Season 4 Episode 4: Lifecycle of a Brand's Turnaround Efforts



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Welcome to the Restaurant Boiler Room, season four, episode four. I'm your host, Rick Ormsby managing director at Unbridled Capital. Today in the boiler room, I talk about the life cycle of a brand's turnaround efforts from distress to wildly successful and back to distressed. I also give an update on valuations as the unpredictable year progresses. Finally, I talk factors that could be leading us to a recession, but might create a favorable supply demand scenario for sellers who keep producing strong EBIDA while M&A supply lessons. The Restaurant Boiler Room is a one stop shop for multimillion dollar or an 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 doors on a monthly basis.

Feel free to find our content at Unbridled Capital's website, Now let's enter the boiler room.

Well, Hey, glad to be back and to talk with you guys today. It's been a cold spring. I know I have no reason to complain down here in Florida, but for those of you who listen and watch the webinars too, man, I hope you're staying warm. It's almost at the end of what would amount to be, I think, a cold winter, unseasonably cold. So, it's interesting. It's time to kind of get back to conventions. So I've been at the KFC convention last couple of weeks, and then I'm headed to the Popeye's convention and the Pizza Hut convention, and going to see several clients and things on deal closings. So I bet I'm like most other people who are starting to really kind of push the travel agenda again. There's been a lot of snafus when it comes to traveling on planes, delays and crazy cancellations and things.

So stay safe out there and keep your road rage at a minimum. But I hope to see some of you who listen in the next several months at some of these conventions and kind of industry events. If you think you're going to be someplace and you might be wanting to meet up with me at any point in time, thinking I might be there too, hit me up with an email or you can always reach us through our website at Love to chat and catch up with you and talk about the franchise business at any point in time. A couple of housekeeping things this morning I wanted to talk about. First, I don't know if I announced it before, but obviously Unbridled had an incredible year in 2021. We brought on another deal maker on our team, a guy named Peter Fisher.

Peter comes to us. He's from Mississippi. Our company's virtual, so he works out of home in Mississippi, Northern Mississippi. He was an MBA and a CPA and worked in an accounting firm, then at a commercial banking company, and then for a Taco Bell franchisee for seven years. So he'll be joining us as another deal maker and kind of deal execution advisor on our team and has a specialty in lending and borrowing and structuring capital. So I'm kind of excited about that. I know he is going to be a good fit and I think it's just another platform for Unbridled to continue to grow and service our clients in new and unique ways and also create more capacity as our best business grows over the next several years as well.

So welcome Peter Fisher to the team, if you haven't done so already. Thanks a bunch for listening to that. Now, one other housekeeping item. I got kind of a cool idea here, and you all may think I'm crazy, but just follow me here for a minute. So you may know that our company Unbridled Capital was named after the 1990 Kentucky Derby winning horse, Unbridled. Just the background, Unbridled was the winner of the 116th Kentucky Derby. He was in the post number seven and the horse came out of the gate in last place, eaten everyone's dirt, but he ends up winning in dramatic fashion at the end. Then he won the breeders cup later that year, too. But Unbridald's real legacy was that he sired, and I don't know the technical terminology, but he was a father and the grandfather of two Derby winners after him. One of which was Grindstone in 1996. He sired grindstone.

It's the only horse to have ever been the father and the grandfather of Kentucky Derby winning horses. So Unbridled was a very ... I don't know. It was a good investment as an income producing asset through the horses that came after him. Okay, so the Kentucky image and the Kentucky Derby's always been a big deal for our company. So I was kind of trying to think of a way data to maybe do another thing with it this year and ongoing years, and to do a little fundraiser, because as you know, when we close deals, we almost always give a donation. Usually we give a donation to the foundations or to the team members through the foundations, the members and the brands whose deals we close.

We've been pretty good about that, and we've given away several hundred thousand dollars of our proceeds. Because I always use the mantra, want to be a blessing because we've been blessed. So the charitable part of what we do is important to me and important to our company. So it's just kind of think, how do I kind of use a Kentucky Derby in our name to kind of do something. So I thought, okay, here's going to be a plan. So I encourage you. We're going to do something fun, which is, in this year's Kentucky Derby, Unbridled in 1990 was in post number seven. So we don't know who ... Derby's the first Saturday in may. We don't know who's going to be in post number seven. It could be someone who's like the favorite or the long shot.

But from here on out, I guess what I'm planning to do is, if horse number seven and post number seven wins, we're going to give $10,000 away to charity, $5,000 if horse number seven places, $2,500 if it shows, and if it doesn't win place or show, we'll give a thousand dollars anyway. We're going to give to the foundation that's really close to my heart here in Pensacola, but it's a national foundation called the Blue Angels Foundation, whose mission is to honor our nation's heroes by seeking to resolve PTSD to save lives and promote positive transitions for our wound veterans and their families. Like I said, I live in the Pensacola area and the Blue Angels are headquartered here. I think it's just a great way to support those who risk their lives to protect our wonderful country.

Then they come back here to the states, and it's a pretty kind of abrupt thing when you get out of the military. For those of you who listen, who've been in the military, but just think if you're wounded. But even in normal city situations, if you've been in the military, you know that you kind of check out, you're discharged, and then it's kind of like a lot of your backdrop of your life is changing. The military does a good job of creating like a family and a community for you. They take care of a lot of things and they keep you focused on the mission at hand. When you go out into the real world again and leave the military, little things just start to become big deals because you have to adjust. Let alone those who are wounded and those who have PTSD from combat.

So we're going to use that Blue Angels fund as our charitable contribution for this Unbridled, Kentucky Derby post number seven thing. If you have any interest in following it alongside with us, or to contribute alongside with us, I'd love to tell you more about the Blue Angels fund. Otherwise, if you just want to have some fun, check out the Derby and watch the race and see what happens. We will be doing the same. So there you go. That was two housekeeping items. I've just kind of jotted down notes here for this podcast about things that kind of hit my mind. The first is I just got back from the KFC convention. Let me tell you a couple things that I saw.

That brand has gone through a lot of transition. They've had a lot of change. The first thing I noticed was all the new faces and kind of a full convention attendance pretty much. A couple of the franchisees were friends of mine, I didn't see there, but I'd say largely a lot of the franchisees have returned and come back. There are a lot of new people in the brands, young people in the KFC brand. It's been quite a transition. It still feels like kind of ... at the convention there, still feels like kind of a reunion of sorts, but it's a dramatic difference in what I'd consider to be kind of older franchisees who would kind of hobble down the convention aisle, who would be in their sixties, seventies, and maybe early eighties.

Now you see a lot of thirties and forties there. I'm really impressed. Not just at the corporate level, but just in general, everyone attached to the convention. The quality of the people, the younger people who are a part of these conventions now, and a part of these brands, it's pretty impressive. Heck, I'm 47 years old and I kind of fall into the grouchy camp of, oh, the young whipper snappers. They're doing things the wrong way and all these other things. Surely, the younger you are, the bigger age gap between young and old, the more you may see that. But I was just really impressed and surprised a little bit at the quality of the education, the motivation, the presentation of the young folks who are now a part of these brands as seen through the KFC convention.

So, it gave me a lot of hope that the industry ultimately is going to be placed in some really great hands in 10 or 15 years from now. I thought that was a real positive that I just wanted to mention in a big shout out. I think it doesn't just go for the KFC convention. This stretches across all the industry is that, when you feel down and out about our country or you feel down and out about anything, politics or whatever the heck it might be, maybe you will see, like I do, that there is a really fantastic glimmer of hope and light with today's young generation that's coming to work. They seem motivated and hard working, and ready to learn. So that's good. I saw it at KFC.

They went about telling a little bit of the story of how back, like five or six years ago, KFC was trying to get into a turnaround. So this is kind of a similar turnaround story that you would see in any major brand. First, you got to stop the hemorrhaging in sales and the closed stores, which KFC did. Then you've got to create a little bit of success in your marketing program to be able to give you some time to then test, to build a robust future marketing program and test new products and new advertising campaigns. So that resulted in KFC and with other brands too, when you go through a turnaround. You've got to get sales growth. They've had like six years, I believe. I might be wrong on that, but I believe six years of same store sales growth consecutively now. So you [inaudible 00:10:51] the tide of declining sales and store closures.

Maybe you get a little bit of advertising support and you get a little bit of upswing that gives you time, whether it's six months, nine months, a year to develop a robust testing platform for new promotions and new advertising and new products. You start working certainly on operations. Usually at this stage, you start simplifying operations and focus on what you're doing well, and sales start to grow a little bit. As they start to grow, then you work on fixing your margin problem. At KFC, this is just kind of an anecdotal comment, but their margins in the last couple years, some of it's COVID related. Sure, but their margins are up three to 400 basis points over the last couple years.

As you get those initial state ages of a turnaround in place, the next thing you do is you focus on your margins and you focus on producing products that are hot and fresh and ready. You try to bring down ... you kind of try to phase out products that aren't being successful. You try to skinny your menu and that's a constant battle, because a lot of the marketing people want to have a real big expansive menu that's really complicated that no one likes. Not just the customer, but also the prep work in the back of the house and cooking. It's difficult to handle operationally. But you simplify, you improve and you get your margins up. KFC was able to do this. Then I think you start tackling kind of some remodeling of your assets.

A lot of brands need to be doing this now. You're coming out of the pandemic. Even though profitability, this year in 2022, is kind of starting to struggle across many brands. In KFC's case, they've got probably somewhere between 70 and 80% of their stores or American showman image, which is a new image that's kind of new and fresh and clean. So you start remodeling your stores, and then you start looking at doing new unit growth too. KFC grew a little bit in store unit count in 2021. They're still not where some of the larger brands are from a new unit development perspective, but maybe 2022 will get there. Then as all of this turnaround happens, you typically start seeing M&A happen in the brand.

So you're going to see some early adopters in everything, whether it's Bitcoin and [inaudible 00:13:11], or whatever in the heck it is, you'll see some people who jump in at the front of a rally of any kind of asset and want to get in at a low price. They want to buy and hold and fix. So you saw that from the M&A standpoint in KFC. Again, this is not just a KFC discussion. This is kind of a broad perspective of any franchise restaurant brand that I've really ever seen, but you get some that come in early. But then you start creating the story and the story of sales growth, margin improvement, remodels, annual unit growth of development. Usually what happens is you get into the second or third phase of that is when some of the lenders start jumping on board that may not have wanted to lend to a brand five of four or three years ago. They start opening their purses a little bit.

They start offering decent loans at decent rates, at decent lease adjusted leverage calculations. They start offering reasonable, kind of development lines of credit. And you start getting kind of capital, debt capital infused in the brand that enables these remodels and these new units to be built. But also, even more importantly, it enables the M&A to happen kind of at a more robust level. Sometime along that growth curve, you start seeing other types of buyers jump into a brand or a system, and you see typically kind of, maybe as the prices increase, you start seeing some of the legacy franchisees who are lower in unit count, or they're tired, start to just naturally sell their companies. That's kind of what happened for KFC in 2021. They had a lot of stores changed hands.

I was counting up the number of stores that changed hands and the amount that we represented, and we did a little less, but right at half the overall stores in the KFC system in 2021 that were sold. We were the sell side M&A advisor for that, which is really cool. I'm honored by that, but that's another stage that you kind of start to see. In this particular brand, and in others, the consolidation usually produces larger and younger franchisees that want to grow, and that think of the business a little differently. Now time will tell whether or not that strategy ... there's an end game to that strategy. If you're any franchisee or really a franchisor, and you're listening to this like it's a circle and it's a cycle, and I've been around this thing long enough to know you don't stay positive for long.

So forever, it ebbs and flows. So you start with the turnaround that I just described, but then at some point in time, you end up getting fat and happy. Sales don't grow any more. There's maybe extra kind of macroeconomic things that happened to the business, IE inflation or high gas prices or wars. Interest rates going up, all these things that are actually starting to happen in 2022. So you have these external factors that can change the direction and momentum of a brand that has gone through a turnaround. I'm not saying it's going to happen KFC or anywhere else, but that's one of the fears, one of the external factors. And then internally, you start getting a little fat and happy too. You start resting on your laurels a little bit.

You start maybe believing the Kool-Aid that you're drinking. So these things kind of start to maybe let your guard down. Let me give you an example of my beloved Kentucky Wildcats who go into the NCAA tournament and get popped by the Jersey city St. Peter's, I think they're the peacocks, in the NCAA tournament first round. You go Walton into the tournament as a two seed thinking you're big and bad, and you get popped because you're not ready. You kind of let your guard down thinking and looking towards the next thing, or thinking that if you keep doing the same thing over and over again, you'll continue to win, which is not true. You've got to change for the situation. Going even deeper. You can't keep throwing the ball inside and shooting long two point jump shots if everybody else who you're playing spreads the floor with one center in the middle and four guards on the outside shooting threes for analytics reasons.

That's over time. That strategy is going to lose you ball games. So it's the same kind of thing with brands. They let down their guard. They continue doing the same thing that got them there without realizing they need to continue to adapt. Then typically, the cycle starts to repeat itself. Sales decline, management gets fired, people try to discount their products. So all of a sudden a burger gets to be 99 cents on a menu to try to win customers back. That ends up kind of dropping profitability to a really bad place. Then there's no money in the brand to finance acquisitions, remodels, or new unit growth.

Franchisees are really struggling and need help with workouts or bankruptcies. Then the cycle kind of repeats ... oh, you abandon new product news for value, because you're desperate to get sales up each quarter for your investors, and then the whole cycle starts to repeat itself again. So let's hope that back half doesn't happen here for any of the brands that you and I know and love, but thought I'd talk about that a little bit. All right. So a couple of other things today, I just have a note here talking about concern for prices. So we're looking at ... we just had one interest rate increase, I think in March here. To me, it seems like, or at least I hear kind of read about it, that there could be as many as six more interest rate increases expected this year.

So rates are starting to move up now. If you're trying to finance an acquisition, or you're trying to borrow money, you're going to start seeing it immediately between the difference between a variable rate financing and fixed rate financing at your lender. There's a big gap between the two now that maybe didn't exist this time last year. It's because of basically the baked in interest rate increasing environment that we're going to be going into. And that makes a difference. It makes a difference on the real estate side. It makes a difference on the business side. The method of financing will somewhat change. The terms will somewhat change. The amounts that people have to pay for money are going to increase. That'll probably have a mitigating effect of some kind on valuations in our space for the next six to nine, 12 months, maybe beyond.

We've basically been in a mild inflationary or even deflationary environment for a long time now with historically low rates for way, way long time. So we're going to see what happens over the next several years as rates come up to try to combat inflation and kind of put a tight lid on money. But my view is that healthy businesses will be able to get financed, but it's going to bring cash flows down. So multiples are probably going to come down a little bit and, anytime you have a tightening and credit, you're going to have a race to the top. The brands that are the most successful are going to be the ones that get financed, and the ones that aren't and that have, and that have kind of mediocre to below average results, are going to not be able to find that capital as easily.

I just got off the phone with a franchisee, not a [inaudible 00:20:26] franchisee, someone in another brand just today. He said ... and this was interesting character's because I don't think it affects everyone this way, but this guy particularly owns about a 40 unit business, 60 million in sales, probably ... let's see, 60 million in sales at a 20% [inaudible 00:20:42] margin is 12 million. Probably has like three million in rent, maybe 4 million in rent. So he is got an $8 million four wall EBITDA business. Not assuming any real estate, so this is a pretty good size franchisee of two brands, pretty solid business, high UVs, and spread out across a couple of states.

My point in saying all that is just to give you a perspective of, it's not just like one little hillbilly in the middle of nowhere making this comment. But he told me today, he said, "December, my profit was in half, December, 2021. In January, February were maybe the first two months that I've ever operated in 20 years where I actually didn't make money." I said, "Well, why?" I know the reasons why, but he said, of course, Omicron. Weather was a big deal. Obviously in many parts of the country, weather was really rough in January and February. It's been, like I said, at the beginning of this podcast, a brutal winner. I know you have no sympathy for me.

Oh, by the way, as I was talking about the Blue Angels fund, I'm hearing the Blue Angels flying over me right now, here in Gulf Breeze, Florida. So they're doing practice routines, which is kind of cool. I don't think you can hear it, but the other thing. But Omicron, weather, and then the inflation impact. When January inflation hit 8% over last year, just an incredible number. He tells me March is better in sales, not back to what March was last year. Then kind of the commentary is that hopes that April and May are going to continue to make progress. But that probably industry wide positive comps in a normal environment probably are not going to be easily achieved in most brands until Q2, when you kind of started to see the rollover impact from COVID start to subside last year.

But then again, layered on top of that, we've now got high gas prices, and $4 gas prices typically cut into the demand at QSR. I've never really understood that. Intuitively I get it. I guess the idea is, if you can just picture this, instead of buying a $7 ... or heck anymore. With inflation being so high, you can't get a number five meal at whatever place for $7. You got to pay like $9, right? So you must trade from the $9 meal either to go into a convenience store and getting the 99 cent hot dog and putting relish on it and then getting the 79 cent big gulp, or you're making your tuna fish sandwiches at home, peanut butter and jelly sandwiches at home where you go.

But whatever kind of the visual of it, when you see higher gas prices, you typically see lower QSR sales. So it may mean that I don't know what'll happen in terms of how quickly the turnaround will happen. I think we do have, M&A is typically the tip of the spear man. So what we see in M&A activity typically kind of portends what's going to happen in the near term future. At this time, I would characterize our business as being ... We still have a lot of assignments, but a lot of them are holdover assignments from 2021 that still haven't closed, or they're in like two or three brands that have bucked the trend and are still producing great sales and profit over last year with a lot of upside.

Those two or three brands are bucking the national trend for QSR, and they're still getting incredible amounts of financing. So those are kind of like the types of deals we're doing to now. But I would say that the supply of people that we typically see, who are looking to sell, is lower than it's been in the last few years, not including like when the pandemic initially hit. When that happened, everyone kind of paused everything they did, thinking it was Armageddon. So I think the is pretty low right now. Couple things I'd say. Carl Icon came out yesterday, I think, and said ... He says the chance of a long term recession or worse is very high. I hope he's wrong. He talked about the two sectors.

I think in the article I read, being the ones to stay away from or commercial real estate and malls, which I thought were interesting. There has been a big appreciation in real estate. It can't last forever. So it is also my view that real estate is going to be dropping in valuation unless you're in certain select markets, in certain situations where supply and demand are different than what's going to happen nationally. You're going to expect to squeeze. Anytime you see trade increases, things like refinancings and purchases are just going to start constricting a little bit. Now, if there are less sellers that are on the market now, and for example, like in any given spring, if we're talking to 20 clients about selling their company, and now we're only talking ... these are just sample numbers.

This is not exact right or not actually what's happening in our company. But if you're talking to 20 sellers typically, and 10 of them become clients in a typical spring period, and now you're only talking to 10, and only five are going to become clients, you have low supply. So supply is probably cut in half this spring, but demand hasn't cut in half. So, on a couple of assignments we have seen, there's been a lot of interest. There's been a lot of interest. So there is a little bit of contrarian thinking in that, if you have a business that hasn't performed poorly in the first quarter, or it's coming back a little bit, and you can make a case that it was just a temporary blip because of Omicron, which is reasonable, if it is coming back quickly, then you might say, Hey, since less supply in the market and the demand has come down a little bit too, but not in half, the market is probably still pretty good to get high prices because, because of the limited supply.

So we'll see. The other thing I would say for M&A transactions, and this is something for people who are buying things, and for people who are just operating, the inflation's terribly high, and we've been raising our prices across the industry. Again, I'm in awe that people are still paying whatever it is, $10 or $11, $12 sometimes just to get a fast food number something meal. Where is the top end of it, where people just put their hands in the air and say, I can't afford to ... I don't want to pay this anymore. It's not worth it to me. But prices don't really ever come down, do they?

So this inflation thing is a pretty sneaky thing. Everyone is raising their prices and some of this inflation will start to mitigate. I don't know when it'll happen, but it will. It'll turn around. I don't know, it's six months, six years. Who the heck knows. But when it does, in the short term, there will be a window at some point in time for businesses that can keep their sales strong. Their profits are going to crush it and they're going to make tons of money. I'm just looking at if labor starts to deflate and if down the road, at some point in time, food costs turn around ... You could be in a situation where you have like 15% margins and all of a sudden your margins go up to 22 or 23%, if you can weather the store in the meantime.

So, be thinking a little bit about that if you operate, if someone's going to buy something. Be thinking about that positive upside potential at some point down the road. I would say this, an example for you might be the Wing Stop brand. The Wing Stop brand is so incredibly hitched to wing prices and they can only raise the prices so high when wings go so high. But think about how much, if you just check historically, wing prices have varied. This is not pandemic related. This is just over the last 20 years. Wing prices fluctuate a lot. In the Wing Stop brand, the franchisees will just kind of say, yeah, you raise prices to what people can afford to pay, not to lose demand. Then you just kind of ride the wave of increasing and decreasing wing prices. Some years you make a lot of money and some years you don't.

So maybe that logic and that thinking can be applied a little bit to the broad QSR industry that, as these prices have gone up to react to increased expenses, that may be somewhat temporary and not here forever. A couple of other notes that I'll make is that I was convinced and have been convinced for the last, let's call it six, nine months, if you're listening to the podcast, that there was going to be a time when casual diners and fast casual companies start hitting the market, because they're have just been like two and a half years where they couldn't sell. So they're just sitting there. A lot of them are in distress with bank covenants and things, and their landlords and their franchise owners, but they're just sitting there to operate and kind of get sales built up back to where they were.

My thinking always had been and was that they would come out kind of in a big flush of selling in the first half of 2022. But after seeing a couple hundred PNLs for casual diners, I'd say a couple hundred. That sounds about right. Maybe 150, somewhere in that range of several potential clients reaching out to us and asking us to do evaluation of their business. My collective viewpoint now is that their PNLs aren't strong enough still. I know I'm looking at a microcosm, not the entire industry, but probably enough data now to make the comment that the casual diners aren't doing very well still. So their sales are maybe back to normal, but the profits are way low. It's no surprise because of some of the inflation, because of some of the cost of labor, and just of some of the other things that have been in place, but I don't know that I was right about that.

I'm not sure that we're going to see a flood of casual dining and fast casual M&A this spring or this summer, unless it's distressed. I don't know that we're going to see healthy sellers sell as vigorously as I thought, because I think their PNLs need more time to season. It may be another cycle. It may be another six to nine months, may be another 12 to 18 months. I'm not sure, but stay tuned for that. Of course, I could be wrong, but that's my comment right now, having seen all these PNLs. The other thing is, if you are off operating stores in this time, and you start to see marginal sales decreases, and profits start to take a hit, take the opportunity to make the hard decisions as an operator to close a couple of your locations that aren't profitable.

Maybe they were propped up with COVID. Maybe you're able to keep them staffed. Maybe you're able to make decent of money out of them. But, as trends start to change, I would encourage all franchisees to be looking at their portfolio regularly and looking for waste to optimize it. Optimize it, I mean just look at where your best managers are in your stores. Remember [inaudible 00:31:38] rule that I always talk about. 80% of your profits or 80% of your benefit comes from 20% of your inputs. So focus on fewer things and do fewer things really well. Focus on the huge profitability of fewer stores and drive that forward. Don't be emotionally attached to locations that really aren't going to make it long term or marginally profitable. If you're a 30 or 40 unit franchisee or more, and you're listening to this, ain't no shame in the game of closing a store to relocate it or closing two stores because they're not profitable.

Don't be emotionally attached to it in that way. You're here to make money, so don't hold on to bad investments. Now's the time to simplify in prune, especially if we're going to be in a recession. Clean things up and simplify them so you can streamline and focus on a tighter and cleaner business that can produce more profitability as you kind of turn the screws into the next year. I note again, that automation must continue to make big advances. Let's continue to watch it leap forward. Capital is still everywhere. Stock market took a big hit, but it's back a little bit. I think Dows ... I'm just checking it here. Dows was in the $32,000, 32,000 point range, which was a pretty big drop. As of today, it looks like here, we're in the 34 or five, which is a little less than 4,500 on the S&P. So assets are still pretty full.

Maybe that's because inflation doesn't hurt the stock market in many cases, as badly as people would expect, but with all of the money invested and all the capital in the marketplace still, I think you're going to see a lot of movement, and automation needs that capital to kind of get the R&D out there to make the progress and change. But our industry's got to continue to push for automation. I don't want the robots to take the world, but I think that is one of the ways in which we're going to make a big change in the profitability of these restaurants over the course of the next 18 to 24 to 36 to 48 months. So watch for that to happen, even as the inflationary impact of these businesses get bigger. Folks like me and you are going to start asking, okay, if I'm dealing with ever decreasing margins, this problem is becoming a bigger problem for me. How do I fix it?

I think automation is going to continue to be a force to reckon with here. When we talk about the valuation cycle, M&A typically flourishes. I think I've said this before, when things are improving. It flourishes when things are really great and it flourishes when things are really bad. But when you go from a transitionary marketplace of really good to only okay, just being really qualitative in what I'm saying, that's when typically any kind of asset class starts to kind of wane a little bit. You're going to see it in the real estate market too, because you've got sellers who are thinking they can still sell things for the prices that things were selling for last year. And you've got buyers who are hitting the road and hitting the pavement and talk to the lenders.

The scrutinized buyers are going to say, I can't borrow money the same way, because your trends are not as good. Or the lending market has changed a little bit because inflation has come up and interest rates are rising. So there's going to be what we call a bid ask spread that's going to grow a little bit over the next six to nine months, I'm pretty sure. In many cases, you're going to see sellers just decide not to sell their assets because they may recognize this, if their company is indeed going through this type of a transition. Other really wise sellers ... I always go against the grain wherever I can, take the road less traveled, and that's made all the difference. Is that Robert Frost? I don't know, man. Some of you guys may know that.

But anyway, take the road less travel. And maybe you decide to sell a good company at a time when there's less supply, or maybe you get to the point where you think things will be a lot worse in the next three to five years than they are now. You look at the overall situation and you say, Hey, it was worth 104, whatever. Now it's worth 99 or a hundred, but it could be worth 85 or 90 in several years. My encouragement is let's not be so myopic that we forget how historically high things are still sitting. Those same people whose businesses were worth 80, let's call it, or 70 five years ago, somehow seemed to forget that if they were going to take a 99 right now, even though it was at a 104 last year, that 99 is still way better than the 70 or 80 five years ago.

If it's going to go back to 70 or 80 in three to five years, don't be so myopic and shortsighted to say, gee, I'm going to wait for it to continue to go back up to where it was. Don't be so brainwashed into thinking that's going to happen. That's what you call irrational exuberance. I think about the time when I was 11 year old, I was at a Catholic school. I was broke, didn't have any money. I went to a fish fry and I had like $2, and I bought my first ever ... one of those little fish fry lottery ticket, kind of like peel off things in the eighties. First time through, bam, 50 bucks. Now to an 11 year old kid who didn't have much, we only went to McDonald's once a year on my birthday because we didn't have any money.

We'd usually get plain biscuits for breakfast. That was like the big event for the year for me in the eighties. I don't want anyone feeling sorry for me, but it's just kind of the way it was. I don't remember it being particularly hard. It's just what it was, but I made that $50 off of that lottery ticket and I said, hot dog. So what did I just go to do? I had the irrational exuberance to think I could keep winning, that everything I would do in the future would replicate what just happened in the past. So I took that $50 and systematically continue to invest that in the darn pop off lottery thing at the fish fry. I lost it all the way to nothing. That was a very valuable lesson for me as a 10 or 11 year old boy.

That stuck with me my entire 36, 37 years afterwards. It's like, just because something was awesome for you in the past, and it was elevated in the past, and it was substantial and valuable for the past, doesn't mean you can do it again in the future, especially if you're seeing a trend and thinking it's going to turn around when it's not going to in the short term. So I couldn't walk away from continuing to lose $2 at a time until I had nothing. That's the same mentality that keeps kind of boneheaded sellers out of selling things when the future doesn't look as bright as the present. They look too much at what happened last year. They look too much at their being a five or seven or 10% drop in some asset class.

They make the assessment irrationally and erroneously that it's going to come back to where it was real quickly, when it doesn't. It's going to go back to the long term trend of being down 30% of where it is now. It's just 10% below what it was eight months ago. So all that being said, don't think like 11 year old boy in a fish fry. Instead, try to see things objectively. M&A is going to probably be a little slow for the next six to nine months. There will be great deals that'll hit the market. Smart sellers will jump in because there'll be a lack of M&A activity, and they're going to go get those high valuations. Buyers are going to have some opportunities. It's probably going to be a little bit light for you for the next foreseeable bit, but be expected and ready for the unexpected.

It's either going to maybe get worse. And if it gets worse, you're going to be out there maybe potentially looking at opportunities that you could add on to your portfolio. Even if you weren't anticipating being a buyer, but now all of a sudden you're like, okay, well, I'll buy. I'll add to my company at a decent valuation for the neighboring franchisee who needs to sell because either they've gotten old in a bad market and they've tried to hold on and they can't anymore, or maybe they're in financial disarray. Or the opposite happens. We hit this blip and things kind of even out. The wheat prices, I heard a third of Ukraine and Russia, they produce a third of the wheat and a lot of the fertilizer in the world.

So we're expecting maybe some potential global foods shortages, and some things like this. Maybe some of that stuff starts to ebb and we get a nice turnaround through the late summer and early spring. And we're back into just a really strong, robust market again. I don't exactly know, but I just say, hold on and to think of things objectively, as much as you can. I hope you guys do great. Thanks for listening. Next time, we're going to have kind of ... I'm going to grab my team and we're going to talk about little M&A update and talk about the specific and individual deals and how they're performing. You'll be able to see kind of a little bit about how the marketplace is treating some of these acquisitions right now. So thanks for listening. Take care.

Thanks so much for entering the boiler room today. You can find our podcast on iTunes, Google Play, Stitcher, Tune In and Spotify. If you like these podcasts, please listen, rate and review. I also encourage you to visit our website at for the best franchise M&A and financial resources in the industry. Our website includes webinars, podcasts, videos, white papers, and a list of our past M&A transactions. Please note that neither Rick [inaudible 00:41:40] be 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 li abilities that may be based on such information, errors therein, or emissions they're from.