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Welcome to the restaurant boiler room season five, episode 10. I'm your host, Rick Ormsby, managing director at Unbridled Capital. Today in the boiler room. I'll be answering questions on the state of the M&A market for franchising.
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At this moment.
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Talk about the difficulty of new unit development in this environment. Talk a little bit too about quick discussions on when to invest in a franchise.
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Brand and share some optimistic news about new franchises that are quietly making a big splash.
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The restaurant boiler Room is a one stop shop for multimillion dollar merger and acquisition activity and financial complexities affecting the restaurant industry. We talk money deals, valuations and risk developed 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.
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Capitals website at www.unbridledcapital.com. Now let's enter the boiler room.
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Well, hello everybody.
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Here we sit as I'm talking to you here. It's right around the 1st of November, falls upon us, I guess. And I hope this finds you doing well. Been traveling a bunch at conventions, I tell my wife and family. I'm kind of like a ghost in.
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The month of October.
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Because so many of these franchise conventions.
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Are during the month of October.
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They start happening in the middle of September, actually, and they usually conclude with the restaurant finance and Development Conference which we call RDC in mid November, which is usually a week and 1/2 or so before Thanksgiving, and then everything shuts down right and we don't do much traveling except client focused traveling for the rest of the.
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The year, of course, the end of the year.
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Ends up being.
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Sometimes motivated by tax planning, other times by legislation or political change. But at the end of the year ends.
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Up sometimes being a.
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Difficult, kind of a scheduling time of the year because people are trying to get deals close by the 30.
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1st of December and.
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A lot of the service providers, like attorneys or appraisers.
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Environmental specialists, with all these people that get involved in these transactions, franchisors go on vacation. In the last couple of weeks of the year, but the travel does kind of sort of kind of quiet down after mid November. So I've been at a couple of conventions. I'll talk a little bit about what's been bantered.
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Well, I was at Taco Bell convention Popeye's Convention recently in a Sonic convention. And then?
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Just kind of talking with other people at conventions to one of the items. I mean, there's there's really uneven performance across some of these brands. It's interesting like they're trying to single out any one brand with any one comment. So just keep it very general.
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And some of the brands.
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That are doing well.
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You hear concerns about transactions. Obviously you know really you hear concerns about transactions all over the board about this time last year, a lot of the pricing initiatives had had subsided. And so in 2023, it's been marked in many cases by.
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Pretty nice sales increases offset by big traffic declines. And So what do you think has happened, right? People have been raising prices, sales have been going up, transactions have been falling a little bit and so in some of the really healthy brands, you hear this really big focus on getting transaction growth.
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For the future, because that's what they feel like is the better measure of what the future holds. And then when you talk about transaction growth, right, what you know you think about transaction growth. You think about things like new promotions and discounting, getting more customers in the door. We're all fighting for what historically has been a 2% growth industry, right? I mean the franchise.
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A lot of it restaurant franchising, but the franchise business as a whole, it really doesn't grow much faster than GDP. It's a slow growth industry. There are pockets within it.
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That are doing.
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Well, is it like faster than that? If it's a new new growth concept or something new to the market, but some of these legacy concepts that have high unit.
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Counts are really going to revert to probably a GDP like sales.
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Growth over time.
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Operators are probably now I'm hearing some of this discussion about like we can't continue to price our products higher and expect our customers to come back in the stores. And it's really a conundrum, isn't it, because EBITDA dropped so much profitability dropped so much in 2022 because of these high wages and high cost of food. Hopefully there's some mitigation.
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On the horizon, it's been persistently.
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Bad though with the cost.
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Of food and.
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Labor inflation and unfortunately, labor inflation doesn't really ever go back down, does it? I mean, do any of you who are franchisees listen to this podcast and say to yourself?
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Gee, I'm having to raise my hourly rate from 12 to $15.00 an hour, but I'm going to move it back down to $13.00 an hour next year when things get a little more modest. I mean, I think we all feel like once you've hit that plateau, you're never going to go back. So. So the prices have gone up. My sense is, and I'm, I'm sure most of you who listen to this, agree.
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With it, we're not really in the.
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Maybe the most.
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Pristine of economic situations, I mean, I think consumer spending has been generally pretty robust, but it kind of sort of feels like to me and this is just one hillbillies opinion in the Panhandle of Florida, but it kind of feels like to me that people are pulling back a little bit doesn't.
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To do and I certainly take note of the high prices in restaurants.
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And maybe we've.
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Reached a place where there's a little bit of danger here in the future, and I think there's a little bit of concern for that at some of these.
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Conventions. How do we?
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Get transaction growth. I do hear and this is a part of the business. I'm really excited about. I always have.
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Been because when I got into this business all these years ago.
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With the KFC brand, the first job I had was to like be on the marketing team and the finance team and to figure out how to like, develop new products and make them profitable, but also make them appealing to the new customers and all this stuff. So I like these new products when they come out and several of the.
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Plans they've been talking with like have some really big plans, both in terms of new products that they're bringing to the market like a whole new platform of products, which is really excited to hear in one brand. And then the other item was like a set price point like a $7.00 price point, which is like the new $5 price point of five years ago there seems.
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To be a lot of.
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Gravity across the industry around $7.00 price point, a lot of brands are kind of hitting up.
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On that price point.
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So like I said, there's a lot of discussion about what happens in this kind of a market when you kind of focus on your promotions, you focus.
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On discounting a little bit you.
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We saw in profitable promotions and new products, that's kind of what I got out of some of the Convention. The franchisees are worried. I think generally across the board about development and we come out of the pandemic in 2021 obviously for a couple of years, there wasn't a lot of new unit development, right? I mean with COVID and.
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All of the restrictions placed on everybody and then the lockdown of capital during 2020.
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Now franchisors you know kind of franchisors working the rears a little bit too, kind of like lenders, right? So they're now just getting to the place where, like, oh, you know, let's develop new stores, new stores, new stores and I've continued to hear of the impossibility of meeting their demands and also the difficulty of making new unit development profitable in this market, not only because of maybe.
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Overreach in terms of how many stores franchisors want the franchisees to develop, but I think more so quite a bit more.
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So in the economic model of building new units, I mean look into your down the street and or have you done a home remodeling project and seeing how costs have gone up, right. So the first thing is like everything is simple as buying a new toilet or paint for the walls or like new flooring materials, all this stuff is up 30 to 50% / a.
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Couple of years ago.
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So cost of building a new unit, whatever kind.
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Of unit it is.
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Has exploded, right? And so the costs are high, and now we're being layered in with this really kind of increasing interest rate environment to the point we have 8 plus percent interest rates. So those two things working in concert together make almost like probably 80% of new unit development, very difficult to do.
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At this moment.
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Now we hope both.
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Of those go down interest rates, I mean forever they won't stay this high. Maybe they'll get higher, but forever they won't stay this high at the cost of all of the materials and labor to build these stores.
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I don't know. So. So it's a pretty loud horn that the franchisees and several brands are honking right now saying that the economic model is broken for new unit development at the moment, unless you can reliably crank out million eight to $2,000,000 stores and if you?
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Can do that well.
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Then maybe if we see a pullback in new building amongst some of these concepts, there going to be some opportunities for franchisees who have that.
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Kind of a.
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Of a business model because they're going to be maybe able to find.
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Some opportunities in.
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The future that they aren't looking for or can't afford right now, or maybe can't find right now, just an idea.
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There. OK, what else did I have? I seen recently I mentioned just very briefly. We we did have a closing, you know, in a new brand for.
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Us with Freddy's.
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So we just closed A10 unit Freddy's assignment and really neat brand. I don't know if you have Freddy's in your market. In my mind's out here and I don't have any data in front of me, but they have maybe like 7.
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Or 800 locations across the country. Now it's been a brand that's really grown.
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I actually I believe he's passed away, but I'd actually met Freddie at a store opening in Bowling Green, KY maybe five or six years ago, and he was at the time, probably in his early 90s.
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And so the restaurant concept is named after him. And if you go into it and you see the pictures on the wall, there's pictures of Freddie kind of. Most of it are cast in black and white images, kind of like on the farm, like the American Gothic type look. Or when he was in the military. And he and his family developed the brand. They're out of Wichita, KS. And I think it's a nice concept they've got.
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Great food and great hamburgers. Grilled fresh. I mean, hey, it's a nice concept if you.
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Have a chance to try it but.
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We just sold ten of those and it's always an honor to work with franchisees in the new brand. We do a lot of that now like I was counting it up. I guess we've done deals in the past several years and over 15 brands. And so we've expanded our business and and it's always a joy to get into a new brand because it's something new. It's something to sink our teeth into and a new brand. But that was a recent closing as another.
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Side note, because Freddy's kind of details into this next comment, I'm going to make so hang with me here for a minute. Our daughters Homecoming was a Baylor. She's a sophomore there, so went down there last weekend for the Baylor homecoming and of course, football team got.
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In fact, it wasn't any fun to watch in the rain.
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But but the.
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Rest of the weekend was great and I didn't know this by the way, but it's the oldest homecoming in the United States is at Baylor. They started at. I want to say it was in like 1909 or something like this, but the oldest one in the US anyway, I'm down there in Waco, which by no means is a progressive city with all you know, newfangled.
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Stuff. I mean, it's a very.
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Kind of conservative little town in the middle of nowhere, really. And but they've got a lot of neat and new restaurant concepts there, and I'm originally from Kentucky and we live in the Panhandle, Florida and everywhere I go, I don't see all these concepts all in one place like I did in Waco. But like, I walked down one street and I see a Hawaiian brothers.
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I see a Dutch brothers coffee. I see an hto. I see Kava in and out Burger Freddy's crumble cookies and then like some daiquiri franchise and a couple of others. And I'm like, wow. And they're all, of course, coexisting right around the Taco Bell and the Pizza Hut and the KFC and the McDonald's and the.
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Chick-fil-A and all these other concepts.
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Too, I just found it.
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Interesting. Now you know a large percentage of the kids at Baylor are from California. I think, like, I don't know, 20.
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Or 25%.
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I'm sure so maybe that's part of the.
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Reason why some of these concepts have made their way to this particular.
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Our city. But I had a chance to try some of them over the weekend. Of course, I'm kind of a geek like that anyway, right? It's like.
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Oh, I haven't.
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Been to these four concepts and so I just eat there. People think, Rick, man, you're going to have a heart attack, but and you also know that I'm part Hawaiian too, right. So the first place I went was I went right to Hawaiian brothers.
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It was really.
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Impressed with the Hawaiian brothers food, I mean they've.
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Got great looking facilities. The service was really good.
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I think everyone has kind of started to adopt this Chick-fil-A kind of drive through model where you've got like people with iPads or whatever. They have kind of in the line and they can Rep the order quickly.
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And get you in and out quickly with a consistent kind of order in a.
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Friendly way so.
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That happened at Hawaiian brothers. I was really impressed. The food was great. I had a spam musabi. If you've ever had that, it's kind of like a spam, which is a big component of World War 2, Hawaii, right? Because they had.
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To have meat that could.
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Hold for a long amount of time and they put it on top of like a.
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Wrap it in seaweed and put it on top of a kind.
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Of a chunk of rice and you eat it.
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Almost as like a burrito or something, and it's delicious.
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Think how healthy it is. I'm not sure, but they had some great menu products. I was impressed and their facilities look really Sharp, went over to Dutch brothers coffee, Bam and I was watching and even at like 10:00 at night, man, that place was just wrapped in circles around it. I mean, the building couldn't have been I I don't.
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Know but it.
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Had to have been a fourth of the size of a typical QSR.
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Building a lot bit bigger area for kind of drive through just because of the speed and the amount of people that they're trying to get through. All the cars pulled up but so it wasn't. That was impressive. I mean, I don't know, coffee seemed fine but like the operation and the way they did, it was impressive. The Cobra was under construction. So so it it hadn't opened yet.
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Hto is one that I saw and I think HTML is a Texas based business. I don't know if any of you have heard about it. It seems to me they have maybe a couple 100 locations or maybe a slightly less than that my daughter loves.
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It we go into HTO they've.
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Got like 50 different types of tea. Really cool. So the whole family loved it. Even my son, who's at high school. Boy probably not naturally inclined.
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To drink tea.
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I kind of digged it too and found something to drink there, so that was a really I was really impressed by that. That facility in and out we went to in and out to those of you on the West Coast I know had in and out and see them.
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A lot, but the service model and the delivery model felt a little bit like a Chick-fil-A, really. I mean, it almost felt like very similar to it. The food was really good. I asked my son what he thought about in and out. Burger versus.
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What a burger.
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Which we do have in our market in the Panhandle and you know they have kind of a cult following too. I think you like in and out burger a little.
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Bit better at personal preference but.
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But anyway, I guess my point in all of that is I was really impressed and hope you didn't mind me rambling here. Some of you probably wouldn't mind the perspective of what I just said, right. Maybe you haven't tried some of those new concepts.
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But the point is, I mean, I would say the future of our industry looks bright. I mean, who knows whether those models will stick, whether they'll contend the facilities will be up kept, whether they'll continue to be profitable as they drop new units around the country.
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Based on the little snapshot I saw in Waco this past weekend, I would say that they're really good concepts out there that are operated well and have nice facilities. I was left with this impression that the future of our industry looks Brit.
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The consumer preference and the consumer taste bud may be changing. Yes, I mean, don't we all? I mean, do you eat meat in three like your grandparents did? I mean, I still like it, but I'm not eating meatloaf and mashed potatoes every day either. So consumer preferences do change. But these new concepts seem to be. I just think it's encouraging. So.
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Keep an eye out for them a little bit as you hit some of the markets and see if you agree with me. Drop me a line if you do, or don't right. It'd be interesting to.
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So that's that.
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Two other things that I want to talk about.
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Today one would be some.
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Questions that have come in and just kind of address, I think the kind of juicy questions, like what's the future look like for franchising, you know, so I can jump into that. But first I I want to answer that kind of a.
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Comment that I.
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Had gotten earlier or late last week, which was when do you want to get into a new brand? Broad question.
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When people are looking to invest in a franchise brand and that's all they're looking to do, you know they don't know whether they're going to get into a a legacy brand like let's say a Wendy's or Burger King or Taco Bell or KFC pizza, whatever Sonic Popeye's.
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Or they want to get?
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Into something new that might be like.
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Only has 10 units.
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Like, oh gosh, I want to get involved in chicken salad chick or you know, something, something that's totally kind of new and growing. You ask yourself, like, how to think about that. And so I got that question on Friday, and I just kind of share some thoughts with you, obviously, when.
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You're getting into.
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A new brand you would expect with the new brand to have a lot of new development.
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Opportunities and hopefully you can deploy capital without cannibalization and you expect also to have a much more agreeable franchise or?
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Probably a bigger development territory and the ability to negotiate in many cases the way you build new units, the relationship you'll have with the franchise or a lot of that stuff is a big positive. You get this first mover advantage if you kind of come into the second inning of a new franchise that's been proven.
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Out in several markets and they have 100.
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Or 200.
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Locations you kind of like get the excitement of dropping it into the market and hoping for the UPS well, right, and you hope that the UPS well in terms of sales and profits greatly exceeds the cost to build.
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Build because the franchisor probably hasn't started pounding very expensive development model at you right yet and maybe not expensive remodeling plans for in the future of your franchise either.
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In exchange for that, you also have pretty high food costs, probably because the food purchasing Co-op hasn't fully been formed. Cost of buying food is high since some of these small models, you have all kinds of crazy things like they might be charging a profit on the food that they're selling you. So you have to kind of watch some of that.
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Stuff too. Make sure you know that.
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And you do have to develop the story.
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And so developing the stores, it can be a profitable venture, but like we talked about.
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Just a minute ago.
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It has gotten more expensive and in addition to getting more expensive, it's time consuming and a lot of these places it's difficult to find the right opportunity in a lot of the markets, especially in the Northeast, you have so many restrictions on what you can and can't build and you have permitting issues and it takes a while to get a plan approved.
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So from the GNA standpoint, you have to spend a lot of money to be able to get your stores to the marketplace and you have to be patient when it comes to placing money into the business and waiting for it to come back by means of store openings. So you have that kind of dynamic versus buying into a legacy concept where you can typically.
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Find someone like unbridled who says we've got thirty of these for sale. Go buy them. But then when you buy them, you're inherently kind of buying an existing EBITDA structure, kind of an existing remodeling structure, which may or.
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May not be.
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Fully reasonable at times, you have a franchisor who has probably more consolidated power over the franchisees.
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Because they have experience and they're less willing to negotiate on A1 on one basis with you because they #1 have more clout and power in a bigger brand that they can dictate the terms, but #2 they're not going to set a.
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Precedent with one individual.
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Franchisee. So you kind of take what you get.
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Right. And they usually want development and that development is usually at the cost of cannibalize.
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I mean your existing stores in some way and so that kind of push and pull in the relationship always happens and usually there's a point at which a young franchise that started with 20 to 50 to 100 locations and two or three franchisees and then they're up to 400 to 500. You know usually there's a point at which the franchise or starts to become.
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Maybe more greedy for requirements of their franchisees, particularly around new unit development.
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And and then they're typically from there, there ends up.
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Being kind of a.
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Period where franchisees and franchisors fight.
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A little bit right and.
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You know, as they grow and then the performance of the brand starts to change. Usually these franchises, the new ones, get off the ground by having a lot of exciting sales and profits for the first.
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Couple of dozen 100 locations. And then, like the natural ebb and flow of our business, has all concepts eventually going down if they're going up? And so how does the franchisor deal with that? And how does the franchisee franchise or relationship?
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Change and then typically you start to see franchisees wanting to sell or being disillusioned and you have turnover and the brand prices in the brand may change in some cases. This isn't every single situation, but this is just kind of like a.
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Broad brush. Kind of a what I.
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See and then multiples might go down, you see.
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Sales going down, there's some consolidation, new franchiser comes in and changes their management structure. The brand gets on the right track. Again it goes back to what it does well.
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Which is and new product innovation, good service and profitable promotions, good support of the franchisees and then like the brand goes back up and then and then the cycle kind of repeats itself and the brand grows. I have found historically that most people who want to like private equity firms and family offices and even small franchisees choose.
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The path of.
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Legacy brand by existing EBITDA and existing stores get a deal done and a lending relationship in place and a relationship with the franchisor and then use a platform from there to either start a second or third brand.
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What I also notice is that many people who do that and then start their second brand with a start up brand or a smaller brand, almost all of them that I've seen are not successful in the smaller.
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Brand so I.
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Think the discipline of starting with a smaller brand and smaller unit count and the type of person who is good at that is typically different from the one that operates a larger.
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Both of stores and the legacy brand. Think about the the swashbuckling entrepreneur in the pickup truck that seems to be the one who can take the new brand and pour the time and effort and heartfelt kind of effort into into making it successful. Not that that same person can't do the legacy brand or that the bigger people who buy legacy brands in large quantities.
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Can't do the opposite.
00:21:51
But but just be thinking a little bit about that as you think about your strategy, terms of which pays off the most, it's a tough one to answer. I've seen both types of people be really successful. I mean, if you're someone who's coming out of MBA school and you're looking to buy or build or acquire A franchise business and you're willing to like, roll your sleeves up and actually go into the stores.
00:22:12
And actually, like, flip the burgers, you know what I mean? Which most people aren't. But if you're wanting to do that and you've got a five year horizon.
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And your patient with your capital?
00:22:21
I would not discount the.
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New brands that are out.
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There, especially the ones that are kind of don't have as big of a footprint, don't require as high capital cost to get into.
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And may be.
00:22:31
Newer and more exciting but less proven make a bet like that. You build two or three of them and see how they go, and then you go up to six or seven and 10:00 and 12:00 and then maybe five years later you have 20 or.
00:22:41
Any of them and you've done it.
00:22:43
Yourself and you've.
00:22:44
Managed it and controlled it yourself and grown it yourself. That can be a nice return on.
00:22:47
Investment, but it comes with a different type of work than if you are primarily financing these transactions. Finding a deal and then financing it with a partner.
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And then kind of.
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Operating as a a president slash.
00:23:02
Financial officer and you hire an operator in a legacy brand that's just a different not to most of the money, there is a financial transaction, right? You buy it, you can finance it through, say a lease back or some way that's profitable. You can do some arbitrage. Maybe you can get something at a compressed multiple or compressed price and then?
00:23:23
Sell it at a higher price later, and that's a risky bet because this is a pretty fluid market. The M&A market and franchising instead, I think it's really a financing play and then maybe improve the margins. Otherwise you need to pick the right franchise or sometimes the franchise goes up, sometimes it go.
00:23:40
Down there's, I think people inherently they underestimate.
00:23:44
How hard it is.
00:23:45
To operate these businesses profitably, and they also look at other success.
00:23:51
That they know.
00:23:52
And they discount how difficult it was to get there. And they also just generally underestimate the cyclicality.
00:24:01
In these brands, momentum is difficult to measure and it's just a funky.
00:24:06
Thing and even though the macro environment might be awesome or the macro environment.
00:24:12
Might be awful.
00:24:13
Brands that you might think are two brands sitting right.
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Next to each.
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Other that should behave the same way in the same markets, right? But they don't.
00:24:21
One of them.
00:24:21
Has momentum and is doing well and the other one.
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Is doing terribly and it's hard to describe.
00:24:26
And find when those times happen. So people I think underestimate the cyclicality of our business too, which is why and I'm just rambling.
00:24:34
Here, but that's.
00:24:34
Why our role is so important, right when someone calls me and says, Rick, what do you?
00:24:40
I think I have lived through 20 years of the ups and downs of these businesses independent of macroeconomic and like what's happening politically or what's happening with interest rates. I just know having been a franchise or side and also dealt with 2025 of these franchise brands over 20 years, you start to see patterns.
00:25:00
I can't predict them, but I just know they exist and so the timing of buying and selling things becomes really, really kind of important here. Realtors say that like the way to make money on a house is to buy it right? Or sell it right. So that's the way you got to be.
00:25:12
- OK. Couple of questions here coming in. What's coming for 2024 from the M and?
00:25:19
A market.
00:25:21
Feels kind of like again.
00:25:22
I've said this in the last podcast.
00:25:25
Just this week we took three new assignments. They aren't the largest assignments they kind of are. All three of them would be smaller to mid scale franchisees first and second generation franchise.
00:25:35
Disease. Who are?
00:25:36
Looking to sell? What do?
00:25:37
I what do I maybe make a?
00:25:38
Conclusion out of that.
00:25:39
I might say that.
00:25:41
Earlier, maybe three to six months ago, we were getting phone calls from some of the family office and private equity groups looking to sell their businesses. So the difference in timing there doesn't.
00:25:50
Mean much to me.
00:25:51
But I think maybe we're seeing kind of a broad return to.
00:25:55
The possible market of selling in 2024, and my gut tells me it's going to be met with some, with some unevenness.
00:26:04
Interest rate environment will persist. I think the banking environment will get slightly harder than it is now, especially for syndicated deals and larger deals. That market is becoming more and more difficult to pull like 5 banks together is.
00:26:17
Like trying to tie 5 cats.
00:26:18
Tails together and tell them to run in different directions. You know what I.
00:26:21
Mean. So I think that's going to.
00:26:23
Put it a little bit of a damper on.
00:26:24
The larger transactions.
00:26:26
The syndicated loan.
00:26:28
But otherwise I think broadly speaking, we're going to see deal flow increase in 2024 and there is enough liquidity right now to have lenders you know to have enough lending out there to do the deals. I think the pricing will change a little bit. I still conclude that the valuations on good solid businesses.
00:26:48
Will continue to be really good, I mean.
00:26:51
It may go down a little bit.
00:26:52
Because the interest rate environment.
00:26:53
But they'll continue to be strong.
00:26:55
Why? Because a good business is a good business. Period. Some of the brands that haven't fared as well may have a little bit of a different outcome in next year. Pricing may drop a little bit and supply and demand will be important. So if we have like 10 deals that are out in the marketplace in any one brand may outpace the amount of buyers. If instead we have a business that pops up and it's the only one.
00:27:16
It may get all kinds of crazy interest in offers. Maybe that doesn't surprise you, but that's kind of what I see for 2024. And then of course the one more comment on pricing is cap rates, right? So cap rates are changing, they they usually do change in arrears, it takes a while kind of like a.
00:27:30
Lender like a credit officer at a bank.
00:27:33
Or a franchisors development ask. So too goes the cap rate. When interest rates increase, it all has a delay to it. Sometimes it's three months, sometimes it's six months, but it's probably between 3:00 to six months, so three to six months after you see big interest rate increases, you start seeing cap rates move pretty significantly. So we're seeing that in the 1031 market. Now you're just seeing.
00:27:55
You know, deals getting repriced real estate sit on the market fairly long amount of time on sold and so there has to be a change in expectations with cap rates, right when you can park your money in a T bill and get 5.6%.
00:28:09
Straight. You're not going to buy a piece of real estate at a 6 1/2 cap rate, right? I mean, that's less than 100 basis points of margin for a ton more risk that makes sense. So something has to change. So I think we're going to see that happen for 2024 which may.
00:28:26
Force some of these.
00:28:27
Smaller operators to keep some of their real estate.
00:28:29
If their expectations aren't fully in line when they decide to sell or buy.
00:28:35
Another question that came in is how our banks. I think I kind of answered that. Again I I will remark that the syndicated loans are having trouble development lines of credit are rough. You start seeing fixed charge coverage ratios with the larger lenders playing more into play into account because of the interest expense. Some of the larger operators.
00:28:55
Already called me saying that they're like man, our fixed charge coverage ratio. Banks are calling us about our covenants and we're tripping the covenants for fixed charge coverage ratio. When that wasn't the thing in the.
00:29:04
Past and said in the past it you know, it was it was some separate like debt funded debt to EBITDA or or other measures but fixed charge coverage ratio now seems to be something that's more play I think franchisees in general are doing better on the covenants now right because they're EBITDA is up quite a bit and sales have been up quite a bit at least as we look in arrears.
00:29:24
Towards the first and second quarter of this year and even the third quarter of this year relative to two.
00:29:28
1022 so that's a.
00:29:30
Good thing and I guess you know the other comment is the development line of credits are lines of credit are expensive now because interest rates are expensive. They're typically on floating rates. One thing is a lot of franchisees were wise and did and either fix their loans or they swapped and they have low interest rate loans. But most of those loans have five year terms on them. A lot of franchisees.
00:29:51
Probably were in the camp of refinancing in 2019, 20 and 21, maybe even the first half of 22. And so the question then becomes like if if high interest rates persist and some of these franchisees have to redo their loans and the market for their loan is now 8% where they were.
00:30:11
Fixed at 2 1/2 or three.
00:30:13
And that's a material difference in their business and I.
00:30:16
Think that's going to?
00:30:17
Be somewhere along the line in 2024 and 25 is going to rear its head in terms of people maybe selling their businesses trying to get in front of that before their interest rates change and their operations become less profitable. So keep an eye on that for the future and the horizon.
00:30:35
And then are there buyers and sellers right now? Yeah. We talked a little bit about the.
00:30:39
Sell side being.
00:30:40
A little bit stronger for 2024 for buyers. I, yeah, I think they're.
00:30:45
There, you know I.
00:30:46
Would say that.
00:30:47
Most buyers are still around in this market. Some aren't as aggressive and this is just a condition of the marketplace we live in. Most buyers now have a little bit more power in.
00:30:56
A transaction than they did.
00:30:57
In 2021 or in other times when it was more of a seller's.
00:31:01
But is it now a buyers market? I don't know. But buyers have more perceived control over transaction than they did before. And so the franchise orders. And So what we are seeing is that the timing on deals and the negotiation on deals is just becoming a little bit more arduous. It's not a surprise. That's the way things happen when it tightens up.
00:31:21
A little bit.
00:31:22
But you know, maybe I would.
00:31:23
Just say if you are a buyer or a.
00:31:25
Seller of anything in the franchise space.
00:31:28
Just be prepared.
00:31:29
For the discussions, the timing to be a little more arduous than maybe.
00:31:34
They have been in the past.
00:31:35
The contract negotiation, the development schedule, the lenders beating on your head, the pricing, all of it. So it necessitates the need from like people who are like reasonable people to speak into you and to tell you how the current market is and what to expect and what to say is OK and what isn't. Obviously we do that for our clients every day, so stay tuned.
00:31:55
Next month, I am hopeful that we're.
00:31:57
Going to be replaying.
00:31:59
A restaurant finance and development conference. An RFC.
00:32:03
Interview a panel interview that I'm going to be a part of out in Las Vegas with a couple of other folks, someone from Rourke and then someone from KBP Investments, one of the largest franchisees in the country and me, and then a moderated by a lender. And we're going to talk a little bit about what to expect in 2024 in the M&A market to get a franchise.
00:32:23
Still closed, so that ought to be a an entertaining podcast. I think we can grab a hold of that and get that moved up onto our platform here.
00:32:30
So please do stay.
00:32:32
Tuned for that and then after that?
00:32:34
I'll be excited to pull my bridal team together and we'll do a state of the Union in early January and talk a little bit about what we expect for certain in 2000.
00:32:41
22 which for?
00:32:43
Certain is a funny word because nothing's for certain, but stay tuned and hope you guys if you hear this happy Thanksgiving to you. I can't believe it's already here. God bless you and holler if we can ever help you with anything.
00:32:54
Thanks a bunch.
00:32:57
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00:33:06
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00:33:07
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00:33:17
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00:33:21
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