Season 3 Episode 7: How to Compress a Deal Timeline to Meet a Year-End Closing



Also Listen On:

Welcome to the Restaurant Boiler Room season three episode seven. I'm your host Rick Ormsby, managing director at Unbridled Capital. Today in the boiler room, I will be sharing some thoughts on how to get a deal completed by year end if you only have a few months and need to accelerate the timeline, how do you cut 20 to 25% of the time out of a typical M&A transaction? I'll also share some thoughts on the resurgence of casual dining, sales and margins in franchise locations and franchisors approval processes. 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 franchisors on a monthly basis. Feel free to find our content at Unbridled Capital's website at Now, let's enter the boiler room.

Hey, so thanks so much for being here today. It's interesting, it's been a little bit of a crazy summer as I talk with you here towards the end of July, 1st of August of 2021. Our deal flow man continues to be absolutely crazy. And it's made it such as this podcast and the webinars that we do have gotten a little bit just for the temporary time being, have gotten a little bit delayed. So my apologies, I had someone who is a big franchisee out on the West Coast, maybe 100 units or so tell me yesterday that they missed the last episode of the podcast. And so if you're hearing this, I want you to know that you're my motivation to do this today. And I'm sorry to those of you who have faithfully listened that maybe there's a couple of weeks here where I'm delayed in getting this podcast out.

It's been because we're currently, I guess our company closed five deals last a week and a half ago, we've got five more deals that are going to close next week. And so that's a lot. And I'll talk a little bit about some of that right now maybe. But when you're doing a restaurant deal, typically the last couple of weeks as you might surmise are always a fire drill as they're looking to get things closed with closing statements and consents and landlord assignments and franchisor approval and final financing and all the things that have to happen to get a deal closed. It's kind of like this hurry up and wait at times, many of you are familiar with that. Being in the military at one point in my life, anyone who's in the military understands that the idea of hurrying up to wait. When you have four or five of them in any one given week, it becomes a bit of a challenge, but it's a blessing to be able to have this kind of work, and it's a testament to maybe what Unbridled has been doing in the marketplace and also a bigger trend of M&Athat's happening after this COVID world we live in with operators.

There's upset in prior episodes and in webinars recently. I mean, dude, it's been a crazy environment. People have been sitting on businesses, they're all of a sudden doing really well. Many of them have been doing well for almost a year now in the QSR world. But certainly in things like fitness and health care, and even now in casual dining, sales and profits are starting to pick up quite substantially. And boy, isn't that a blessing and well-deserved? And if you're listening and you're one of those operators who's had a rougher go with the post COVID fallout, my heart pours out to you, number one. And number two, I'm really thankful to see that things are getting back to normal and you're probably seeing a big surge once again in your business.

And so kudos to you man for hanging in there. And what doesn't kill us makes us stronger. I know for a lot of us it's been a real rough go, and so kudos to you guys. When you get these deals out there and you have the pace of business continuing to be strong, what you see is a little bit of pressure on the timelines. And what's also happened in our business as I've alluded to in the past is, and I think across the market in general, it's not individual to us by any means. Matter of fact, it's not individual to us at all that a lot of clients who have these businesses that are now sitting on 12 months in a row of really strong sales and profits and looking continuously at the prospect of higher capital gains taxes in the future. Who knows how much and who knows when or if it'll happen, but most people are saying, at least rumbling that they hope that any tax changes won't happen until January 1st of 2022 or later.

And if that is true, which of course that's a guess and who the heck knows with politicians and compromising and all the things they do up there. It has pushed a lot of business into this year. As we sit in late July, early August, we're five months until the end of the year. It typically takes for most of our clients, our average transaction soup to nuts takes about six months to close. That doesn't mean that we can't close a deal by the end of the year that starts today if we're calling today the 1st of August. But it certainly makes it less and less likely. Maybe what I'll do is first start off and talk a little bit about what you have to do to get a deal done quickly. How about that?

I don't know that I've spent much time talking about this before, so I'll do that. A little bit of context, in most years, and this depends, man. COVID is one of these things that really put a monkey wrench in the normal way of doing things from an M&A perspective too. But if you were to take the 2020 and 2021 out of the picture, and I look at my experience over 20 years in this business, you typically see a lumpy big start to the year in February, March, and April when people just naturally will take their P&Ls, dust them off, talk to their credit committees and their lenders, advisors and all these people, family members that are close to them and their family, partners and then maybe make a decision to sell a company or refinance a company.

And if they're going to sell a company, maybe they get their year-end P&Ls, 1st of February, they make the decision to look at it through the month of February. And 1st of March, let's just say, they decide to engage us. And in that particular situation, the deals close typically six to seven months, five months later, somewhere in that range of the end of Q3, early Q4. And then those kinds of deals start happening in March and April. And what it does is set up for a natural cycle of deals that close in the fourth quarter of any given year. And anyone who's in this business as a lender and a deal-maker or has bought a lot of things knows that that's a pretty heavy sequence on a yearly basis. And then you typically have a series of people who decide to sell their companies or do a refinancing action in the fall.

I don't know why, but it's a smaller lump, but there is a lump of activity that hits usually in September, October, and November. And then the rest of the business that we do is people make those decisions sprinkled out throughout the balance of the year, and it's more haphazard. Maybe there's someone who dies in the family or a divorce or maybe there's a circumstance that causes them to act at a given time that's not maybe as planful. Because of that typical sequencing of deals throughout a year, you're going to see naturally a bunch of closings towards the end of the year. And when there's a bunch of closings towards the end of the year, what that typically means is year-end pressure to get things done. But the year-end pressure to get things done typically is not as pronounced when there's not tax things at play, when there's a change in presidency or when there is an expected tax policy that's either going to phase out or phase in a given tax year.

So when those types of events happen ... When Obama was coming into office too and George W. Bush was leaving, I can remember that being a time when people were pausing on transactions or trying to get transactions to happen more quickly. So it's a natural time for that to happen. And as a pause right now, I'm doing this podcast, and it's pretty cool. I think most of you know I live in Gulf Breeze, Florida, which is right around Pensacola and in between Pensacola and Destin. And right now the blue angels are flying by. Pretty sweet, man. If you want to get your blood pumping and watch those blue angels fly in a sequence of five or six about 100 or 200 feet off the ground and do their maneuvers, it's pretty impressive. Back to the discussion.

So there's year-end pressure typically, but it's not as big of a pressure until you see a tax or a regulatory or a political change. Generally speaking, if there's going to be a year-end closing, some sellers actually choose because of their advice from their CPA or attorney to close in the following year. So if something was going to close December 15th, they may otherwise decide they want to try to close it in January 2nd. Because if they close January 2nd, the taxes aren't due until at least April of the following year. And if it's a big set of proceeds and tax laws are expected to change, effectively pushing the deal into the first couple of weeks of the next calendar year means that you can hold your money for another 15 or 16 months, maybe longer before you have to pay the government. And when people are walking away with a tax bill that's going to be 15, $20 million and they can put that money into something that earns a few percent interest, it's a sizeable amount.

So you see that dynamic a little bit. Of course, buyers typically aren't pushing as hard for the timelines within a calendar year as a seller might. But in this particular year, we are, and some of the things that you have to do right now. So if you do a deal right now, you could you throw this in your bag of tricks for whenever you're going to buy or sell or whenever you're going to raise money or you're going to lend or finance or seek equity, whatever it is, there are certain triggers that you can maybe be thinking about that would make the timeline go faster. Some of them are creative, and they're not without their faults. But these are just ideas, and I'm not endorsing any one of them.

But the first thing you have is, in our process, we typically take three to four weeks to uncover the best offers, the right offers, a handful of offers typically, sometimes less, sometimes more for a given business that's for sale or being financed. And then we typically go through a two-week invitation management only meeting. Right now they're going over Zoom where you might invite two or three of the buyers to come on Zoom with the seller and answer questions and present themselves and talk about their proposal and who they are and all those things. And then the seller typically chooses the final person to be there by her choice. And then we move off into the sunset and try to get the deal closed.

Which reminds me of another thing, as a bit of an aside, I would say that those management meetings, if you're like that, a lot of people who listen to this podcast are probably buyers or people looking potentially to get into this space. We obviously cater to a lot of Northeastern based young MBA types who've gotten into the business over the last four or five years and have bought a ton of restaurants particularly. Those management meetings are very, very important. Those management meetings are important. And the one thing I would tell you if you're in one of those management meetings and you get selected is ... Now, I'm a sales guy, I'm a numbers guy, but I'm a sales guy too. And I've watched these things over and over again.

And I'll tell you, it is important when you hop on these management meetings if you're going to be talking to a seller about a proposal you're giving them and why to choose you that you talk about the seller more than you talk about yourself. So if you're in an hour long management meeting and we're sitting on minute number 40 of 60 and you're still talking about who you are and your background and what you've done and all these things and who your company is, you probably spent too much time talking about yourself. You want to be in a position where you talk about yourself, it's the good old typical sales 101. You talk about yourself maybe 10 or 15 minutes. At most, you want to introduce who you are. People need to know who you are and what your background is. But then you want to talk about the person and the business and the longevity that you're trying to acquire.

Because everyone at the end of the day, read the Dale Carnegie book, howto win friends and influence people, everyone wants to hear about themselves, don't they? They didn't want to hear about you. So if you're in one of those management meetings ... Oh, by the way, if you're one of those young millennial buyers of these businesses, no offense to you if you're listening to this, but you typically probably had a silver spoon in your mouth and you were coddled a little bit by mom and dad and you're used to things being about you. And you might be a little self-centered. You might not be naturally the type of person who wants to instead. And you're younger, so you feel a need to justify yourself in front of maybe an operator or a seller who owns a bunch of restaurants who might be in their 60s or 70s. But that's maybe not the way to be.

The way to be is to ask other people about themselves. Hear, seek to listen first and not talk. Tailor your presentation in a way that you'd want to hear it if you were going to sell something that had been so close to you in a business like a mother and dad or a spouse or kids over the last 30 or 40 years. Did I kill that? I probably went too heavy on that, man. So back to this idea of deal activity and timing. Usually we have three or four weeks of a process and then one to two weeks of a management meeting. So let's just say that's five or six weeks. That five or six weeks typically takes up, let's call it six weeks to choose the right first seller, to choose the right buyer or the right financing partner. Six weeks out of a six month process. Six weeks is what? One and a half months. One and a half out of six is one-fourth.

So that's one-fourth of the time is there. We can usually compress that to four weeks where we can trim the process down to three weeks in the final selection or management team over the course of a couple of days. Maybe we can take that six weeks to four weeks. That's something that we do. And we can do that pretty effectively, but it takes a lot of long hours and a lot of commitment from the buyer, an agreement with the buyer and seller to be on hours and hours of meetings from 7:00 AM till 7:00 PM instead of spreading them out over the course of a couple of weeks, if that makes sense. So that's the first thing that you can do to effectuate the timeline in a process that's really under compression.

The next thing is the LOI. So while I always agree that an LOI needs to be thoroughly reviewed and agreed to by both sides, about half of the time an LOI is kicked back and forth and takes a week to trim up the LOI and get the terms right and redline it, and people want to use attorneys. And so that's a process that we can sometimes short change too. It's not something you would prefer to do if you don't have to. But sometimes I've seen clients decide to just basically send emails back and forth and say, "Okay, the LOI looks fine, let's just move to a purchase agreement," instead of negotiating a document that ultimately goes away. The other thing is that sometimes for the sake of ... You certainly want to call out all of the main deal points. If you miss those in the initial stages of a deal, they're going to come back to bite you whether you're a buyer or a seller.

But nonetheless, abbreviated LOIs may be a better idea if you can verbally go through the main deal points instead of entering attorneys in the middle to negotiate a document and take a week negotiating a document that otherwise, it's just going to go away once a purchase agreement is signed. So you might be able to pick up a couple of days there, I'm going to keep a little tally here. So we've saved two weeks, let's say the typical process is six to six and a half months. I'm just going to throw a number out there. So we save two weeks in the selection of a buyer, maybe we've saved half a week with this LOI idea. Next one thing we do is we go into the purchase agreement. So the purchase agreement itself. I guess I would say this, I have more and more conviction around this comment that I'm about to make than I ever have.

If you choose the wrong attorney to help you, your deal is screwed if you're trying to be on a short timeline. We have one deal now, it's a big one. I won't name it, where it is or what brand, but it's a big one. And the asset purchase agreement has been under negotiation for over 90 days. These things are supposed to take 30 days. And most of the reason for ... And it probably is going to take another two or three weeks. So this APA is going to take 100 to 110 days probably to complete. Dude, that is too long. If it's going to take that long and people who are in the deal business know that that's a ridiculous timeline, it is obvious that you got the wrong attorney. Now, the problem is once you get into it, you can't really change attorneys. That's very rare to see people do it because of the voluminous amount of work and negotiations that go into agreeing with these purchase agreements.

But what it does mean is this, let me tell you. If you are a buyer or a seller and your attorney has not completed a dozen M&A transactions in the franchise space specifically and can't list them on a page for you and you're under a time pressure, don't hire them, just don't hire them. I don't make legal decisions, so I got to caveat that, but you have to make your own decisions. But time and time again, if I look at a deal board like I have in our office here, a deal sheet shows 30 deals we're working on. We have a couple of third-party attorneys, we don't get paid for it. Clients make their own decisions, but we have just referrals, people that we know in the business that do a lot of work specifically for M&A and franchise deals.

The 30 deals we've got, probably 20 of them have taken our advice even when they have their own attorneys and have hired these third-party attorneys that that's all they do, the other 10 don't. Guess what, of the 20 deals we got going, almost all of them are on track. Of the 10 deals that are with the local attorney who might be the real estate attorney or might be the personal attorney of the seller or buyer, half of those deals or more have been delayed at least double if not two and a half times what the normal deal is during the asset purchase agreement phase. It is just a major problem. I have a personal attorney, I know we all have a personal attorney who we trust, who knows our family matters, who has maybe trust with our family or has helped us with establishing our LLCs or has helped us negotiate with our landlords. All these other things that they've done in personal matters, maybe helped us with our taxes too.

Whatever it is, we respect them and trust them for it. It's kind of like kudos to the Milwaukee Bucks for just winning the NBA finals. I was a sons fan because of Devin Booker and all the Kentucky player. My son and I love Devin Booker, and they lost. But it's kind of like putting Devin Booker at center, you know what I mean? Devin Booker is a heck of a player, the guy can shoot threes, he's dynamic, electric. But he's like 6'5", and if you put him at center, he's going to be terrible. That's the idea about putting a trusted attorney who is good for your general business into an M&A transaction that hasn't had experience doing franchise law. In many cases, they will wreck the timeline. Even if they are specialized in M&A but haven't the experience of working with a franchisor and working on a franchise transaction, it likely will add 30 to 45 days to the process

So the next thing you can do is you can listen to your advisor, I.e., if you've hired Unbridled and go through that process of hiring a third-party attorney with experience closing franchise M&A transactions. That's critical. If you don't do that, your deal ain't going to close in five or six months, except for few instances. If you do that, you increase the likelihood that the APA process of negotiation lasts between 20 and 45 days. If 20 and 45 days, okay, so how do we spend that and make that faster? There's only limited things you can do, but it can put everyone on notice for every for twice a week phone calls with the parties to try to speed it up and to try to initiate and facilitate business points getting negotiated and agreed to alongside the legal discussion.

Typically speaking from observation, the legal discussion happens. The people negotiate the legal language, and then there's two or three business points that end up being what at the very end. And those business points can be typically brought forward sometimes, and they can shorten the process and maybe make this 45-day outside window, a 30-day number. And if it's a 30-day number, then potentially we can cut a week or two off of the process up to the point of APA mutually being signed by the various parties. So the next part in trying to shorten the timeline of a purchase when you're under pressure and not just a purchase agreement but a deal is the third-party diligence that needs to happen. Now, typically in a deal if you've done deals here in the franchise space, sign a purchase agreement and then due diligence will last somewhere between 30 and 60 days thereafter. 45 days is common, but that's not what everyone agrees to all the time, depends on the size and the complexity of the deal.

During due diligence, one of the things that, if it's a larger transaction ... Well, hold on. Whether it's big or small, you have to usually contend with leases, real estate diligence. You've got to get transfer approval from the franchisor. And then you've got to think about financial diligence. For smaller deals, there's typically not a whole lot of financial diligence, it's typically just internal. The buyer looks at the financials, maybe asks for tax returns, whatever they're going to do and get comfortable with the ask for royalty sales from the franchisor. There may be a reviewed financial statements from the CPA. And then they're addressed in the asset purchase agreement, the veracity of those documents, and then they move forward.

But on the larger transactions and with these bigger groups, and especially these groups that are so prevalent these days that have family office money or private equity money, their constituents, whether they be limited partners or whether they be the family that's funding these family office funds, they're going to want in many cases third-party due diligence financially. So what this looks like is some sort of what's called a quality of earnings study where maybe a specialty finance group, typically a CPA comes in for a fee. They come in and they come through the trial balances and all the P&Ls and all the financial information. And then they are looking to make sure there's no irregularities. And then if they don't find or whatever they find, they issue a letter in most cases to the potential buyer basically with some sort of guarantee that they haven't found or what they have found. And then the buyer uses that obviously to show their investors or their credit committee so that they feel comfortable affirming the acquisition and the equity and the price and all these sort of things.

So that's something that sometimes can be pushed forward a little bit potentially. That can take sometimes as long as 30 to 45 days to go through. I've seen some of the quality of earnings last only three to four weeks, some last two to three weeks. So getting those things started sooner is a big deal. Getting the lease assignments started quickly is also a big deal because if any type of situation where you have to transfer 15 or 20 or 30 leases, they're going to be 10 to 15% of them that are just arduous. It's always that way. You've got grandma Tilly who owns, she's a third generation landlord, and it was passed down from her great grandfather to her father to whoever. And she's now living in Toledo, Ohio and doesn't have a cell phone. Or you have, what's even worse in most cases, you have the landlord is some big REIT that owns 7,000 properties out of San Francisco and you're given some 1-800 number to try to get the lease assigned. And it just takes a long time with a lot of bureaucracy.

So those are some of the things you definitely want to jump in front of quickly to try to get a week or two quicker on the timelines. Sometimes what we're seeing too on the real estate diligence if there's real estate, and this is a case by case basis, not all buyers and sellers agree to this. But the process of ordering environmentals and surveys and appraisals happens typically 30 days into due diligence, 15 days into due diligence but after a purchase agreement is signed. When you're trying to curtail a process, sometimes maybe you can come up with a solution where maybe a buyer and seller share the cost of those studies, of those environmentals, of those appraisals, of those surveys and front end them. If the deal doesn't close, I Mr. seller will help split the cost or defray the cost. I don't know, whatever is agreed to between the parties.

But the idea is you get those people and those boots on the ground working on those surveys and appraisals sooner than they otherwise would, especially when we're looking at a year-end situation. Project forward, the busy-ness for us being M&A advisors, obviously right now is very busy. But trying to get these things closed, I think we're all getting fearful that as we get into October and November just these people who inspect facilities or these people who are doing appraisals. I mean, they have to actually put on their shoes and drive to a location and take pictures of it and be there in person to do their work. When they have so many deals that are dependent on year-end closing, those types of people and resources and services are going to be strained pretty dramatically. So those are the types of things that you want to try to bring forward as quickly as you can. Facility inspections is another one. Sometimes if it's a smaller deal or if it's a buyer who knows the seller, sometimes facility inspections just are handled in a multitude of different ways.

Sometimes it'll be the buyer will drive, do a casual drive of the stores if it's a smaller deal and maybe bring up some issues, a pothole in the driveway or an AC unit that looks old and defrayed and try to use that to talk about repairs that are needed. If it's a larger transaction, they may do a more formal process and have a third party inspector come to the table to go and physically look at all the HVAC units, for example, in every one of the 150 units and then come back with a report of the age and the condition of each HVAC unit in each location. And maybe there are two HVAC units in each of the 125 stores, that's 250 HVAC units. And the numbers get to be a little bit larger. But that takes a long time.

If you have a large deal, think about having one firm that has maybe seven or eight people in their firm going to see 150 units and spending probably three or four hours at each location or whatever it would be and then generating the report. So you want to get those things moved forward as quickly as possible too. If you can front end load and pull forward and maybe get buyer and seller to agree to start spending money prior to an APA being signed on some of these things like financial due diligence, especially the quality of earnings or maybe with their appraisals, surveys, environmentals or maybe with some of the inspections, you can typically shave a couple of more weeks off of the total timeline.

So if we were saving two weeks in the sales process, maybe two to two and a half weeks. And then maybe if you get the right attorney harping on that again who has experience in franchise M&A and knows how to do these deals, and maybe that shaves one to two weeks off of the process. Maybe front end loading some of the diligence that I just described may get you another two weeks, I don't know. But this is how we're thinking right now. And collectively now if I'm adding all these darn times together, I'm getting like six to eight weeks. So now we're getting some meaningful amount of improvement in the overall timeframe. Let's just call it six weeks. So the other thing that you can do that probably bears thinking about, and this is a bigger topic, but the franchisor obviously has the right of first refusal and then the transfer approval.

For those who were in this business pretty regularly, you know that most franchisors do not exercise the right of first refusal very often. Now, we probably do business in 10 to 15 brands pretty regularly. I have personally in a 20-year career seen a right of first refusal exercised less than five times in maybe two or three brands total. So it's not something that happens a lot. And as you all know, we can talk about this for ad nauseum for hours probably. The model has historically been in the last four or five years, it's called asset light model, the franchisor wants to sell as many assets and have as low a percentage of corporate ownership as possible usually in the 5% range to be able to test market, to be able to have a critical piece of operations and some credibility with the franchisees, but they don't want to have a big operation because the money is in the royalty stream.

And the higher multiple, the higher value of the company for the franchisors in the royalty stream not in the company operations. But nonetheless, going to the franchisor is always something that is different. So in some brands, the franchisor will render the right of first refusal and start their clock, whether it's 30, 45 or 60 days based on a signed LOI. And that's pretty good, especially if you're a buyer who's coming into a deal and you don't know the brand or you haven't been approved in the brand beforehand. So that's interesting and something to note. But most brands want a signed APA beforehand. So is it possible in those brands to go to the franchisor and to plead the franchisor to start the approval process and to start the right of first refusal process prior to getting the APA? Well, they probably won't do it, but maybe they'll tee the deal up. Maybe there are some things that can be done to squeeze a week or so in the process.

The other thing is if you are going to get into a franchise brand for the first time and you're a buyer, most of these brands, and this is another topic that I may talk about today actually later on, but maybe not. If not, listen next time. It's about what franchisors are demanding or how they're looking for their approval process for new franchisees. They're obviously getting a little bit more aggressive in the demands that they want. If you're a new franchisee, no longer is it will we approve you or not? There is that. But then after that, it's if we approve you, will you sign a relations? What agreement can we get out of you to guarantee that you won't sell the assets for the ... Not everyone's like this, but most franchisors want to extract a pound of flesh to get you to agree to development and remodeling schedules that may be really accelerated or pretty aggressive. And they also want to try to tie you into not being able to sell the assets for a certain amount of years after buying them.

At least some of the franchisors are that way. Some franchisors will call that a relationship agreement, which is a term for an agreement where we're going to ask a whole lot of you in exchange for our agreement to let you buy these stores that you're trying to buy. So those are some of the things that take a long time. Some of these relationship agreements with these new franchisees, they can take a while. So I wouldn't be surprised. And we've seen several transactions where the relationship agreement takes somewhere between 30 to 45 days in addition to the approval process just to get negotiated depending on the depth and scope of it. There are a couple of law firms that are out there that we know who actually specialize in negotiating these relationship agreements so they're pretty healthy documents.

And of course, since they involve these family offices and private equity groups and the general partner and limited partners, and they define that relationship and the financial commitment that must be made to the brand, it is a very important document for these groups. The point is you got to get out in front of it and get out in front of it quickly. A good advisor is going to point that out to you. And a good advisor is also going to give you some thoughts about the conditions under which the relationship agreement typically is invoked. Because what you don't want to do is be 30, 60 days into a new transaction working on a purchase agreement with the seller only to find out 30 days later that the brand that you're going to try to buy these stores in is going to require something that your charter with your investors just won't allow or they'll be asking for remodel requirements that you just physically will not ever agree to.

It is obviously true in many cases that the relationship agreement is negotiated, the development requirements, the remodeling requirements and all of these things depending on the brand, depending on the time, depending on just the leadership and the brand and the franchisee who's approaching the matter. This is all stuff that takes time to unfold, and it can't be viewed anymore as something that is at the end of the transaction. I think historically, I mean, I've been, I don't know, doing this a while. So when I first started doing M&A especially with brands franchisees, it was an afterthought the franchisor approval process. You worked almost linearly. If you're a seller, you found yourself a buyer, you negotiated the price, you signed an LOI, you signed an APA.

Once you got the APA signed, you threw it into corporate. That was really the first time you gave them a buzz and you let them know that there's going to be a possible transfer happening and bringing in a buyer for this business. Then you're finalizing your financing and you're working on your leases. That's the way it used to be. But it doesn't happen linearly like this anymore because the franchisor over the years has tightened like a python, a constrictor and they want more control. They would certainly want you new unit development. Their ask has started ramping up again post COVID. Generally speaking across all the brands I see for probably a year when COVID happened, all the development ask stopped and went on pause because as everyone knows, it's difficult to get money. No one's going to be building new units in the middle of a pandemic and you can't get people to do it.

But now we're starting to see the franchisors beat the drum. They're beating the drum, they want the requirements. They're noticing both in their own P&Ls but also in the franchise royalties they're getting paid and the phone calls and all the work that they're doing with the franchisees that the franchisees have money. They have the PPP loan money, their sales and EBITDA especially on the QSR side are really high right now. And so the franchisors who are incentivized for new development, what do you think they're going to do when they know all of that information? They're going to be pushing everybody to build more units. And I think as a condition of transfer, it's going to become a bigger issue, and they're taking a heavier hand. And so here's where I'm going to go ahead and keep talking about the franchisors.

In several brands that we've been working on and several deals over the last 30 days, 20 days, maybe 30 days, two brands I can think of particularly, I won't name them. I had a franchisor who for the first time I've seen in many, many years declined a franchisee to buy a business even when the buying franchisee was well capitalized and a great operator and approved in the system because they didn't want stores to be bought non-contiguous from where the current franchisee's operations are. So that's something across now several brands that you have to consider. It's a question to ask your advisor. If I'm a buyer and I own Jimmy John's in Dallas, is Jimmy John's gonna allow me to buy Jimmy John's restaurants in Columbus, Ohio? I don't know the answer to that question particularly, but many brands are going to put restrictions if you're an existing franchisee on where you can acquire. And some will base it based on your operation scores obviously and your growth approval status, your financial status. But increasingly, where do you currently operate stores, and where are you proposing to buy more stores?

And it's part of the equation of not wanting to have franchisees all over the place. And I think part of it gets back down to, number one, they think it's protecting the brand, the franchisors do. But number two, I think that's a formula for them for development. So they want to bring in new franchisees or people who are nearby that they feel can develop more stores more aggressively. So that's going to be what I've noticed. And also I've noticed that franchisors are just not as friendly anymore to buyers, even well-qualified buyers who aren't in the system. Working on a deal right now where there might be five buyers who've come to the table on a big deal, and none of them are franchisees in existing brand.

We know now to call the franchisor. And oh, guess what, the franchisor had a really healthy opinion on several of these potential buyers. So the franchisor is really exercising more authority and control. I go back to the constrictor or the Python analogy. My son's a tennis player, and so I would you could beat your opponent in tennis one of two ways. You can beat him one way by striking like a cobra, you know what I mean? That would be like pounding the forehand and just hitting winners on people or to be really aggressive. And then our good friend, he's not a good friend, but Novak Djokovic who just won his 21st Grand Slam Championship, he beats people typically by squeezing them like a Python, constricting, returning the ball over and over and over again, hitting it to your backhand a hundred times in a row until you falter and you make a mistake.

I think the methodology here is that you're seeing more franchisors with a little bit of constricting going on, wanting more control and coming out of this COVID circumstance with more control. Sounds similar to our government, doesn't it? Oh, by the way, so onto another topic. And I think that's fine kind of how you think about reducing the timeframe to get a deal done when you only have four to five months, and you usually take six or six and a half. It is true now that we're starting to hear rumblings that some franchisors are saying, "Hey, if you don't get your deal to us by X amount of date, we're not going to be able to guarantee that it'll close by 2021." So they're feeling the pressure too. You all know too in the age of corporate restructuring and downsizing and G&A reductions, these franchisors don't have much staff.

And usually you're dealing with middle managers who are getting paid $125,000 a year salary who are standing in front of $200 million deals. So it's a weird circumstance, isn't it? Wouldn't you think you'd put more G&A and more attention and bigger and better resources against such big deals when they're so important to your system. But that's the way it's staffed these days. It's almost like working through aids at a politician's office and not the politician himself or herself. So those are the things you have to think about. Overall, I do think we're going to see some theatrical here in Q4. I don't know what's going to happen as we get towards the end of the year. And we have hundred deals in the franchise M&A world that have to happen in the final three weeks of the year. So strap on your boots and get ready, I think it'll be an interesting end of the year for sure.

A couple of other things I will just point out as we finish up here, one would be I've heard a couple of comments that are interesting. One comment I've heard recently from buyers is that we are addicted to depreciation, and that's why we're continuing to acquire. Ain't that interesting? So these are the first and second generation self-made franchisees that are growing. These are guys that are probably different, a lot different than the family offices. Depreciation is a beautiful thing for people who own businesses. And being able to depreciate goodwill and FF&E and leasehold improvements and even real estate to a lesser extent is a powerful reason why people who are creating multi-generational family owned businesses want to continue to buy especially with a lot of debt, and especially when interest rates are really low.

Who is it? Robert Palmer? Remember that song man in the 80s, was it in the 80s maybe? Yeah. Might as well face it, I'm addicted to love, that song. But it should be addicted to depreciation. Might as well face it, I'm addicted to depreciation. Maybe that's a good t-shirt. So that's something to be thinking about. I do think we're going to start seeing a casual dining resurgence. So this is just a ... I've just got a yellow pad here, five or six things I wanted to chat about. So the rest of it's going to be fairly short. But casual dining is starting to see a little bit of resurgence. I don't think we have any really robust lenders who are raising their hands yet and saying, "Ooh, ooh, me, I'm willing to finance casual dining deals. I want to go out and finance or refinance an Applebee's deal of 150 units."

No, I don't think there's a lot of that just yet. But I do think the performance and casual dining has obviously shown some big improvements. A lot of casual diners who I know, who I'm chatting with are starting to see their sales that are in excess of 2019 levels. I think the bar for casual dining that I'm sure lenders and advisors and investors all like and franchisors are all looking at are in many casual dining brands in 2016, 17, 18, and 19, the trends weren't great, were they? They were really taking a hit. And so what do the trends look like coming out of COVID, if we were exempt the COVID blip and all the bad stuff that happened to dining and restaurants during that time, what's going to happen here in the next three to six months in casual dining? I mean, do we have any conviction or any data that's going to show us that the trends are going to be reversed and actually there's going to be a little bit of a step change and people are going to go back the casual dining in a big way?

I don't know. I think there's opinions all over the board. I was just talking with a dear friend of mine who's a big franchisee the other day. And he says, "Hey, maybe this Thanksgiving and this Christmas you're going to see more people piling into O'Charley's, Applebee's, and Tilly's than you've ever seen before. And I can understand that sentiment. It may be true. Does that create a longterm trend? Like anything else with QSR or any other brand that we saw during COVID, you then have an opportunity to get a new client or a new customer or a lapsed customer in the door and wow them with your service and with your food. And if you do that, maybe it can create a longterm growth in business and a change in the way it's been, which has been a slow decline over the last four or five years.

So watch out for the casual dining resurgence and see how that may translate to more deal flow in 2022. We'll see, we'll see. What's going to happen to sales and margins as dining rooms reopen? That's starting to happen right now. A lot of P&Ls have been looking really good because there hasn't been much labor spent inside the dining room recently. And so it's a double-edged sword, isn't it? I wonder what the sales will do. I mean, you would suspect that when you open your dining rooms you're going to be getting higher sales, how much higher sales, how many people are going to be coming back to a QSR dining room that previously for the last year and a half have just basically gotten accustomed to only eating QSR through the drive-through or delivery? That's a question. How much sales was will be new in the dining room or will it shift away from the drive-through and delivery? That remains to be seen.

And then what's going to happen to profitability? Obviously, you got to have more people staffed to clean the dining rooms and to keep them fresh and ready and everything good to go for the employees, pardon me, for the customers. I think we're going to have a perspective on that in the next couple of periods as we look at EBITDA here and we look at sales. Keep an eye on that, I'll talk about that probably as we get into Q3 and Q4. I will say that we have seen that some sellers are a little bit, this is another point, some sellers are a little bit greedy. I would remind those of you who listen to this if you are a seller, remember that if you're ... In some businesses now, I want to be sensitive to the fact that if you are a fitness franchisee and you're listening to this, you had a really rough go in COVID. If you're a casual dining franchisee, you had a really rough go.

I mean, a lot of these, health and beauty franchisee, you had a really rough go and you're just getting back. You deferred a lot of rent payments, you probably didn't pay the franchisor their full royalty. The bank has probably not been paid at fully over that time period. So you've been hurting, and now you're getting back to a point where you're getting finally getting cashflow in your doors hopefully. So good for you guys. This doesn't apply to you as much as it does the QSR operators we see regularly who are forgetting I think that their business may be up 20 to 25% or whatever it is in value over the last 18 months. And they were happy of the value of their business back in 2019. So in 2021, be happy if the value of your business goes higher than what you ever could have expected. Sometimes greed is nasty little thing, it's a nasty, what is it, five-letter word? G-R-E-E-D. Yeah. It's a a nasty little thing, nasty little five-letter words.

So let's not forget where we come from. You know what I mean? It's like a good old country boy forgetting his roots and hating on his hometown. Let's not forget where we came from. If you're in a position where you have a business, it's all of a sudden more attractive than it used to be, man don't forget and also be grateful where you are, don't be greedy. I hope people hear that. I know this is going to be at the end of the presentation or today's podcast, but I hope people hear that. I may have to start repeating that every time. And then the last thing is, let's just keep an eye on the workers coming back, man. I think the labor problem hopefully will continue to, the word on the street is it's starting to get a little better out there, which I think is fantastic for people coming back to work as the unemployment benefits are getting cut off, especially in the Southern states over the early part of the summer.

I hear some of my friends who are operating big franchise businesses down South are starting to say that they have less positions to fill and more people applying now. Which, duh, when the money is cut off, of course people go back to work. But I think it's a good sign. And hopefully we'll see the labor market start to moderate here as we push into the end of Q2, Q3 area. And I hope that means good things for everybody, workers and franchisees, employers, employees, everybody alike. We want this thing to get back to normal for everybody involved. So I appreciate you guys listening today and look forward to talk with you soon.

Thanks so much for entering the boiler room today. You can find our podcasts on iTunes, Google Play, Stitcher, TuneIn, and Spotify. If you like these podcasts, please listen, rate, and review. I also encourage you to visit our website at for the best franchise M&A and financial resources in the industry. Our website includes 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 there in or omissions [inaudible 00:48:16].