years, with a massive amount of acceleration.

And then I brought Matt Ailey on and Matt at GenRock Capital who has all the restaurants in the Pizza Hut, Arby's, and Moe's space now. And I asked him how he got into the business. I asked him to explain the PE and family office phenomenon and franchising. And I asked him what the value of an advisor is, an M&A advisor, a little bit of goosing him for... Just talk nicely about Unbridled, which he did. And then talked to him about what is important to him when it comes to approaching a seller or doing business with a particular seller. And I asked him to explain his due diligence process. Those five questions took about 15 minutes, I would say, to answer. We're going to have this webinar available in audio. We did it through zoom, and so if it's something that you're interested in seeing, just reach out. I can't really characterize his answers here, but they were excellent.

And we had a lot of online questions about them during the Q&A. And then finally, what do you do afterwards? And we talked a little bit about passive income investing through 10/31 investments. So for a lot of our... Probably now, it's crazy, probably 80% of our clients who are under 60 years old, who sell their business in real estate, end up taking the real estate, doing a 10/31, and investing it, in a diversified manner, across multiple investments and across multiple states sometimes and multiple types of properties. And they borrow some responsible debt against it. Most are looking to target a cash on cash return somewhere around eight and a half to nine and a half percent. When you do that and you take into account the impact of not paying taxes on the real estate portion of the sale, plus the leverage benefits that you get. You are able to oftentimes get two or three times the monthly payment you would get, if you just were to pay the taxes on that real estate amount, invest it with a investment advisor and target a 6% return.

So the difference in money, especially if you're looking for ongoing income, it's quite eye-popping, I think. Glad to go through that at another time with you. And then we just had a really good comment from Bob, Bob at Round Table, he just said, "You are now your CEO of a family organized organization." And so you have to think about things like maintaining your lifestyle, projecting cashflow going forward, and protecting your assets and thinking about how to maximize your legacy and solve for your passive income needs or your active income needs. So there you go. I don't know how quick that was, but it was a bit of a webinar and I thought it was just an excellent webinar, so please check it out. We're going to be doing more of those obviously in upcoming months.

Now, the next thing I wanted to talk about quickly today was the franchise investment conference in Dallas. I just got back from it a couple of days ago, and it was really, I thought, a really nice event. Although, maybe a little bit cut a little bit short on people because of the coronavirus scares, but we had a good time and we were honored, Unbridled was, to receive one of the 12 deal maker of the year awards and so I just thought that was awesome.

You can find our podcasts on iTunes, Google play, Stitcher 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. 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 emissions they're from.