Welcome to the Restaurant Boiler Room, Season 7, Episode 7. I'm your host, Rick Ormsby, Managing Director at Unbridled Capital. Today in the Boiler Room, I'll be sharing my personal thoughts on questions asked during a panel discussion at the Restaurant Finance and Development Conference in Las Vegas this year. The panel was entitled, How Leading Investors Assess the Market Opportunity in Franchise Restaurants. I was supposed to be the moderator of this panel, but I had to cancel my plans. We will put the panel on the Boiler Room platform in December 2025 so you can hear the responses of the franchisees who participated. The restaurant boiler room is a one-stop shop for multi-million dollar merger and acquisition activity and financial complexities affecting the franchise industry. We talk money, deals, valuations, and risk delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on a monthly basis. Feel free to find our content at Unbridled Capital's website at www..unbridledcapital.com. Now, let's enter the boiler room. Well, I hope you all are doing well. I thought I would jump in here right after the restaurant finance and development conference in Las Vegas, which happens every year around the second week of November. It's usually like a Sunday, Monday, Tuesday, Wednesday type of conference. And it usually pulls together a lot of the big multi-unit restaurant franchisees, particularly, sometimes other non-restaurant franchisees too, but mostly restaurant franchisees and lots of lawyers and doctors and entrepreneurs and all the people who invest in our industry, as well as lenders and franchisors too, in one place. Fairly well-attended conference. And I'm guessing, I think this is the 4th or 5th year where I was asked to be either a panelist or this year a moderator out there. It was an honor to do so, but I had to cancel at the last minute. and couldn't make it. And so some of the questions that I was preparing for the panel, I didn't get to ask. I heard it went really well. The panel was moderated by Nick Cole, who's a lender at MUFG. And the panelists were Andrew Krumholz of Delight Restaurant Group, who owns Taco Bell and Wendy's restaurants. Eric Herman at Capital Spring, who invests in lots of restaurant companies, and then Tommy P. of Magic Concepts, who is a franchisee of both Wingstop and Jersey Mike's. And so we will air that next month in December of 2025, so you can hear their answers. But hey, I thought it might be fun if you just heard my answers to the same questions. And so I hope you enjoy. The format here is, for the panel, there were probably, call it a dozen questions. And the idea was to spend 3 or 4 minutes on each question and to go through them all and to ask the panelists their perspective. So for today, you'll hear me just ask the question and then just answer the question. These are what I thought to be when we kind of put all this together, the salient points that someone would want to learn about, know about, think about if they were thinking about what the value of a franchise company is in today's marketplace. Okay. So the first major question I think that was posed was how to value an acquisition and what are the factors that you focus on. So at Unbridled Capital, those of you may know, that's kind of our business is franchisee will, in almost every situation, regardless of what their ultimate goal is, the number one thing we do is help establish or help a franchisee or a franchise buyer or seller understand or franchise or understand the value of what they have. Because without knowing the value of what you have, it's hard to make a decision on what you want to do. Some people call us and they want to sell their companies, right? Because maybe there's a litany of reasons, there's three or four big ones, right? Usually they want to sell for a gain, or maybe they think the future is going to be not as bright as it is now, or there's death or divorce or change in circumstance in their family. or the partners want to retire. So there's a litany of reasons why someone would want to sell something. That's a factor. Some people come and they want to borrow money, or they want to find a new equity partner, or they want to buy out their partnership. Maybe they want to acquire the next door neighbor's franchise business and want to know how to put it together. All of those questions seek the same initial answer, which is, here is your valuation. So when we are called to talk about any of these types of things, first thing we do is we ask for a franchisee to send us, or a franchisor, large or small, or any of these clients, to send us like three to four years of historical P&Ls. If it's during the middle of the year, we'll ask for rolling 13 P&Ls in the year, so like trailing 13 periods or trailing 12 months plus three years prior to that. And we look on a by-store basis at sales and then all the line items of the P&L. Anytime you do this, we will analyze these P&Ls versus kind of like a benchmark or what we know just historically are the ranges. And so we'll look and see what a franchisee is running, whether they had some stores that were closed down for certain amounts of time for remodel or for store, or the brand new stores that opened during a given time period. And we'll normalize those sales and EBITDA. We'll look at any other kind of things that have happened to the P&L. Maybe there was a capital expense that was wrongly appropriated. Or maybe there was a huge training expense in one of the stores because it was open new and they had doubled labor for a four-month period or something like this. But we will look at all the historical financials and their relocation come up with a normalized trailing 12 month or rolling 13 EBITDA. You know, I use those terms loosely. A lot of smaller franchisees work on months, so they'll have a trailing 12 month EBITDA. And then most, but not all of the larger franchisees will be accounting for things on a period by period basis, you know, 28 day, 13 period cycle, which enables franchisees then to look at their businesses period over period and then period over period last year, and then the trailing 3 periods on a similar time zone basis, right? Because time basis, because otherwise it'd be hard for you to look at note February and March sales when February is 28 days and March has 31 days. So we'll look at the trailing 12-month financials, a rolling 13 financials, the last three years. We'll normalize everything. We'll look at the trends. We'll look at them based on prior deals that we've seen within the brand and over the last couple of years. And we'll come up what we think is a store level EBITDA, okay? Once you get to a store level EBITDA, We add back all the extraneous above store expenses, all the expenses related to G&A typically that are above the four walls in the roof of each individual store. And we really want to get to a four wall, we call it EBITDA. Once we get to a four wall EBITDA, because we will assume that different people run their businesses differently. If you're a large company that has 700, 800 restaurants, you're gonna have a different management structure and GNA structure than if you're a 15 unit franchisee in Omaha, Nebraska, who has all your stores within one market. And your goals may be different too, right? If you have that big business of 700 stores and you're reporting to private equity companies who are looking for a return, you may have a different motivation to show the highest profit that you can, while a small business owner, may not be trying to tweak the business for the utmost profitability. They may have lifestyle reasons while, and they may have personal relationships with some of their restaurant general managers and things. They may decide to run their business less lean for whatever reason. So we try to neutralize for that. We get to four wall EBITDA. And then after that, we'll take a GNA factor that we typically find common somewhere between $50,000 a store and as much as 3 1/2 to 4% per store. Now, 50,000 is about as low as you can go. I mean, we do see, 4% of $1,000,000 business is only $40,000. So if you had, for example, a large multi-unit business that had 50 locations, but the average AUV was $1,000,000, We might put a 4% G&A factor on it. A lot of it depends on size, the brand, the AUV. So that number can flex up and down a little bit. And there's a little bit of art to it to figure out kind of what a reasonable G&A factor would be. But let's just say for round numbers, 3% G&A, right, is what you would use. So let's say we have a million and a half dollar AUV store of some kind that has 15% store level EBITDA margins. which would be $225,000. And then let's say we have 3% GNA there, which is $45,000. I'm just working off my head here. That makes $225,000 of four-wall EBITDA, less $45,000 of GNA, gets you to what, $180,000. And then we assess a multiple to it. And the multiple would be, in most cases in this market, the multiple is going to be somewhere between four and six times EBITDA. I think we're historically in a little bit of a down market overall. People will pay up for the very best brands and the brands that have done really well in this marketplace. But a lot of brands in this marketplace haven't done as well. And historically, those brands have traded in the four to four and a half to five times EBITDA range, depending on location. And within a certain brand, if you're out west in some markets, you're not going attract the same kind of multiple as you would in the Southeast. And also if you had a business that had abnormally low AUVs, you wouldn't attract the same multiple in the same state as a business that had in the same brand a higher AUV, right? So that's also art, but let's just say in this case, we have $180,000 of post-G&A EBITDA. We have a 5 multiple, so we multiply the two together and get $900,000. And then the last thing we do is we look, depending on the brand, there's a little bit of art to this too, but we'll look at two to five years of future CapEx spending and we'll take a portion of it against the price. If you own a store that has a $500,000 remodel that's due in four years, we're probably going to say the buyer's going to probably ding you for half of the cost of that remodel. It's somewhat arbitrary, but so we would say this $900,000 value minus $250,000 might give you a value of $650,000 with a decent confidence that the value would be between 6 and $700,000. Okay. If that remodel is 5 or more years away, we typically don't look at it too much. that typically buyers don't typically take the valuation into those remodel, those future way far off CapEx costs against the value of the business. You know, if it's next year, so let's say you've got this same million and a half dollar store that's got a half million dollar remodel due in a year. Well, by the time you sell it, the buyer's going to be obliged to do the remodel like right away. And so in that case, you would subtract, you know, in most cases, most, if not all of the cost of the remodel against the business. And I would also tell you, sometimes franchisees push back and they say, well, if they're going to incur this cost, they're going to get the benefit of higher sales and more customers. And so we shouldn't be dinged for the full price of the remodel, even if it's next year. And my pushback always to that is, well, if that was the case, and you should have spent the money yourself to do the remodel and reap the benefits and then sold the business, but they have to incur the cost to get the benefit. It's really theirs to get. So it's not very common that a franchisee is buying franchisee is going to pay for future sales upside on a remodel that you haven't done, if that makes sense. So that's how you get to evaluation of a business asset. Real estate assets, you know, we'll use an implied rent. We'll try to keep the rent no higher than 8% because many franchisors push back and won't allow transactions to happen if third party rent is, or related party rent is kicked up above 8%. And then we'll take that out. We'll look at the rent coverage ratios. So if 8% produces a dollar rent, that's too high for the EBITDA of the business and the rent coverage ratio drops below like 2, 2 1/2, then we're gonna tweak down the rent to 7%, to 6 1/2%, to 6% until we get it to that range. We'll take that rent out. In this case, if it's 8% of, let's just say it was 7% of 1,000,005, that's $105,000. If that's the rent on a fee property, that then we would divide that by a cap rate. The last podcast we did and webinar, which is now on this platform, talked extensively for a whole hour about cap rates with an expert and friend of mine. So if you didn't catch that, go back and listen to it because it's like all the stuff you need to know about cap rates. But let's just say in this case, it's a 7 cap rate. Then you get to a million and a half dollar real estate value. And then I think our value on the business was two point, pardon me, was 650,000 with a confidence level of 600 to 700,000. You've got a 2.1 to $2.2 million business. And that's kind of how we go through the math. Now, for the larger equity-backed sponsors and people in Wall Street and all the other places, they will sometimes not look at this type of analysis exactly. They're going to look at it a couple of different ways. What we call this is like a market comparative multiple analysis. I know that sounds very technical, but basically we look at EBITDA, we look at market, like what the EBITDA multiples have been going for, And then we kind of marry the two together, put a little bit of art into it based on geography, performance, and what we think the market would pay for it. And then that's how we come up with the valuation. And typically, unbridled capital is within 5 to 10% at max of reality on almost every one of our valuations. sometimes even less than 5%, believe it or not. So we're really good at that. But some of these equity firms will use a present value of future cash flow analysis, which is kind of more of a textbook way to look at a valuation where they'll take like the expected future stream of EBITDA of cash flows, and then they'll discount them by present value to get to the present, and they'll come up with a value and a required IRR along with the capital components, how much capital we have to spend to get there. And so they'll come up with all of these assumptions and a threshold for their IRRs of what the return they have to get. And then they will work and then they'll discount the future cash flows to the present value. And they'll come up with kind of a price that they're willing to pay based on the IRR that brings the, you know, that makes the equation pull together. And what I will tell you is that calculation for the financial buyers is very, very, very heavily weighted towards same-store sales growth, new unit development, and capital spending. And what I mean by capital spending, like how much remodeling I have to do. So those are the three main drivers of the value. And if you monkey with those three kind of values in their models, you can see the price someone's willing to pay double or could be cut in half in no time. If they layer in a same-store sales assumption of zero versus plus one or plus two, it has a major impact on their IRR and what they're willing to pay. If you lay in a bunch of remodeling, like for brands that have huge remodeling costs, this has a massive negative impact, like an abnormal negative impact on the price and the equity IRR that they have. And then new unit development, it's why you see kind of in this market, not a lot of financial buyers going after legacy franchise concepts. And instead they're going after the new smaller emerging concepts, you know, a little bit more that have a lot of new unit development possibility. Because when you crank in new development, as long as the new development is at reasonable payoffs, right? So I think the wing stop, they say it costs like $500,000 more or less to get a unit open and they're generating over $2,000,000 of annual sales. Whereas like you might have a more legacy QSR concept that costs $2,000,000 to get it open and it does a million two in sales. You can see real quickly how the first example can, if layered into a model, can really produce a really high RRR. And the second one, really kills the IRR and kills the equity owners, the financial investors' interest in investing in that brand. And maybe that was too much to answer one question, but that kind of gives you some context of how that happens. I would say that the small and medium size and even maybe larger size franchisees, especially larger franchisees who are buying smaller packages or tack on packages to their business, they're not really going through, in my opinion, much of this equity IRR calculation as much. with their present value calculations as much as they're going through kind of a comparable market multiple valuation. Because most advisors who are in this space, including unbridled, are going to be typically selling these businesses based on market comparables and EBITDA multiples, if that makes sense. So that was one question, and that took a lot of time. I'll try to go faster through some of the others. How do you assess a growth plan was a question. What are the ways of assessing capital returns on new unit development and acquisitions? And how do you value a development agreement opportunity versus an obligation? Well, I think we talked about the first one. I rambled on about that in the prior question, but I'll talk about the second one. How do you value a development agreement opportunity versus an obligation? That's a really, I think I came up with that question initially for the panel. It's a good question, if I might say so myself. Like in some brands, New unit development opportunity is really, really valuable and people want it. If it's a great brand with low investment costs, an easy build out, not a lot of red tape or a lot of permitting that's needed, and it has high unit sales, I mean, that's an opportunity. Cash on cash returns, 40% or more. If the new development stands, like the new unit stands on its own and has high returns, relative to the investment. It's going to be looked at as an opportunity that's going to enhance the value of an existing business that's either for sale or under current operation. Whereas an obligation, which is much more frequent in the legacy brands, almost all the legacy brands, where franchisors, I mean, we still have a lot of publicly traded franchisors of legacy brands, Most of these legacy brands have no real growth in the United States left, right? But they still, for the purpose of their stock, for the purpose of their company, and for the purpose of the profitability of their company, they're pushing new development, sometimes questionable new development on franchisees as a condition of either buying new assets or being an existing franchisee in good standing. And because of this, You might see the example I talked about before where it costs two to two and a half million dollars with the real estate to build a drive-through location with a big old dining room and a double drive-through. And the store does maybe 1,000,002 to 1,000,005. that's a, just think about that. For $2.5 million, if you took that $2.5 million and you just threw it in the treasury market at 5%, you're probably going to be getting somewhat close to the type of return that you'd be getting if you only generated 1,002 to 1,003, 1,004 in sales on that location, but had to pay for that. So that obviously is looked at more realistically as a development obligation. And I think you can look at the, just look at the brands, look at their unit counts, look at the ones that are growing a lot. by unit count. If they are growing their unit count across the country at a rapid clip, it's much more likely that a buyer is going to see that type of a brand and that type of a franchisee acquisition as a development opportunity. And if they instead, you have a brand that's meandering along year to year at the same unit count across the country and maybe actually declining in unit count, be pretty sure that that's very likely to be seen by everyone as a development obligation. And if it comes with too many new builds, as if you're going to buy the business, it's going to affect in a negative way the price. And in many cases, it'll scare people away altogether. Okay, next question. What are some of the external and macro factors? Okay, so one is the economic outlook and interest rates. Certainly, we have all kinds of an opinion on that. In the short term here, we've seen pullback in traffic, certainly. And our industry is kind of flattish in sales, but there's been just a weird trading over of different types of concepts. You have within our big portfolio of hundreds of restaurant brands, you have some that are doing really well, some that are doing surprisingly well, some that are doing surprisingly badly, and then many that are just down fractionally. So that's kind of a comment at the brand level. The economic outlook, it's anyone's best guess. I tend to be an optimist, so I say that better times are ahead. In the short though, certainly with, I've heard a lot of franchisees tell me that in their markets, a lot of their sales declines are due to kind of the ICE stuff that's happened, you know, the illegal immigration crackdown. So a lot of those folks are either not here or not eating out as much. And so several franchisees have told me that's a couple point drag on sales. Now the interest rate environment is expected to kind of get a little bit more favorable with at least, we're hoping, one more change this year, one more reduction this year, and a couple reductions potentially into the first quarter of 2026. That'll have, hopefully, if we can get interest rates down, that'll have some positive impact, obviously. The supply chain, you know, I think that's a commentary there. You've seen the costs of things like coffee. And beef, just to throw out two examples, are really high. I mean, beef is really expected to peak, I think, sometime around the end of Q2 next year, but it's at kind of all-time highs, right? Now, I don't understand the dynamics behind it, the cycling of the herd, but there's not as much supply here. And the issue has gotten so loud that you'll see it with Trump talking on the national media about the cost of beef. And obviously the cost of coffee has gone up like 30 or 40%, I believe, in the last six to nine months. So the supply chains are strained. Prices are up a lot, which is really a terrible place to be when your traffic is down as well, right? Because it's kind of a double whammy. We hope that improves, but it doesn't look like that's going to be improving in the next like 3 months. It looks like it's probably going to be improving this time next year would be the hope. Like as we go into 2027, we'll start to see some meaningful change. That's my guess. I don't know. The lending environment, what are some of the factors related to the lending market? More of a lender question, but I would say I think there's been a rush to lenders wanting a flight to quality. I would say that. I would say there's been a flight to operators as opposed to private equity. It seems to me in non-limited circumstance that lenders like brands that are performing well and mid-sized franchisees who operate and own their own businesses without outside capital. It seems like that's the sweet spot for the lending market. And it also seems like the lenders are starting to add to their interested brands. brands like 7 Brew are starting to get financed where they weren't before. There's lenders now in greater quantity for brands like Wingstop and Jersey Mike's and some of these other concepts are getting larger and have had good performance over the last couple of years relative to the legacy concepts. And then, you know, the lending environment is also changing for the negative in some of the brands that have had recent bankruptcies and have had really poor year over year over year over year performance. you start seeing kind of a lot of the lenders, and I see them all the time when I'm at conventions, just not be in attendance anymore. So that's where you see it, is on the convention floor at the brand conferences when there's either like a million lenders or no lenders, right? And how will these, I think these things will all affect valuations. It's tough to say in what place. I would say in 2026, we're going to continue to see the tight supply chain and the high cost of food present itself in lower EBITDA in a lot of the restaurants. And for the brands that don't have pricing power and are losing transactions and can't continue to increase sales by raising their prices, you're going to see valuations come down because EBITDA is less. At the same time, if the lending environment gets a little frothier, if interest rates go down, then you might see the EBITDA multiple people are willing to pay be slightly higher to offset it. The economic outlook ultimately is the most important piece of all of it. When the economy is doing well and the lower and lower middle income consumer in our country is healthy, these businesses trade at higher prices because more, many of the customers are back in the stores, spending their money and enjoying their food. And when that happens, the stores have higher sales and higher EBITDA and they sell for higher prices. So that's the most important. Some of the other stuff is important to be clear, but I think if I had to point one thing the most important, it's the economic outlook. A strong economy for the low and lower middle income American consumer translates into a better valuation for people who want to sell and for people who want to borrow and buy. Another question question here, what are the franchisor related factors that affect evaluation? And this was, I think, asked of all the panelists, but the question specifically is how much variation in valuation do you see between brands and how's that changed in the brands that you operate? Well, I mean, it's a great question. So I've been doing this for 25 years. And when I got into this business, Taco Bell's sold for 6 to 6 1/2 times EBITDA. And now, you know, they're maybe have crested a little bit around 10 to 10 1/2 times EBITDA, but they've been up in this 10 times EBITDA range for probably 5 years. Heck, maybe it's been a little more than that. But you can see over time, you know, they've had sustained growth and sustained same-store sales wins year over year over year. And their valuation has moved upwards by a time and a half, and it has stayed there for a long time. You see some other brands, some of the legacy brands, I won't name them, but some of the legacy brands where, and I just was a speaker at a brand convention where I said this, where the premium asset in this brand probably traded for six and a half times EBITDA in 2021. And now it's trading for probably five times EBITDA now, which is a 30% reduction in value just based on the EBITDA multiple, let alone what the EBITDA itself is. So it's probably more like a 50% reduction in value because obviously a valuation is mostly aligned between the EBITDA itself and the EBITDA multiple. And then just in general, with the market conditions and the higher interest rates since 2021, we've seen like the I mean, with some exceptions of the brands that are really doing well, I'd say the average EBITDA multiple has dropped from maybe, it was probably pushing 5 1/2 to 6, and now it's probably 5. 475 to 5. So we're talking a meaningful 15% drop in EBITDA multiple across most of the entire industry. It's interesting too, from a geographical standpoint, some of the states that have really shown themselves to be very difficult to operate in and have very difficult operating environments and regulations and litigation and all this stuff, they've seen their assets take a bigger dive over the last few years than brands in other states too. So some of it's graphically focused. And the other thing is for brands where the AUV has not increased, with the costs being so high, I think increasingly, if you have $1,000,000 AUV business, it's now probably close to break even, no better, you know, in most cases, unless you have a really tight operations model and you've got a real small footprint and low rent. So those types of brands, once you start getting closer and closer to break even, the multiple is less important because I mean, like what do you multiply, whatever number you multiply by zero is still zero, right? So as you start getting closer to break even, the EBITDA multiple really starts to break down. And so that's happening, unfortunately, for our wonderful industry, you know, in greater quantity across the country right now. Another question is, what's your experience dealing with different franchisors? What are some of the behaviors, franchisor behaviors that make you favor some over others? Great question. There is a continuum, I tell people all the time who call me. I get my hand on one side and hand on the other side and say, there's a continuum. Like you go all the way over here to the left and that's a zero and all the way over here to the right and that's a 10. And you can say, okay, name me a brand and I can kind of tell you within this continuum how good they are to work with. Are they perfect 10? Are they a perfect zero? Are they somewhere in between? And you get this experience of having dealt with all these franchisors. They have different hot buttons. Some hot buttons are going to be to control the price of the acquisition. Some hot buttons are going to be to find new franchisees who want to develop more stores. Some of the hot buttons are going to be to find local operating franchisees who are nearby and not financial buyers. Other ones are going to be more interested in attracting franchisees with higher amounts of capital and are willing to tolerate the financial buyers a little more freely because they have more capital and they want to grow. So there's all kinds of these different types of challenges, of desires of the franchisor. but they absolutely, they work on a continuum. I do note in general that especially with the emerging brands, but also in the environment that we're in, it feels to me in the 25 years that I've been in this business, that franchisors are generally more controlling than they've been in the past. I don't know if that is just the world we live in or it's maybe a generational thing. A lot of the franchisors are populated now with millennials who aren't maybe in their lion's share, aren't as close to boots on the ground of entrepreneurism as it used to be back in the 70s and 80s with some of these older brands where people literally mortgaged their house and everything they had to build this business out of the ground. But that mentality of entrepreneurship, taking a risk and the American dream is kind of not quite as strong at the franchisor level as it used to be. That's the one thing I'll note. And because of that, you see the behaviors of franchisors seemingly being more corporate, if that makes sense. Sometimes that's good and sometimes that's bad. I'm not making a suggestion over which, but it's just an observation. Less entrepreneurial, more corporate structure oriented. Next question, when assessing bank financing terms and various controls, what are the key metrics that you focus on? Yeah, just name some here, otherwise we could talk forever, but rent adjusted leverage or lease adjusted leverage is one you've probably heard a lot about. That's just a simple calculation. People like that to be five times or less, sometimes a little higher than that. when you're talking about lenders and their willingness to lend or the ratios of which they're going to be calling you and saying you're in trouble. Fixed charge coverage ratio, which is another calculation called FCCR. That one has come more into play. I've said this before, as the interest expense on loans has come up since the interest rate is higher. So that one tends to be a bigger factor than it has been in previous years when interest rates were really low in terms of an existing borrower busting through their covenants and getting a concerning phone call from a bank. Other ones are new store run rates and then structure around development line draws like advance rates and incurrence tests. This is interesting. I just kind of read this out. This is not my area of expertise as much as maybe some of the franchise lenders. I'd kind of bring that discussion to them. But #7, let's touch on some additional brand related topics. So what are the challenges and benefits of operating in multiple brands? I'm going to answer this as an advisor. Obviously, the benefit to operating multiple brands is that you have some diversification. You can seek diversification by either being a franchisee of 1 brand and then having other businesses. You can seek diversification from being a franchisee of 1 brand and owning real estate in that brand. A lot of people have done that historically, and then they use the real estate kind of and think about it maybe separately from their business. Some people have diversification by owning one brand, but owning it in different areas of the country. But certainly one advantage of diversification is to own two different brands and maybe to own two different brands in the same operating geography where you can keep tabs on the brands. You can operate them well in the hometowns that you know, but you have two brands that may operate. One may be up and one may be down. Momentum is a hard thing to catch and hard thing to define or see when it happens. But these brands catch momentum and catch fire at different times, and that's oftentimes been a big benefit of owning multiple brands. But the question is, I do see more people owning multiple brands successfully, but historically speaking, And I have no data here, just a comment from the back of my cobweb-infested head. But historically speaking, in the last 15 years or so, I would say I know more people who have struggled with two brands as relative to people who have struggled with one brand. So I'm not, you know, just it's an observation that more people than not probably don't maximize the benefits of owning multiple brands. Either they get into one really, in a big way and then they have a second brand they jump into, but they only have five of those locations and they don't care about it as much as their 50 unit business. Or they make a decision, I'm just guessing here, they make a decision, I want to put it in my hometown and they may sub-optimize the real estate or choose the wrong brand or their operations teams just never really focus on the new brand unless it's of equal scale and size. But I do note that in a lot of cases, the multiple brands historically hasn't been as successful as we think it would be if we were just grabbing a pen of paper and trying to sketch it out. But I think that might be changing, especially with some of the emerging brands, for sure. So how do we think about emerging brands, valuation volatility? And then if you're picking a new brand to invest in today, what are the one or two that seem exciting to you? I mean, I'd love, I think emerging brands are a good part of the portfolio. I personally think having spent my whole career in legacy brands, I used to be a young brands guy, work for the corporate office, and we've spent a lot of our time in the legacy brands. I see there's going to be some winners and losers in the emerging brands, but it sure seems like there's a little bit more mojo in the hands of the emerging brands in some of these legacy brands. I'm not so sure that some of these legacy brands are not on kind of a pathway to be half as big as they are right now in the next five years. And it seems to me that while they have the benefit of scale of operation and marketing and everything across the country, it just seems to me that some of the younger eaters in this country are just not frequenting the legacy brands as much. And I also get worried about the lower to lower income consumer really driving the future of these legacy brands when they've been marginalized quite a bit with the economy and the environment from a macroeconomic standpoint. So I noticed the emerging brands. I personally go there more than I used to. I think some of them won't make it or won't make it as well as we think they will, like anything else, like investing in AI, right? Some of them won't work, but some of the companies will go to the moon. But I do think we're going to see a future in 10 years that has a lot of these emerging brands at the forefront of it. I know a lot of franchisees in Wingstop, Jersey Mike's, and 7 Brew, for example. And those are just three brands that kind of have now are developing scale in terms of high unit count growth. good long-term kind of results and compelling unit, new unit economics and forward-thinking franchisees and edgy marketing and things like this. So I think those brands seem exciting to me. There's others that are smaller than that, but in my role as an advisor, I'm charged with knowing about those smaller brands. and watching them from a distance, but really I get more involved in knowing the franchisees and participating in them in M&A cycle with these brands when they get a little larger in size, like maybe 500 to 1000 units or more. So those are two or three. There are others, but I just mentioned those. Couple of other questions here. What is your philosophy on real estate ownership? How do you value it? How do you factor in store closures? I talked about how to value real estate in the first question, but my personal observation of the franchisees and friends that I keep is that those who have owned their own business, who are franchisees, who are entrepreneurs, a lot of them still hold the real estate, and it's been kind of their best investment. And it's really helped weather the storm of the ups and downs of the operations of these various businesses, because all of these franchise brains have ups and downs, and it can't happen at times when sometimes you don't expect it. So you still see a lot of that. And so I'm kind of predisposed to look at real estate ownership as a really good way of monetizing, creating generational wealth, reducing taxes, creating safer operating environments. I mean, if you own the real estate, you can shut the store down with the franchisor's approval, and you can move it easily across the street or down the highway if you need to. So I see that typically, and it's very, I would say, evident in small and mid-sized franchisees. Now, when you get into the private equity and family office model, I think most of them will say we are real estate agnostic. They see it as a way to finance something, nothing more, nothing less in most cases. And so they typically don't really care about real estate. They'll sell it if they can get a fair price for it. Maybe they'll keep it if they can't. But otherwise, it's not, many will also call it an underutilized asset and will try to get it off the balance sheet. Because when you do own a piece of real estate, you have to finance it, right? The return isn't as good as the return on the business for a lot of these folks. There was a question about store closures. How do you factor in store closures? You know, and unfortunately, it's a real thing that we have to talk about now. And Most times when franchisees come to me, let's say with a 50 unit business, it's like anything else. I mean, Pareto's rule, right? 80%, you know, 20% of your, or 80% of your bad results come from 20% of your stores, you know, the 80-20 rule. So there's always the bottom 20% in everyone's 50 unit portfolio. There's the bottom 20% in everyone's 1000 unit portfolio. There's the bottom 20% in everyone's 5 unit portfolio, right? That's 1. 20% of 5 is 1. So like everyone has a bottom 20% And I have said for 15 to 20 years now, and more actually, that like you should always be looking at your bottom 20% like any company would, at ways to remove it. And there ain't no shame in closing stores. If you have a poor performer, get rid of it and replace it with another store in a better place. And so I, as an advisor, we will do that with most of our clients and kind of circle the stores that we feel like should be closed. where you should call the franchisor and try to negotiate. I mean, some packages don't have any of those types of stores. But the issue with store closures is you can't, you know, depending on the franchisor, and the franchisors have wildly different requirements, you can't cleanly close a store without their approval, without facing penalties. So for some brands, some legacy brands that I know very, very well, they have no, there's no risk. In other words, if you decide that a store is unprofitable, you can close it without any penalty. All you got to do is de-image it. Just take the logo down and don't make it look like the brand that we're operating here, and you can do what you want to with the store. And so that's the best scenario for either someone wanting to sell a business who's now becoming aware of a negative store and wants to get it out of the portfolio, or a buyer who's going to buy a business, but it has that a couple of closures in it. But then there are other franchisors and many of them, especially with the emerging brands, but also some of the legacy brands when they will not allow you to close and they'll have various amounts of penalties if you close without their authorization. And some of those penalties can be really, really stiff. And so then you're left with a situation where you have to take on a store that's losing EBITDA, but because if you didn't, you have to pay XYZ years of royalties and advertising fees to close it. And cost benefit analysis doesn't work in your favor to close it. So you end up continuing to operate a bunch of marginal stores. And when you go to sell a business that has a bunch of marginal stores in it, especially in this operating environment, it definitely has a drag on the valuation. It drops the EBITDA multiple, it drops the interest in terms of the number of buyers. And these store closures are a big, big factor right now in the times that we're living in where the performance has been declining in many brands. It's like I've never seen in my professional career such an impact of a few negative stores on the marketability of an overall portfolio as I have in this last cycle here. I'm just going to look at a couple more. When you go to sell a business, what return are you looking for and what metrics do you use to evaluate a successful investment? Goodwin. I would say it could be as simple as a five-unit franchisee who looks at what he owes the bank and what he needs to retire. You know, he may say, I need $3 million to retire at age 65. And if this business is worth $10 million and I owe 3 million to the bank, that means I'm going to have a $7 million. And And then you pay taxes on that, you pay 2 million in taxes on that, and I'll end up with $5 million, less maybe a half $1,000,000 in fees and attorney fees and paying inventory and all this other stuff that has to happen after the sale. And I may end up with $4 million. That's good enough for me. I'll sell. It could be that simple. That would be a successful result for someone who's wanting to retire. Or it can be maybe a mid-sized franchisee who has done really well, maybe a little younger and has developed a business that no matter what price they sell it for, since it's bigger, it will net them a big gain. They may be looking at a multiple. I see this a lot. Someone who owns 25 restaurants and will sell it if the multiple is X or higher. And if the multiple doesn't hit X or higher, they won't sell or they pull it down. So you have on the lower end, it's price. Certainly for everybody, there's ultimately a price because everyone behind the scenes is talking to their CPA, asking what their net proceeds will be and what's in it for either their investors or their family. As you look at like funds, funds look at IRR calculations and many are also very concerned with a calculation called multiple of invested capital, which is MOIC. and they're wanting like they'd love to have a multiple of invested capital return of three times or more in our space. They'd be happy probably, I don't know, but typically they'd be content with 2 1/2 to three and then anything less than two to 2 1/2 is not a successful investment. So they would look to sell their business at that to get that type of a gain. But again, I've been involved in transactions where we represented large companies where this is just a restaurant asset as a part of a huge portfolio that they own. And they may have other reasons to sell that have nothing to do with price and multiple. It may have like our fund has to close down. We're in year six of our fund and we need to return the investment to our limited partners in the next 12 months per our documents. So we have to sell. Or maybe we just sold XYZ business whatever, it's an oil and gas business for huge gain. And so therefore, it enables us to sell this slightly underperforming restaurant business, at a lesser cost and still do right by our investors. Those kind of decisions happen all the time. And they happen on a smaller scale for individuals like you and me too. And then the last question I'll answer today, and this is, where do you think we are in the valuation cycle? Are we at the peak, the valley, the middle, and what's your outlook trend? And this is one I wanted to present to everyone. And hopefully, again, just to remind you, we'll have this panel and the four people on the panel on our podcast platform and also on unbridledcapital.com in a few weeks, sometime in December. And then you'll get to hear their answers. And I picked these guys, they're different from one another. They offer different size businesses and different brands and different platform from one another. So I think you'll like their answers. But so where do I think though, the value we are in the valuation cycle? I mean, we're certainly not at a peak. I wouldn't say. The peak was in 2021 and we've been kind of gradually drifting downward for the last four years. I was telling some friends of mine recently that I feel really, my heart, those of you who listen know how much I care about the franchise industry. My heart and soul goes to these folks who've been operating in this valuation cycle for so long. It's been hard to operate and profits have been challenging. The consumer's been challenged a lot of the times. And it just feels like there's always been almost a one-off challenge that we're facing, whether it's really high commodity costs or labor inflation or impact of tariffs or high interest rates or competition from emerging brands or poor corporate leadership that leads to lower sales and poor decisions. Like there's just been da, da, da, da. And it hadn't hit everybody this way. Certainly, like I said earlier, some brains are doing really well. And like in any race, I mean, it's like the Kentucky Derby, right? A bridle capital is named after a Kentucky Derby winning horse on bridle. from 1990. You could have a Kentucky Derby where it's pouring down rain and the track is sloppy muddy, right? Well, the relative score, the relative time of those horses coming across the finish line is not going to be nearly as hot, as competitive as when it's sunny and the track is fast, right? But still, even when the track is sloppy and wet and slow, you have winners. I mean, someone wins. Someone comes in, someone wins, someone places, and someone shows. And oftentimes you see a huge delineation between them. You know, like in a rainy race, you'll see one horse like win by 10 lengths. And so you see that going on right now. It's been a little, the track's been a little bit muddy. It's been raining. The times aren't so fast. But you do see winners like dominating and coming through and winning the accolades across the finish line. Isn't that funny? I just came up with this analogy. I feel sorry for my wife who has to listen to all this. But so I don't think we're at a peak. Are we at a valley? Doesn't necessarily, I kind of feel like 2026 valuations are probably going to get on balance a little bit worse than they were in 2025. Not much, but a little bit worse. I mean, the last six months in our industry have really been under pressure. And I don't know that I'm seeing any sort of like positive change in the near-term horizon. Kind of feels like the current kind of difficult environment that we've been in for the last, call it, six to nine months is exacerbating. It's probably not getting much worse, but it's probably just staying the same and just kind of continuing into Q4. I don't see any key drivers to say Q1 is going to just all of a sudden turn around. Maybe we'll start to see things change and come up a little bit in Q2 as the macroeconomic environment hopefully changes. Maybe we'll see costs of goods come down just a little bit too. So these are things that could create maybe a valley, maybe sometime next year. And so I do think that 2026 will be a bit of a challenged year. And I've been hopeful that it wouldn't be, but I think it's going to be year five of a bit of a challenged M&A year for our beloved industry. Valuations will continue to be challenged. And I think people are going to be choosy on the deals that they get excited and involved in. The good news is for any seller, despite some of the negative talk that I'm telling you here, there's not a lot of quality restaurant deals on the marketplace. I mean, it's still that way. So if you have a quality business, you got to feel good at least that you have the supply demand curve is in your favor. Regardless of the size or the brand of the business, those favorable fundamentals will be there for you, I think in 2026. But I think it's going to be till 2027 until we start seeing like a meaningful rebound. Then we're in the guesswork of what's going to happen to our economy in 2027. And then always know, too, that any time we face any sort of negative tax consequence or risk in the future, that is a really motivating reason why people decide to sell things. So my hope is that 2026, we bottom out sometime in the first or second quarter. We kind of stay in a lower place, but we move up slowly into the back half of 2026, and we see some meaningful macroeconomic change and industry change into 2027. Once the franchisees had a healthier trailing 12-month financial statement, which it's hard to see that happening until probably at least like the third quarter of 2027, then maybe we see the activity really pick up. Once we get into the last year of Trump's presidency in 2028, I wouldn't be surprised, unless we're in a really bad economic time, I wouldn't be surprised if we see a gangbusters M&A environment at that time. But who the heck knows? I've been wrong more than I've been right. I know we all have over the years. So I hope all of that was helpful to you. It's kind of fun going through this. And anytime you want to talk, please reach out. But stay tuned. I hope you guys have a happy Thanksgiving 2025, at least in the middle of the US. It's supposed to be warm next week. So I hope you all have a warm and wonderful Thanksgiving and a blessed one. And please stay in touch. Thank you so much.
Thanks so much for entering the boiler room today. You can find our podcasts on iTunes, Google Play, Stitcher, TuneIn, and Spotify. If you like these podcasts, please listen, rate, and review. I also encourage you to visit our website at www..unbridledcapital.com 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 therefrom.