Season 5 Episode 2: Q1 M&A, AKFCF Highlights, & Dealmaker Award Nod



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Rick Ormsby:

Welcome to the Restaurant Boiler Room, Season Five, Episode Two. I'm your host, Rick Ormsby, managing director at Unbridled Capital. Today in the Boiler Room I'll be talking about a few topics, including new trends of franchisors preferring mid-size operators to large PE funds, thoughts from the recent KFC Convention, supply and demand of restaurant M&A deals currently, and hiring a generalist versus a specialist investment banker.

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, and 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. Okay, so the first topic for today and it's good to I guess talk with you guys, is... Oh, by the way, by the time you hear this, it's probably going to be NCAA basketball season, so my question is who's going to win at all? My daughter's a freshman at Baylor, they're kind of looking like they might be a two seed living down here in the Panhandle of Florida, I'm close to Alabama. They seem to be like the number one or two team in the country right now. Some of the big names like Kentucky and Duke and North Carolina have been faltering a little bit this year. So I wonder if you're a fan what you're thinking about the upcoming NCAA tournament.

I'll try to create a couple of analogies, maybe I'll forget as I talk about this podcast, some basketball analogies just in kind of the vein and in the spirit of basketball season. Unbridled is really cool, we were blessed to be able to win a Dealmaker of the Year Award through Franchise Times. They do this every year and there's usually seven or eight winners. I think there's seven or eight winners this year, but we were the only franchisee, restaurant franchisee, winner on the list for 2022. We won three Dealmaker of the Year Awards in 2021, I believe it was, but for this one here was for, it was a relatively small deal, but I think it was the nature of the deal that made it such a good award to win.

It was Taco Bell, 16 Taco Bells in Shreveport, in Bossier City areas of Louisiana. They're sold from a group, Helm Restaurants, and sold to a large Pizza Hut franchisee, ADT Pizza and ADT Taco led by Adam Diamond. He's about 200 unit Pizza Hut franchisee and it was his first foray into the Taco Bell world. And what made the deal, I think really I guess important is because Taco Bell typically doesn't allow many new franchisees to enter the brand. They have some pretty strict standards and a lot of popularity with their assets that they sell. So this transaction was kind of one of the first that I know of, of a brand-new franchisee coming into the Taco Bell space in a while. And for that reason, I think it was noteworthy, but the deal took place.

Steve Helm and his family were a longtime family-owned business of over 40 years, 48 years. He had been associated with Taco Bell on the corporate and then on the franchisee side. He represented what a lot of these franchisees are, first generation franchisee, his son was in the business, he ran great operations, faithfully operated in kind of a mid-level area of the country, which is where a lot of these restaurants still do really well, especially in the Southeastern United States and kind of rural and then semi-suburban or semi-rural markets where QSR restaurants just really continued to thrive because of their appeal and also because of their price point.

And so their family had operated this business in this area for a long time, the process we went through was a good one, and Adam and his team ended up being the buyers. And they, as a result of this transaction, now are in two brands, Pizza Hut and Taco Bell. And as you all may know from talking with us, we try to be charitable whenever we close a deal. In this particular deal, we gave a donation to the Blue Angels Foundation to honor our Nation's heroes and to help wounded veterans through transitional housing and counseling and PTSD resolution. So that was that deal, and it did win a Dealmaker of the Year Award for Franchise Times in 2023.

Stay tuned, I think sometime in maybe April, late April I believe, I'm going to be doing kind of a panel through Restaurant Monitor and Franchise Times to talk about the deal. And you might learn a little bit if you're interested about how it happened and how it transpired and what were the hot deal points and things like that. So kudos to those two parties and to the process.

Now, the second topic I wanted to talk about a little bit today was a new trend that I've started to notice. And for the last, and gosh, Unbridled has been a victim of the success of all of this, but for the last seven or eight years, and really it's been like a 20-year kind of situation where the franchise industry in general, but the restaurant franchisee industry in more particular, and maybe even more particular would be like legacy, large, chunky QSR businesses that have like 3,000 or 4,000 units or more, so they have a lot of franchisees.

For the last 20 years we've been on a trend of consolidation. I've talked about this in prior years' podcasts, but it started with Ma and Pa Kettle, with the American Gothic picture if you picture that, their suspenders on and the pitchfork in their hand on a farm in Iowa deciding to become a one-unit franchisee. And then over time they end up either giving it to their kids or they sell it and sell it to the neighboring franchisee who now has, he buys it and he had two stores, now he has three, and eventually the guy who has three buys two or three more of retiring franchisees. You kind of get the picture.

And all of a sudden this franchisee has 10 stores. And the average franchisee in some of these systems goes over the course of from the 1980s to the early 2000s, maybe from three or four units on average per franchisee to 10 units per franchisee with several franchisees being 20 and 30 unit franchisees at that time. You start seeing the initial stages of private equity in the early 2000s, just really on a small basis, several small deals in the system particularly. And then it really started to explode when franchisors started to go asset light coming out of the Great Recession in the 2012 or '13 timeframe when they were selling corporate markets to go from 20% corporate ownership down to 5% corporate ownership.

And doing that, these franchisors always kept big metropolitan markets so they could test market their products and have concentration of labor and wage. So they might sell Phoenix or they might sell Orlando or they might, you know these markets. And coming out of the Great Recession, the people, the existing franchisees didn't have in many cases the finances to be able to handle those deals and drop these young private equity groups and family offices and private investors that are run by operators that have experience in the brands. And that started it. We'll get into 2015 and you start seeing some new entrants from kind of Wall Street, young Harvard MBA types, get into the business, raise money, and start buying businesses.

And then over the last six or seven years, man, it's been a flurry of activity and they've been the type, the ones that have gone into a system. I mean, I'm just generalizing here, but they might buy 30 stores. So they might come in as a, here's an analogy, they may come in as a point guard, but a point guard is great at bringing the ball up to court and seeing the vision, but may not be good at shooting a three-point shot or taking it in down low. So after the first acquisition, they pick themselves up a power forward and then a center and then a shooting guard, and now all of a sudden they have 150 restaurants in three or four markets and they've got a complete team or a complete business that they've built out.

And so that has been happening over six or seven years. A lot of brands have gone heavy into that model, some have been very, very slow to go into that model. I mean, you could find like, I'm just throwing names out like a Culver's brand, which is largely a mom and pop brand, same with Chick-fil-A, just as two examples of brands that maybe preferred the one and two and three unit operators and had more control at the corporate level, smaller operators who were fully invested in the business, but a lot of these large QSR concepts went the other way, which is they were, and some of them fell in love with private equity and big family offices and they wanted to actively put these big deals in the hands of 200 stores in the hands of these new franchise entities.

What was the reason to do it? They felt, perhaps erroneously so, that they were well capitalized and that they would spend their money on remodeling a new development. And then, by shrinking the number of franchisees in their system, they would reduce their G&A and have easier streamlined management of the franchise realm of their businesses. What people probably shortsightedly didn't see is that private equity groups are the people with the money, want to spend that money less than anybody I've ever seen. I mean, most private equity people that I know are some of the most tightfisted with their money of anybody I've ever seen.

So just because they have the money doesn't mean that they'll spend it, most of the time they won't spend it. Matter of fact, most of the time mid-size franchisees are more willing to spend their money than private equity groups. They want to borrow it all and do it all with debt financing and they want to push out obligations and cut G&A and all that stuff that produces good returns. So we run into some brand challenges, some competition challenges, some challenges during COVID, reduced traffic, increased food costs, labor problem, and then all of a sudden we have those shocks to the industry and some of the brands that have been heavily private equity driven where there haven't been sales growth, what do the private equity groups do?

A lot of them reduce capital spending, reduce R&M, don't build new units. And the next thing you know is you have this fight with a franchisor or you have stores that are unprofitable or you have big sale leasebacks on the stores that were done at 8% of sales but are now 10% or 11% of sales, or you have bad deferred maintenance in the stores because financials are so bad. In that case, you have a business that customers don't appreciate anymore. It looks tired.

So all that backdrop to say, I think two brands notably, and I won't name them, that we do business with at Unbridled, and I've just noticed the franchisors are perhaps actively is third hand, it's not second. In one case I've seen it secondhand, in the other two or three cases it's third hand but I've been hearing through others that these two brands are wanting to take the big deals and break them up into smaller deals. And instead of having 200 and 300 unit operators, they want 30 to 50 unit operators.

And they think people, men and women who are franchisees would know their markets, that you know might be from, I don't know, call it Des Moines, Iowa, and you know most of the towns within 30 minutes of Des Moines, Iowa in North, Southeast, West directions from where you live. And you know the people in the stores, you know the RGMs, you travel to the stores, you might even know the band that's there playing or the cheerleaders that are cheering at the halftime of a high school basketball game. So that may be a model that we see coming back into our system.

Coincidentally, even though like I said, we've been kind of a victim of this because our company and others have been part of the consolidation in our industry, I have said over and over again over the years that I think in general, businesses are best, these franchise businesses are best operated by the 30 to 50 unit franchisee independent. They're the ones who have the right balance between the right capital in the business and to be able to support sensible growth and remodeling, but yet touch the stores and have a level of sophistication, but have a level of hominess to their business.

So I don't know that this will be a trend in all brands, but I do think it's maybe a trend that we're seeing in a couple of brands that could be exacerbated, especially if we have some continued struggles and we have pre-bankruptcies and bankruptcies and things like this that would naturally lend themselves to a condition where assets could be split up by market. And we see that continued trend too geographically where you have these larger private equity franchisees if they do struggle or they might have markets that are 600 miles from one another, that may be a driving force in the franchiser trying to get in the way to break up those assets.

One thing I do know, if you stick around the M&A business long enough, to use another basketball algae, since we're talking about the NCAA tournament, right? It's kind of like, did you ever watched black and white basketball in the '50s, black and white basketball on TV? You see Bob Cousy playing on all those, and Wilt Chamberlain playing on all those Boston Celtics teams, and those guys have tall socks up to their knees and really short, tight shorts. And then you fast-forward to the early 2000s and you watch Kobe playing for the Lakers. That guy in the mid 2000s was wearing shorts that came down to his ankles almost, his baggy, everything was baggy and short socks. And now we're kind of somewhere in between.

So you stick around long enough and you see the cycle kind of repeat itself. I guess it'll probably be sometime soon again when we see the tall socks and the short pants on the basketball court, same kind of deal with M&A. What starts independent usually comes together and builds and consolidates and maybe then there's a reason whether it's externalities or brand specific, but you see things break up a little bit and then you see things kind of go back to maybe mid-size or smaller franchisees for a while and then you'll see the trend probably recycle itself again. So that's something to keep an eye out for.

Now the thoughts from the recent KFC Convention. I just got back from Austin, KFC, it's interesting. I don't know, someone told me, they said that KFC was in the Wall Street Journal recently or maybe months ago because they had so much turnover, that the president leaved, they had their CFO leave, they had their chief operating officer leave, their chief development officer left, and their chief legal officer left, I believe if I'm right about that. Most of the senior executives on the KFC team left at the corporate level, which is quite surprising to see. Unless there's major distress or problems, you don't see that much turnover at the executive team level.

So the new team was there at Austin, a lot of new faces and a lot of new positions there. And I think it's very much a wait and see to see what the team will produce. It just feels like a new chapter for the KFC brand, so watch it with a little bit of an interesting eye to see how the new management team is put together. It feels like it was kind of hastily done with people that have some good experience but clearly are going to have to grow into their new roles. In terms of the franchisees in that brand, I think most of them have had a couple good months of sales and profits. 2022 is a bad year for KFC, not just KFC, but a lot in the chicken space.

I mean, we do see that chicken wing costs have dropped by 50%. That's not a substantial part of what KFC does, but brands you've seen publicly, Wingstop has tons of food cost tailwind. I mean, they were running food and paper costs at almost like 50% at one point at the early part of last year. And here we are now and they're like at 35%, so it's just remarkably big drop in food costs for boneless wings. That doesn't pertain to KFC as much, what we see is that the chicken prices have stayed high and we're all talking about the price of eggs having doubled, or even more than doubled, over the past several months. So I think the chicken segment in general, chicken on the bone and chicken tenders and chicken sandwiches and such, have undergone quite a bit of food cost challenge.

We'll see what happens with it, but largely I would say hopefully some good news on the menu for KFC, upcoming franchisees seem to be a little weary, but hoping for kind of a rebound in the third quarter and fourth quarter of this year. I did see a lot of lenders at the convention, and I'll tell you, I have never seen the environment the way it is for lenders. I think a lot of these lenders are at these conventions, these restaurant lenders, at any restaurant convention. I mean, some of the ones where the brands aren't going well, you may only see a couple of lenders there, but at something like a Taco Bell or a KFC convention, you should expect to see 12 to 15 restaurant lenders there. And I've never seen such a lack of deal flow, I think they're very, very hungry.

And with deposits dropping precipitously in a lot of these banks because they're not offering any interest, people like me and you and everybody else is pulling their money out of banks and putting them in financial institutions that are T-bills, where they can get 4.5% to 5% interest in today's market. It's leaving these banks with fewer deposits and fewer deposits mean that they can't loan as much money, right? And so I think we're going to see a condition where that married with a lack of deal flow is going to mean a lot of my good friends and colleagues in the lender side of the business will maybe out of a job by the end of the year unless this thing picks up from a deal flow perspective in the next few three to six months or so.

What it means for a franchisee or someone looking to borrow is this, I think you got to do your due diligence with the banks, number one. Some of them are just not lending, they're showing up to conventions and taking phone calls, but they're just, at the end of the day, their credit committees are like, "We can't lend any money, we're not lending any money, we're staying in our lane, we're servicing our existing loans, but we're not adding anything new because our deposits are dropping and our risk tolerance is increasing or decreasing." That's, I think, what you're going to see. I think there's going to be a lot more scrutiny on which bank is going to do which deal and which brand. I mean, there are still banks that are lending up to six times lease adjusted leverage at higher interest rates.

I mean, as you see the interest expense increase on these loans, you're going to see fixed charge coverage ratios be a bigger deal in the limiting factor to advances on loans and covenants even more so than lease adjusted leverage. And you're just going to see a bifurcation of people doing deals, talked to one lender who said, "I want to do deals and have a little bit of a nick or a little bit of hair in it." You know what I mean? It requires some creativity. I appreciated that from him. Some of the other lenders were eager, I think you're going to find that there will be liquidity in the market.

It might be expensive, but you're going to find liquidity to borrow money in the market just because there's a lot of aggressive lenders there, kind of like dogs with their tongues hanging out and no deal flow. So a careful planning on that side should continue to yield some results and just be in touch regularly with your lender as you look to make acquisitions, and we always have an opinion if you want to call us. That was the KFC convention.

And another thing I want to talk about today, let's see, supply and demand of restaurant M&A deals. I talked about this last time, but I think I'll just continue to roll through this almost every month since it's been such a crazy time. I mean, golly, I can remember for first 15 years I was in the business. I mean, we had changes in the amount of deal flow and the cyclicality of it over the course of several years, but not like month to month like it is now. It just seems like with COVID everything's going faster, but I think right now I continue to see that supply and demand is big time in a favorable standpoint for people who have things to sell.

I've got three deals that I can just talk broadly about. One in Taco Bell, one in Burger King, and one in Wingstop that we're current currently doing decent sized activity to put these deals on the market. Everyone says there's no deal flow, put them on the market. Crazy amounts of offers even in the, I won't tell you which one of the three, but even in the brand of those three that's struggling the most still had like six or seven people wanting to buy those businesses, which was shocking to me. And the other businesses are probably going to get 10 to 15 offers just in terms of, and the valuations have been rising in some of these brands, Taco Bell namely.

And it's interesting, it's like how can the valuation rise? How can the EBITDA multiple increase when the interest rates are now sitting, your variable interest rates are sitting at 7.5%, probably going to 8%? It doesn't necessarily make sense. And I think I just come back to the equation or to the explanation of there's not a lot of deals in the market. A lot of these big buyers are sitting on tons of ERC money that they're looking to spend. And I mean, it's like if you've parked a bunch of ERC money at 3% and it's just sitting there and a deal comes up that could be interesting to you and a great brand that you really like. I mean, so what's the big deal to go pay a little bit more for it to be able to get... I mean, even if the returns are lower because the price is higher if you're getting 10% or 11%.

So I think there's a little bit of that phenomenon going on in the marketplace. And for that reason, even though the conditions overall aren't great, I would say again, from the last three deals that we've seen over the last month, I would say I absolutely tell you that the supply-demand curve is tilting these deals in a way that I would not have expected and actually making the pricing and the security of the deals way stronger than any of us probably would expect at this point in time. Now, that's a very temperamental thing, isn't it? It's like, "Here you go."

It's like Nate Oats at the University of Alabama basketball team. He is the master of analytics. Like 3% of his shots were non-layup, non-three pointer, non-free throw shots. I mean, he tells his team actively to not shoot the ball unless it's a layup, a three point shot, or you get fouled. Really wild type of a way to coach, but that's analytics in basketball, man. So it's like that per the equations and everything else is going to yield the highest opportunity to win a ball game. But that makes the assumption that not everybody else is running the same type of offense, doesn't it? Or the same type of defense. And so initially you start seeing that being the case, but then when everyone else implements the same type of offensive strategy, it starts to change and you stop winning.

So I think that's a weird analogy of supply and demand. I think right now we don't have a lot of supply in the market. If supply increases, if we have more teams playing this crazy analytic basketball, then the success of high results M&A processes might drop a little bit. So keep that in mind as you think about how things transpire. I do think there's going to be a flood of M&A activity towards the end of the year because I'm just starting to hear that a lot from franchisees who are tired but have a P&L that's still not ready to be emblematic of what their business has been over the last 20 years. And they're just like, "I got to wait a little bit longer." So that's supply and demand.

Okay. The next topic would be just to chat a little bit about musings in the pizza business. I've seen a couple of earnings calls here in the last few weeks. It seems like both Domino's and Papa Johns are experiencing some difficult times with margin pressure and some pretty significant same-store sales pressure or changes in same-store sales based on what is perceived to be a lower consumer demand and then a return to normalcy from people eating in maybe, which may be taking a little bit of the delivery business. And interestingly, it might be why Pizza Hut is doing pretty well over the last four or five months and they're kicking out some pretty darn strong results right now as a result of their Melts promotion, and then also of their dine-in business, which may be doing better comparably than the delivery business.

And I think another reason why the pizza delivery business might be struggling a little bit is the flourishing delivery business, these third-party delivery apps and everything in other QSR. One of the things I heard at KFC, which I've heard at tons of other conventions, is the higher check average, the higher loyalty, the better investment criteria, all this stuff of having delivery in digital businesses, especially the digital businesses. And everyone's working on getting their app and taking bodies out of the dining room and out of the front of house from a labor perspective too, and putting them in the delivery business, in the carry-out business. So I think that's probably hurting pizza a little bit too. All in all though, like I said, Pizza Hut seems to be doing well and maybe it's because of their dine-in business, everyone's kind of cursing the old dine-in business.

Let's use another basketball analogy. So the dine-in business would kind of be like the old seven foot, two inch, 325 pound center who can barely run up and down the floor. You don't really like him when you're playing this brand of basketball, that one dribble pass, three passes, and then shoot, right? But when the old guy starts cobbling down the lane and you slow the game down a little bit in the final few possessions, guess who's getting the rebounds? And guess who becomes all of a sudden more valuable? So maybe that's happening in the pizza business with the dining business flourishing. So good for them. Really glad to see that they're doing well. We'll see how that all transpires.

And then, one other comment I would make is just I've seen quite a bit of this over the last three or four months, as these restaurant businesses get into the hands of these private equity and family offices, particularly the private equity groups, and they grow by acquisition up to 50, 100, 150, 200 locations, and they keep growing. They're typically backed by private equity groups who are called on quite frequently out of New York. And so in LA, San Francisco, and New York, wherever, Chicago, by these generalist investment banking groups. And these generalist investment banking groups have like, you might picture having an office in three or four different cities, they have a bunch of folks and they have specific departments for each one of seven or eight or nine different segments.

And so they utilize those relationships to be able to call on the private equity groups and offer them services, whether it's investment management services, investment banking services across all their different investments, not just any particular investment. And for that reason, a lot of the big private equity groups look increasingly at hiring generalists to do their investment banking work when it's large, but certainly in the franchise space I would just say that the specialist investment banker, and I know this is a plug, but the specialist investment banker like Unbridled just knows intuitively how to do these specific transactions so much better than someone who doesn't spend the time in it.

And I think the perceived value is a little bit backwards, specialist investment banker is probably worth 10% more than a generalist on a franchise QSR deal, really. I mean, I don't know, let's just throw it out there because the knowhow, the knowledge of the franchisor, and the knowledge of how the processes transact, which is very specific in a QSR business, right? Because you've got a franchisor who actually owns the trademark of the business that you're operating. These types of industry-specific, very nichey things are important when you look at trying to keep your closing percentage in the 80s or 90% and get the highest price and actually get the deal to transact. So I think what I think will happen is you're going to watch a trend towards the specialist investment banker because we have seen in the last six months several failed processes from generalist investment bankers stepping into large investment banking, franchise M&A deals in our space.

I mean, you call me for example, we close 90% of the deals we take, but I know that I can give you, I won't mention them here, but I can just give you several examples of these generalists coming in and promising the moon and then their deals don't close, right? So what would you rather be told in anything in life? Would you rather be told something that could be true but has a 30% chance of actually happening? Or would you rather be told something that is true and has a 90% chance of happening? When you sell a business, and I want everyone to hear this, when you sell one of these businesses, it takes a huge toll on you. I have watched lots of friends and clients struggle with their health and struggle with their overall wellbeing, their family relationships, their partner relationships, their employee relationships when going through the process of selling a company.

It is not easy and you only want to do it once. You don't want to take the decision lightly, throw it out there and see what happens because you will do more damage to your body, your health, your emotions, your relationships, and then you have even the biggest part of it, two big parts of it. Number one, your employees find out about it and then they all quit or they don't trust you anymore if you don't actually go through with the sale, number one. And then number two, the franchisor knows that you are on the chopping block, which means that they're not going to kick you any favors, right? I mean, they're going to look to you to be the franchisee of the year next year if you were looking to sell your business but couldn't last year?

So you just got to be careful about how you plan these things. That's one of the comments I'll just keep beating on here, is that most people who own a business have very little understanding of how taxing it is to sell the business. It is a big endeavor, and so do not take it lightly and do not chase for the stars because if you try to chase for the stars, you're going to end up with a lack of success, and then you're going to have a heart attack or something like this. I don't take that lightly, but just wanted to paint that picture for everybody.

Okay, next month, by the time you hear the next podcast, I'm hoping that we're going to be able to pull a good friend of mine, SG Ellison, onto the webinar and we'll make it a podcast an SG runs a 300 unit Taco Bell business as franchisee out in California, down to over to Nevada, and then over to Kansas City and some other areas too that I'm sure I'm forgetting, but their story is a really cool story of maybe 10 years ago, starting out with no stores, being real estate people, and then building it into a formidable franchise business that's now one of the biggest in the country. So I hope that gets to come to fruition and I think it will, and I know you'll appreciate it, so please tune in.

And good luck watching the NCAA tournament this next couple of weeks. We have the Sun Belt Tournament in Pensacola here this week, so I'm going to sneak over and try to watch these kind of lesser names play like Coastal Carolina and University of Louisiana Monroe, and so I'm a basketball junkie. Enjoy it, thanks for tuning in, and hope to talk with you again soon.

Thanks so much for entering the Boiler Room today. You can find our podcast 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 therein, or omissions there from.