Season 2 Episode 5: Franchise M&A and Real Estate Market Conditions



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Topics covered will include:
M&A Market Conditions
COVID-19 Impact on M&A
Real Estate Market Conditions
COVID-19 Impact on Real Estate

Mike James and Reed Melillo of James Capital Advisors (JCA) will be joining the webinar. They will share some spot-on perspectives on how COVID-19 has changed the marketplace for real estate acquisitions and divestitures.


Welcome to the Restaurant Boiler Room season two, episode five. I'm your host, Rick Ormsby, managing director at Unbridled Capital. Today in the boiler room, we'll talk about a recent unbridled capital webinar from April 21st entitled Franchise M&A and real estate conditions post-COVID-19.

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 a monthly basis. Please feel free to find all of our content at Unbridled Capital's website at

Now let's enter the boiler room. So I just, by the time you hear this, I guess we'll have completed this webinar, the webinar that Unbridled, it's our second webinar. The first one we did was on estate planning, and this one is going to be franchise M&A and real estate market conditions post-COVID-19. And before I start, I guess I'd just like to give a shout out with all my prayers and thoughts to all of you who've been affected by the COVID-19 crisis that's happened over this country over the past month or so. It's been unbelievable. So many of our restaurant friends and clients have been struggling mightily because of this. I take absolutely no happiness in that. As a matter of fact, my heart crumbles for them and we hope the business can turn around quickly. We certainly send prayers out and our family's been doing a lot of praying for the families who've been affected by it, not just by the sickness, but also by the death and the family members and friends through part of it.

So this webinar was pulled together, James Capital Advisors and myself, and Mike James and Reed Melillo from James Capital, we've done a couple of hundred million dollars of real estate work with them. The point of the webinar was just to kind of talk about what we think the market conditions will look like when we come out of this thing. Mike's group is out of California and they've got several specialties, one of which is restaurants. We've used them to do a lot of the institutional sale-leaseback financing for a large private equity and family office buyers of businesses that we've been selling. And then they've also taken a lot of our clients and taken some of their proceeds on a 1031 basis and helped them invest with our help to help them invest in the marketplace to create a passive return for their money.

So the topic of the conditions in the M&A market, current conditions were going to be part of what we're going to talk about in addition to the COVID-19 impact on M&A. Real estate market conditions, the COVID-19 impact on real estate, then we're going to do a quick Q&A, I'll do all of that on this podcast. So in case you missed the webinar, you can hear. And as of today, we've got a massive turnout on this webinar. I mean, probably at least five or six times more people than actually hear this podcast are going to hear the webinar. So I think it's a topic that's very germane for this conversation.

For probably half of the people who are on the webinar, and maybe some on the podcast who actually don't track the restaurant business too closely. Went off with the first slide, which I'll talk about, which is the current franchise business environment, and clearly COVID-19 has produced some challenges across brands and geographies, right? I just have some just kind of general, first three weeks of the COVID-19 crisis, and this is not meant to be exact, but it's directional. The QSR business is down about 40. Fast casual down about 50%. casual dining down about 70%, and fine dining down about 80% or a little bit more, but in there lies pockets of differentiation and different performance amongst brands and geographies, and segments within the marketplace. For example, pizza and drive-through, carry out are outperforming. If I was looking at some recent statistics, Wingstop has been killing it. We have a huge Sonic client right now that we're helping them sell their business, and their business over in the year over year basis during this crisis is only down three or 4%. Why is that? Because they don't have a dine-in business. They're a drive through business. That's actually getting crossover traffic from other companies.

You've got the pizza brands have largely been doing well. We have a big Papa John's client who is actually up year over year in sales and profits since the COVID-19 crisis, even when not making the adjustment for the fact that there was no NCAA tournament this year.

So a couple of the concepts are really, really doing well. Most tier one drive through QSR concepts have generally been down about 15 to 30% or so. With casual dining and fast casual, really, really struggling because they don't have drive-throughs and their businesses, a lot of which have been closed across the country. I talked with a large Denny's franchisee, he's a friend of mine, and he says that over the third of the Denny's in the country just went straight up and closed their restaurants. And I think a lot of the mostly casual dining establishments have considered doing that.

A lot of the pundits and experts expect that 10 to 20% of restaurants will permanently close coming out of this COVID-19 crisis. I think that number seems a little high, but a 10% number is probably right. And fortunately for the industry separating the wheat from the chaff is not a bad thing. We've had too many years of flattish GDP growth, flattish sales growth, and a lot of new units dumping on the line in the restaurant business nationally. And it's created a situation where there's just low traffic, traffic is worsening, and the only way people are getting higher sales is by, in most cases, raising their prices, which is not a permanent solution.

So I think some of these closures, whether it be a large franchisee of 200 units that decides to close his 20 lowest performing stores, or really a lot of independence and casual dining that close in large quantity might actually be an okay thing for the industry. The P3 stimulus is helping a lot of our clients. We've been helping get the P3 stimulus money or pointing them in the right direction. The first $350 billion burned out real quickly, and as I'm speaking tonight, it looks like there's about another $400 billion that's in Congress that's going to be quickly approved. My guess is that money goes quickly too, because most of our clients were unable to get the financing and funding that they needed. And this of course was a loan issued through the SBA by the government, and it's going to be, in many cases, forgivable, if used to keep your employment levels up. And it's meant to get you through your business through the next couple of months before, hopefully, we get this rebound in the marketplace from a consumer spending perspective.

So the stimulus I think is helping. I've got clients who have been really putting it to work and hiring again, instead of sick leave and laying off. One of the things I would say is if you didn't get the first round of funding, you're probably not going to get the second round of funding if you go back to your big national lender, who's putting multiple step online processes in place in order to get the money. It makes it too hard to get and there's such a big queue and there's so much confusion. A lot of these small regional and local community banks are really shining and showing their metal during this time by providing the great customer service that we've known from those groups for years, and they're winning clients because of it.

Just an FYI, the government checks have started to provide a kick. So money is starting to get into the hands of the consumer, these government checks. And so some brands, is a talk about this, and now we're at like April 20th, but some brands have started to see year over year sales increases last week. Some of our Taco Bell clients are reporting plus sixes, sevens, eights, and thirteens. So clearly that's helping people get back into purchasing. We see pockets of sales optimism.

Obviously if you're in the Northeast, or you're in one of these areas that's been hit more substantially by COVID-19, your sales are down, right? And your optimism is probably down a little bit more too, but there are a lot of places that aren't that way. And I think Tennessee and Georgia just announced tonight that they're going to be opening up in phases no later than like the end of April. I saw they were kind of the first two states to do that. And so I think the certain areas of the country are going to see quicker sales return to normal, hopefully. Some brands are going to see sales return to normal. Maybe in some cases you see some brands actually skew better than normal, like Wingstop, which is just saying that their sales are actually increasing, but you're going to see some other brands where it's not that way. Where you see sales and profits go away and never come back.

One of the bright spots is the dropping commodity costs. A pound of cheese was a $1.71 is now currently trading for about a $1.07. Wage inflation may actually resolve itself a little bit, because there's going to be more unemployment potentially once the government funding for unemployment kind of maybe lessens a little bit. We saw the price of a May barrel of crude oil was at one point today at negative $38 a barrel. I've never seen anything so crazy. We may see gas prices below a dollar soon. So, easing commodities is going to help franchisees as well with their P&L's.

Now it is true that the current market conditions, just to give you just a bit of a refresher here, over the last 10 years, starting at the end of 2009 to the end of 2019, if you were to look at a graph of franchise valuations over that time, it would largely, especially if you strip off casual dining and some other sub-segments that haven't performed very well, but aren't a big percentage of the total franchise industry. If you just take main line QSR businesses, you're going to see like an upward facing trend from 2009 all the way to 2017, maybe the middle of 2018, that starts to flatten out over the last year and a half. And I imagine a lot of asset classes have been that way, commercial real estate, probably stock market returns, all of these things, right? You've seen just like this massive appreciation evaluations that's kind of leveled off in the last 18 months. And that's where we've been in the franchise business prior to COVID-19.

Starting in March 13th of this year, the COVID-19 thing just hit hard, and everything basically shut down. We, the day before had just closed, we were very thankful to have closed a 67 unit Moe's transaction, where we represented four sellers, tied them all together and sold their businesses at once to a private equity group out of New York. And that business was in Florida, and then all the way kind of up the East Coast of the United States and the new franchisee will become the biggest Moe's franchisee, and we're excited about that, but that deal closed one day before the major news of COVID-19 started really rocking us.

And so we had 15 to 20 deals during that time. A lot of them have been put on hold, slowed down. I would say most of our remaining deals are going to extend to 90 to 120 days minimally. To people are dealing with trying to staff the restaurants and understand how to work through all of this to get money. The P3 loan process has been several weeks of confusion and hard work. And so I think just in general, things will probably get postponed or elongated in the various stages of the deals that we're working on. We did have one large Papa John's business on the market during the middle of the crisis. And it was interesting, we saw a massive drop in the number of offers of the business, but the pricing only dropped by five to 10%. And I think that's an interesting point. It's just one data point. It probably doesn't say a whole lot. Good businesses, the valuations haven't dropped as much as just the number of buyers in the marketplace. And clearly the liquidity crunch that's coming out of this COVID-19 situation is going to exacerbate the buyers that don't return quickly, because they don't have the liquidity to borrow the money, right?

And then we're kind of recommending to our new deals, pause until about June the first, at which point I'm hopeful we're going to see kind of a pretty strong comeback when the economy opens back up with less restrictions. Especially, I mean a come back as a whole in the economy, I'm not sure, but the QSR business is one that I hope will come back in fairly quick order.

Okay. I talk about a base case timing. And so I'm going to paint an M&A timeline for the next 12 months. I'd say for May and June, there's virtually going to be no M&A activity. It'll be quiet and slow. People are just in really focused and trying to keep their business alive and waiting for the economy to open back up. In July through September, let's just say we're going to see loan modifications start. Borrowers can't repay and the first wave of store closures hit. Now, it is true that a hundred percent of franchisees, if you own restaurants and you're listening to this, you will need a loan modification. And not just calling up your lender and telling them to defer your principal and interest payments for 90 days, right? That's not going to do it. You're going to need things like permanent covenant relief. Maybe you're going to need new interest rates, new amortizations. Potentially, you're going to need forgiveness of part of your loans. They're going to need to be modified and change,. And I think that's something that we'll start seeing in the second and early third quarter.

In August through October, you're going to start seeing, in my view, an initial wave of bankruptcies. You'll see a reduction in restaurant store count. Will be continuing as stores close, but I think you'll hopefully start to see the uptick of M&A. And I think you'll see it initially in two ways, one is strong businesses that are first moving. A lot of operators who are friends of mine say, you know what? I should have sold a year ago. I have a healthy business. If this thing comes back quickly and we can basically pro forma the trailing 12 month financials for most of COVID-19 by just saying it was a speed bump, then I'm a seller, even at a lower price. And I think those types of sellers that come to the market quickly, if there's liquidity into the market, but will be the ones that will be able to have a little supply on the market when there's a little bit of demand, if that makes sense. So it might be met favorably with pricing and interest from buyers because there won't be a lot of supply.

There also we'll start to see distress deals I think at the market. Whether it's somewhat healthy brands, but franchisees that just were over levered going into this crisis, or more likely brands, and I'm not going to name them specifically, but brands that have struggled for a long time. Places that you know, you see them on TV, but you haven't eaten there in years, right? Those types of brands that have been struggling, we'll probably start seeing multiple distressed deals and probably a lot of movement in the space.

And if we get into November through January, my hope is that we return to pre-coronavirus sales levels in the November, December timeframe, especially in the QSR business. It may happen sooner. I'm getting a little more optimistic by the day that it may happen sooner, especially as I hear some of the good news from fellow franchisees and friends in the marketplace. Obviously, we're not going to get to back to normal sales for a long time in casual dining and most fast casual concepts, because we've just may be changed. We may not want to eat in restaurants right next to people in dining rooms as much, right? So I don't know how to forecast that, but I do hope for a return to pre-coronavirus sales levels for QSR by no later than early Q4.

By February and March I think we're going to see a new wave of bankruptcies. What typically happens after the end of the year is that banks and franchisees and franchisors kind of come back from the holidays and they start looking at year end P&Ls and they start making decisions. But my guess is depending on whether or not the political climate is good, if we're in a deep recession or we've come back for it, if we have geopolitical problems, what's happening with trade wars, the regulatory environment, all these questions, but I do think if we thread the needle here, that April and May, maybe even March of 2021 could possibly be the biggest M&A boom we've seen in several decades.

As rolling P&L's will start to look great again. And we have the hopeful benefit of low commodity costs rolling through these P&L's and creating really strong EBITDA. And I think you're going to hopefully see, if again, we thread the needle with all of these geopolitical questions and things like this, you could see a massive M&A boom.

I will remind you that QSR typically does really well in recessions, unless gas prices are high. If what I'm seeing in the marketplace is real, it looks like it's going to be sub $1 gas here soon. And that bodes well for family offices and private equity groups that might be wanting to get into the franchise space as a hedge to some of their other industries and businesses that they invest in.

Post-COVID-19, I'll give you a couple of things to think about. Number one, segment leaders will prosper due to less competition. There'll be less competition. The cream will rise to the top. B, that was a B, brands with high off premise will recover sooner. Domino's, a hundred percent off premise. Papa John's a hundred percent. Pizza Hut 85 to 90. Taco Bell, KFC, Burger King, Wendy's, Arby's, Chili's. And then you get down to like the Tilly's, TGIF, and Applebee's that are down below 20% of off premise. Those are not going to recover as quickly, right?

Under the base case, I think the EBITDA multiples will likely drop out of this crisis depending on how deep it cuts and how quickly it comes back. Somewhere between 25 basis points or 0.25 to a hundred basis points or one turn of EBITDA. Now we might have a restacking of the brands that become more in vogue, and those brands may have a big EBITDA increase. You might see Sonic, for example, start trading at a higher multiple, Papa John's as well. And you might see a group like Taco Bell, not really change a whole lot because there's always been way more buyers than sellers in that brand and the supply demand is there. As long as liquidity stays in place because their valuations are so high. You may see other brands that are languishing, QSR brands or casual dining brands that actually fall way more than this, because their profits never recover and there's a lot of franchisees who want to sell the businesses in distress. So that's a kind of a wide range of viewpoints there.

In point D there are going to be fewer lenders who will reemerge. I mean, we had like 25 or 30 restaurant lenders in the space and then like four or five of them have gotten out recently. There will be others, and others will just basically not make loans. So credit will be squeezed and is pretty much on lockdown now. How long it'll stay that way? I don't know.

E is least adjusted leverage. I think it's going to drop by at least a half a turn. So it's going to mean that more equity is going to be needed to make purchase prices if they stay the same. The good news is, is that interest rates are incredibly low. So the cost of borrowing is at historically low levels. I didn't think it could get lower, but it is.

In item F, normalizing P&L's will be an interesting one. So I talked with one lender and one franchisee who said, "Well, if I was going to buy a business or finance a business, I might take 2019 P&L's and drop the sales by five or 10%. And what I would use to make my offer." And the lender would say, that's what we would use to finance the transaction. This is just some high level view. Obviously it's more technical than this. My view is that we look backwards at the pro forma trailing 12 month financials, and we have to make some assumptions of normalizing the COVID-19 crisis. And it becomes really easy to do that if we just have bam by June 1st, everything goes back to normal in the QSR concept. What becomes difficult is if it takes six to nine months thereafter, and we're kind of languishing at minus tens and minus fives, it becomes difficult to adjust the backward looking periods so strongly. So obviously pricing is both a factor of EBITDA multiple, and the EBITDA itself.

I would expect that M&A processes will take another 60 to 90 days. Our average deal has taken five and a half, almost six months to close, from start to finish. I think because of the lending environment, the franchisor environment, the leasing environment, the real estate diligence environment. You're just going to take more time now. I think earn outs and seller financing will become in vogue again. I've seen two of these recessions and those are effective tools at getting buyers and sellers to agree to purchase prices when there's a little bit in the middle that everyone's unsatisfied with. And so you'll see those come back. And I do think that store closures will help profitability, and remodels and development obligations are going to be slowed or washed away. A lot of franchisors are going to be able to save face with their shareholders and now say, hey, our franchisees have to close some stores and we can't develop some new stores for the next couple of years. And that's going to give the cover fire that these franchisees are going to need to be able to renegotiate and to slow down the capital spend in the bad market.

Now, at this point, I was going to invite in Mike James of James Capital. And so I'm going to pretend like I'm Mike for a moment and just kind of talk through his slides here on the presentation. I'm going to read them mostly just kind of get a perspective of what he talked about, but some of the questions that he was going to ask is leading up to the COVID-19 crisis, what did market conditions look like? When did you notice a change? And in what ways? What has been happening in your active deals on the buy side and sell side? How has COVID-19 affected timing in acquisitions? And how do you market properties for sale in this environment?

And so he brings out this cap rate calculation and graph that shows that cap rates look stable through March. He said kind of the average cap rate from October 19 to March 2020 was 5.63%, 5.63%, 5.79%, 5.56%, 5.98%, 5.65%. And then average tenure treasury during that time has been 1.71%, 1.81%, 1.86%, 1.76%, 1.5%. And then in March, shocking 0.87%. big drop. So that's kind of the overall conditions all the way to now. All right, but there's more commentary here. He's looking at thing in two different ways on the portfolio sale-leaseback side. Okay, and that's when you're selling a large amount of real estate at one time. So a large amount of franchise real estate at once. Or the private market sale-leaseback one-off market, the 1031 market, where let's say, you're a franchisee and you just want to sell one piece of your real estate, and you sell it to an individual investor. Obviously in the first case, you're dealing with REITs, real estate investment trusts and large organizations as buyers. In the private market sale-leaseback, you're dealing with typically 1031 buyers who are looking at smaller investments.

In the first case, portfolio sale-leaseback, he says cap rates your repricing is going to be somewhere between 25 to 75 basis points higher. He says rent guarantees in escrow, many institutional sale-leaseback providers will require rent guarantees in escrow holdbacks. There'll be an extreme focus on credit and liquidity, and the ability to weather the storm in making these investments. And he gives the example of a 52 unit business, $6.6 million, its franchise business and EBITDA 24 feet properties pre-COVID 19. The sale-leaseback provider agreed to 6.15 cap rate with 1.25% annual increases under a master lease. And the offering went back to market and ended up securing the same buyer at a 6.35 cap rate with no prepaid rent. So just a 20 basis point degradation. I don't know if that business has closed yet or not obviously.

If we're looking at the private market, he says, the repricing will be 10 to 35 basis points higher. So it's going to be less of a degradation in price. And I guess that makes sense, because on the portfolio sale-leaseback side, you're dealing with big institutions and big groups, prices are larger. There's physically less groups that want to buy a lot of those restaurant real estate assets when a private one-off deal has more demand, right, in the marketplace.

He says, there'll be a flight to quality in the one-off sale-leaseback market with the focus on underlying real estate in the strength of the guarantor. The focus on rent per square foot in the intrinsic real estate value, and I think this is critical, buyers and lenders are wary of rent per square foot in excess of $60 per foot, especially in tertiary markets. And he uses the example of a 65 unit franchise transaction in the Midwest. So one-off development sale-leaseback process in place, just one, and the private buyer under contract at a 5.05 cap rate pre-coronavirus, and then ended up increasing the interest rate by 35 basis points in exchange for closing on the 1st of April, and providing a 50% rent reduction for the first three months. That's some interest.

And so, he also has the next slide. He talked about structured financing market and he said, pre-COVID 19 terms, he said 60 to 75% of appraised value interest only between four and a half and five and a half percent. He said the secured by Propco or the property company Propco entity, not by the OPCO, and no impact to OPCO leverage ratios. And he said two to three year term and no prepayment penalty. Now in today's environment, he says the market is essentially shut down at the moment as lenders turn focus to their existing portfolios, and lenders will still look at and underwrite portfolios, but cautioning they will need a minimum of 60 to 120 days to issue commitment letters. I think that's from my perspective, that sounds about right.

We did a quick Q&A, and I'll just go through a couple of these like franchisees. The first one was, how do you think about buying and selling? So I just answer that here right now. I would just say that buying and selling has always been an element of liquidity, and supply and demand. I think buyers are going to find that there's going to be some, not to prey on other people, but there's going to be some opportunities for them. I think if you're listening to your family officer private equity group, and you have equity and you're willing to spend it without having to jerk around with difficult loans, I would encourage you to start making yourself well-known, and start getting really laser-focused on which brand you want to participate in and get to know and invest in. And I think there will be opportunities. That the first opportunities, like I said earlier, are likely to come from brands that are struggling. And so if you're a buyer of like tier two or tier three distress brands or casual dining brands at really low prices, those are going to create opportunities that aren't great opportunities from an EBITDA perspective, but may be priced the right way. The key is going to be the liquidity piece of it.

If you are a seller, and you have a healthy business, I would say, even though you're kind of bummed out at what's happened here, as it relates to your business, I would say this, if we get a nice recovery, that's not too long in the taking, therefore we can kind of pro forma the trailing financials for coronavirus as a kind of a bump in the road. You may take a little bit of a hit to your valuation over what happened pre-coronavirus. But hey, look, you're still likely in a way better position than 2013, or 14, or 15, or 16. So are you past the peak? Sure. Will commodities potentially help you? Yes. Can sales come up quickly? And we can explain a way the coronavirus? Probably in its lion share. If you have a brand that people want to buy, what would I tell you? I mean, I think you might've missed the highest part of the market, but that doesn't mean that it's going to be higher in the future, after we get through all of this, either. Once we have liquidity coming back to the market.

The last thing I said is a question on the Q&A was describe some of your deal flow, and those of you who listened to this podcast regularly know that we do deals across most tier one franchisees. We probably do, Unbridled Capital does, my average client probably has between 20 and a hundred units. And we either sell or recap their business in most cases. Sometimes between 20 and $100 million, depending on the deal. Some of these deals look bigger, some smaller. A lot of our deal flow is obviously in restaurants, but we do take limited assignments outside of restaurants in the franchising space, as well. Particularly in healthcare and beauty care and some of these kinds of areas, and car accessories and car parts, and things. So that's what we do.

Now a couple more slides here to talk about thoughts on the turnaround. So I talked a little bit about my base case here. The best case is this thing pops back fairly quickly. If it pops back fairly quickly, I think QSR can rebound really quickly. And a lot of the clients that we cover and the brands that we really love, can go back to normal and sales like by June or July, and if that's the case, I think the M&A market, as soon as we have some liquidity will probably open back up in a fairly robust way. And maybe sooner than what I'm anticipating. The worst case is if we get the wrong political changes and if we get in a really deep cutting recession, and if consumer spending doesn't come back and restaurant sales don't come back, who knows what that means? It means a long arduous path back for everybody, including me, yours, truly.

Some of the things I'm telling operators are look at your staffing levels. Your AUVs, think about your profitability, your franchisor relationship is worthy to dust off and reconsider, and look at your lending relationship too. Bringing back and training employees will be a challenge. All the people who are on unemployment and sick leave right now are getting paid a lot of money by the government, and it's going to be a challenge. And I think providing that customer experience, that positive customer experience is going to differentiate you. Right now, I'll go to McDonald's and wait in a 10 minute drive through line down the street from my house, right? And I understand that the staffing situation is bad, and it's difficult to get fast drive-through times. But when business opens back up, I'm not going to be okay in a 10 minute drive through. And I'm only going to be okay in a three minute drive through, and the company, and the brand that can provide that to me is going to be the one I'm going to, and I know everybody else will be thinking the same way. So the best operators, who have the best speed of service, and the best client touch are going to be the ones that are going to do the best. And you've got to have good people for that.

So questions I have are, hey, how do we staff the pent up demand coming? Are we going to be in a better hiring market possibly? Is there going to be less wage pressure or wage increases? Will they may be subside potentially or will maybe states ease some of their crazy minimum wage requirements that they've been forcing in their states? Will they may be ease a little bit? And then look for this commodity cost favorability. Again, on the turnaround, I'm telling you guys, loan modifications are going to be a big part of future business here, because everyone's going to need substantial loan modifications to their business coming out. Even if your business a hundred percent recovers, you're still going to be double the leverage ratio that than you were before, right? And I think better operators will tighten the ship and do a better job.

In closing, I guess I would say a couple of things. Number one, new brand winners will emerge. This industry is a kind of an old industry, an old state industry, but it's now time probably for some new innovation to happen. The ghost kitchens, the smaller real estate footprints, the smaller dining rooms, the new method of delivery, the new food systems. I mean, all of these things are going to happen and the nimble new brands are going to emerge I think, because of what's happened with coronavirus. The best brands will get even better relative their competition. I just think that's naturally going to happen. The best brands are going to do it the best, and they're going to continue to do it the best with their customers. Restaurant closers were badly needed as a result of over development. It will be okay for the industry to see a 10% drop in the number of restaurants. And it's going to bring more sales to the restaurants that are already healthy and make them more profitable, right?

Independence, fast casual and casual dining will be the losers here unfortunately. I'm sorry to say, I don't think there's any way around it, the recovery won't hit them as easily. And obviously in areas like the Northeast where they don't have as many franchises, they have more independence, more fast casuals, more casual dining, more sit down dining establishments, and those are the ones that are going to be really struggling unfortunately.

So restaurant real estate becomes both, get this, much more important and much less important going forward. As the drive-through becomes more important to be on the corner of main and main is a big deal, right? So in that sense, having the right real estate, at the right stoplight, at the correct side of the road is going to be even more important than it was before because people, I don't think are going to be eating in dining rooms as much in the short term, maybe the long-term as they were before. But as that happens, the question becomes, do you need an acre and a quarter or an acre and a half to build these things? Why not just have like Sonic or Checkers or Rally's, like no dine in business, especially when a lot of these traditional QSR food companies are not doing a whole lot of dining business anyway, and weren't doing it before the coronavirus came.

So is it true that we can maybe like the restaurant real estate changes? Can they make it in a warehouse? I mean, as people think about delivery more and it becomes more mainstream maybe coming out of this crisis, does it mean that the real estate cost can actually lessen substantially by taking less valuable real estate because it's all online and delivery. These are some things that I think we all have to think about.

Another point is remodeling and development, and new development is going to slow. And I think it's going to point buyers back to brands that were previously unattractive. I'm not going to mention the brand, but if I had one call at a hundred from one franchise brand that if you bought 20 restaurants, you had to build 50 more, right? In that case, like who would sign up for that? So you would get people who either wouldn't agree to it, or people who'd agree to it with never having the intention of actually fulfilling it. But I think a lot of those previously ridiculous and unattractive development obligations are going to go away coming forward, because they're just not going to be achievable. And I think franchise owners again, are going to have the ability to save face with their shareholders because of this coronavirus.

So that's something that may change, and I think we're going to see both an increase in bankruptcies and brand specific workouts, but we're also going to see pockets of big time optimism as we're seeing already through this crisis. I was going to field a question or two that were sent to me before this webinar, and I'll read one or two of them and just talk about them quickly. And then we'll end here.

One was, how relevant are valuations based on EBITDA multiples? How relevant will they be? Well, the answer to that is, I mean, EBITDA multiples have been the standard tool we've used to evaluate business valuations for a long time. So I think they'll be continued to be important. The deal will be what is your EBITDA, and how do we look at your EBITDA coming out of this COVID-19 crisis? And so his second following question was, should someone wait for a year or so to see what the new EBITDA will be post COVID-19? And I think that's a very particular question. Again, like in some brands that are doing really, really well, they may actually be higher in EBITDA coming out of this crisis, and because they're higher in EBITDA, and because their delivery model is attractive to a new set of investors, and private equity, and family office buyers, their EBITDA multiple might go up and the overall valuation of these companies may actually be higher coming out of this crisis as soon as we get liquidity.

So that wouldn't be a good decision to wait for a year or so. Some brands like Taco Bell that have such a highs demand relative to the supply, it's hard to see their valuations change a whole lot, right? Because there's so many buyers for every seller out there. There are some businesses that are going to be in distress and have to sell. So waiting a year is not going to be a good idea. But in other cases, there will surely be people that want to wait a year to see what their EBITDA will be on a full year basis so that they don't have to explain away the coronavirus. And maybe that was what feeds into my comment about how I think April and May of 2021 are likely, if we clear all these other hurdles of geopolitics and all this other stuff, those are likely to be some of potentially a huge pent up M&A time, but I think we will see some really robust M&A return in the fall as well, the late fall.

Last question that we had come in was in case of an M&A opportunity, how would you factor changes in consumer behaviors while making your assumptions for valuations. For example, the impact of preference versus drive-through and drive in, and what would be the impact on valuations for dine-in restaurants? Well, I mean, again, this one's kind of a difficult question to answer, but I would say generally speaking, if we come out of this and dine in, I mean, if I was just to characterize a very, very simple answer to this question would be, drive through concepts might average pre-coronavirus six times EBITDA. They may drop to five and a half times EBITDA. Maybe five and a quarter, okay? Dine in establishments might've been at four and a half times EBITDA coming into this thing. They may come out at a three times EBITDA. They're certainly going to take double, I would say at least maybe more than double the degradation in EBITDA multiple over a drive through primarily concept.

Why? Because people coming out of this crisis really are going to look at dine-in businesses with even a more [John 00:35:19] decide than they have in the past. It does not look like a good investment, and not only that, for a lot of dine in establishments, there are down 70 and 80% in sales likely to never fully recover. They're already operating on low profit margins. So, I mean, I don't know that multiples will matter a whole lot in some dine in concepts where there's a lot of sellers and not a lot of profit. It may come down to just something other than EBITDA multiples.

So that's it, and if you have any questions right on this, on what we talked about today, and you want to reach out to me, you can always do so. You can find our contact, and my contact information at If you go to our website, I've got like a little yellow box at the top, and if you just click on it, you can sign up to receive our email notifications. And then we're coming out with another webinar that I think is going to be awesome on business interruption insurance, and I think that's going to just hopefully be a home run, and it's going to be the next shoe to drop after this P3 loan process is finished for franchisees, because let me just tell you in closing, every single one of these insurance brokers, when you call them as a franchisee and you say, "Hey, does my policy cover business interruption for a virus for this coronavirus?" And they're going to say, what do you think? They're going to say? No. And once they say no, they're probably being instructed to say no. Of course, every insurance company is trying everything they can to not pay out claims, right? That's going to be what they're going to initially say. And then there's going to be a huge fight and a bunch of litigation that's going to come from it. So stay tuned. Okay?

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