Welcome to the Restaurant Boiler Room, season 8, episode 6.
I'm your host, Rick Ormsby, managing director at Unbridled Capital.
Today in the Boiler Room, this podcast is part three of our three-part podcast series this year that outlines an initial discussion I would.
Have with a theoretical seller so that they understand the value and timing of the sale of their business.
Part one is from season 8, episode 3, and it was a general discussion of the business at hand. Part 2 in season 8, episode 5 was a very detailed look at valuation of a subject business with examples. And today in part 3, we will be talking about timing and process in a sale. This podcast can be listened to separately, though it will be most powerful when combined with parts one and two. And it should be equally useful for buyers or also for franchisees who are looking to borrow money or find financing. Hope you enjoy. 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. hey, how you guys doing? It's good to be back in touch and hope everything's going great for you. Let's see, what kind of fun have you been doing this summer? I guess I would say Susan and I are now empty nesters. Whoop, whoop. So our son's at Florida State. in Tallahassee and starting. He's a Seminole this year, so he's our youngest. So it's a new world for us. Our daughter Allie got married this spring, which was a real blessing, and her husband's great. And we're a little bit footloose and fancy free. I guess we're going to be watching some football this year. Florida State football used to be a big thing. I'm just learning about it again, but we got to get it back to where it was, I suppose. But I hope you have big plans for the fall, I guess. If you have any sort of ideas for an empty nester and wife to knowing if you listen, knowing what type of personality I have, give me some comments on what you think we should be doing and places we might see kind of as a bucket list type stuff over the next several years before we become grandparents. But anyway, hope you guys are doing great. And we'll start today with our third of a three-part series, which by the way, I intended to be one part. Yeah, oops. Season 8, episode 3 was the beginning of it. was a general valuation guideline. It was basically a sample client calls in to talk business with me and ask questions about their business and tries to get an idea or a snapshot over an hour-long conversation of whether or not it makes sense to take the next step to look more closely. And so the first conversation and the first episode was episode 3 of this year. And I thought that was going to be just like all of it, but it started rambling and it went longer. I think good content, I hope, and you tuned in. So we came back after the mid-year update, M&A update with our team into episode 4, and then we did an episode 5 that kind of took some really particular examples of some just random restaurant, theoretical restaurant companies. And I took you through what goes through my cobwebs of a head, right? When I'm actually talking with a client and telling them about the value of their business and some of the things to think about and why the valuation changes and all that stuff. Hopefully you'll find that useful. And I hope you also can tell from that episode how technical it can get to get to the right price and how difficult our job can be at times. This third episode though, is going to be about timing and processing a sale. We'll do that. I'll tackle that for this episode and then we'll be finished. These 3 episodes are meant to be listened together. I think you'll find this episode will hold pretty well by itself. If you just happen to be like coming to our platform and listening to this one, the first one you see, if this is the first one you see and you just click on it and listen, I think you, and I trust you get value out of it and I pray you will. But go backwards to episode 5 of season 8 and then episode 3 of season 8 too to kind of get the full picture. And then reach out anytime you have any questions or want to talk, okay? And the last thing is, and I think I said it in the intro, I think you'll find whether you're a buyer, a seller, you're a lender, you're a franchisor, all of this stuff should give you some very good perspectives on how our industry operates from an M&A perspective. And it's really, I hate to say universal, but across most, if not all franchise brands, The process is very similar. It doesn't matter whether you're a XYZ franchisee or a franchisor or whoever you are, whether you operate Massage Envies or you're a Taco Bell franchisee, I think you still get benefit out of hearing the process that's involved here. So best wishes. Here we go. So today is timing and process. So as we got through the last discussion at the very end, okay, I've kind of given my range of valuations for a business on the phone. I'm usually right within 10 to 15% band on one way or the other. And the client or the prospective client needs to make a decision at that point whether they want to go a more detailed route of deciding if they want to do evaluation that requires the 30 to 40 hours sometimes of work on our analyst team to pull all the information together to get that 10 to 15% down to a 3 to 5%. And usually it's that good. Now we're not always that good, but usually the valuations that we give at the initial, after we do kind of our due diligence and underwriting in the second kind of part of this, usually approximates what a buyer will actually pay to within 3 to 5% or oftentimes less. Some of the brands that we work in a lot, I mean, I think I talk about them a lot, but I used to work for Young Brands Corporate, KFC, Taco Bell, and Pizza Hut. So in those brands, we're typically within 1 to 3% at times of what the valuation is. Just because we dabble in it so much and been a part of it, it's a blessing for so many years. Some of the brands, like if you were to call and it was a thinly traded brand, like whatever, chicken salad chick, there may be a little bit more variability because we're not, we don't, there's not that many deals in the market young brand like that's growing and really exciting, but most people who operate those as franchisees aren't selling them yet. So there may be a little bit more variability about what the valuation would be. But some of the more legacy brands, it's a lot more narrow. So the client hears the discussion. In the last, in episode 5, I said the business was worth probably $18.2 million. The client decides whether they want to take the next step of tightening that a little bit more closely. In most cases, if it's someone I've known for a long amount of time, and let's say it's a Taco Bell company that I really know pretty well, I can get on the phone and probably get within 5% of the valuation. And usually that initial call can kind of make the franchisees mind about whether they want to sell the company or not. But in most cases, if I don't know the person as well, or if it's in a brand that there's some more variability, or in an area of the country where we need to see the P&Ls much more closely, that percentage gap could be 10 to 15%. And we always want to do the full underwriting and give the full valuation and our final perspectives and agree on the likely range before we go, we take an engagement. Why? Well, number one, I don't want to be known as the guy who or the company at Unbridled Capital who takes assignments that can't close. So we're going to be typically keeping a success rate of around 90% over many years. I'm very, very proud of that. It's got to be two to three times the average for other M&A advisory firms, regardless of what they're trying to sell over a long amount of time across a long swath of industries in this country. So I'm really proud of that 90% general range. roughly, and we want to keep it. And we want to be known as the place where if we have a business for sale, that it's going to sell. And we want buyers to know that if they're coming to look at a business that we're selling, that it's a well-vetted client that's whose deal is going to close, right? We always make, we can't be 100% right, but then circumstances happen where someone may change their mind that we don't expect or the business may somehow crater in some way, like unexpected. There's all kinds of crazy things that can happen, but typically if you follow this process, outcome is very successful over a long amount of time. And that is a benefit to any of you who are listening who are sellers or buyers or franchisors, you know what I mean, or lenders that get involved in our deals. You should know that they almost always close. I can give you one example where many years ago, where Lehman Brothers collapsed like on a Monday. I mean, my dates aren't exactly right, but let's just say Lehman Brothers collapsed on a Monday and we decided to celebrate a deal closing on a Sunday night or a Saturday, pardon me, and Sunday, Saturday night and Sunday, just because I was living in Kentucky at the time and the Ryder Cup happened to be in town that weekend. The client loved golf and wanted to come see the Ryder Cup. They came to see the Ryder Cup and then we took them out to dinner. And I said, we'd never celebrate before a deal closes before, but since you're here, that's what we'll do. Well, sure enough, guess what happened? Lehman Brothers collapses on Monday. The bank who's doing the deal says we need more time. By Thursday of that week, they said we're out of the deal. And the franchisee had already bought a vacation home on a lake. Is that crazy? I mean, that's the kind of crap that happens. I mean, you live like that, like I've lived for 25 years, man, you realize nothing is certain, right? But death and taxes. And so the seller had to, in that crazy case, had to take their business, fold it back into what they were doing, and last minute had to continue to operate their business and decided to do another four years before putting their business back up for sale. We helped them the second time. And this second time, fortunately, they sold their business for like, I don't know, but let's just say it was 20 or 30% more than they did. before the Lehman Brothers crashed. So it was a pretty cool outcome for them, but it was way unexpected, not what was in their bag of tricks. And so these things cannot close in ways you don't expect, but we try to control by valuation whether or not we feel like it's an assignment. So we have that initial call. If the franchisee decides or franchisor decides that they want to send us the P&Ls, we then do the next step. And in this step, we're typically asking for three plus years of historical financial statements in Excel. We also want period by period. P&Ls for the last 13 periods or 12 months to create a rolling 13 or trailing 12 month financial statement. What really becomes the basis of the valuation is the most recent 12 months or most recent trailing 13 period P&Ls. We typically think in terms of periods, right? 28 day periods, there's 13 of them a year and that equals 364 days. So that just means there's one day that's typically missing that gets floated around. in typically period 13, week 4 on each year. And so it gives you, for those of you who don't know, the ability to compare equal amounts of time over year, but also within months. Otherwise, you have February would look way different than March when February has, let's say, 27 or 28 days and March has 31 days. And it would be very difficult to compare the trend of your business if you were comparing them month to month. You could see it month over last year, and that's a valuable thing. But you also, in that case, have to be able to know when major holidays and things happen. Like when is Lent this year versus last year, or when's the Super Bowl this year versus last year? Sometimes they jump into different periods. Sometimes they jump into different months. When's Easter? Sometimes Easter's in March. Sometimes Easter is in April. And so even then, you have to know the major events. When's Mother's Day? I can remember being at corporate, and that's the biggest day of the year in the KFC world, was Mother's Day. Huge sales on Mother's Day. I guess it's historically a time when families get together and eat buckets of chicken, and KFC would typically have promotions for cakes on Mother's Day too, so you'd go and get a big family meal. So that was always something every year that we're like, okay, when you're comparing sales year over year, period over period, month over month, when's Mother's Day this year versus last year? Because it'll skew the numbers. Same with Easter, same with Super Bowl. So those are things that you have to keep a watch for. But so we'll ask for three years of historical P&Ls plus the 12 month trailing month P&Ls, rolling 13 period P&Ls. We're going to ask for leases. Not the leases themselves at the initial stage, but probably just a lease brief for each of the leases. And what we'll want to see is the amount of term left on the lease, any escalations, any options, any particular percentage rents. We want to know who pays CAM or any extraneous expenses. And then any items that are particular, like are you a sub lessee? In other words, like Burger King would be an example. Sometimes the Burger King would own the real estate, sell the real estate, and then they sold the restaurants, but they had to stay on the leases. So then a franchisee who bought the restaurants from Burger King would be on a BKL lease, which is a lease where they're responsible for paying the, franchisee's responsible for paying the rent, but Burger King corporate is still on the lease because the owner of the real estate wouldn't allow Burger King Corporate off the lease because they're a stronger tenant than the franchisee would be. Does that make sense? So we want to know that too. And so just some of the particulars we also watch to make sure the leases match the franchise agreements where possible. Sometimes they don't, but usually they do these days. Back in the good old days, they never matched. And that's something that some of the franchisors are typically better at now is making sure that we have what's called code terminus lease expirations with franchise agreement expirations. So A franchisor and a franchisee is not in a position where they have like 3 years left on the lease, but the franchise is expiring. So they want to be matching so you can make clean decisions. So we watch for that. We also want typically franchise agreement expiration dates and date of next remodel and estimated cost of remodel or re-image. And so those, and then we'll want to know like any development agreement, like how many stores do you have under that would transfer to a buyer. Some big, awesome, fast moving brands, they're looked at as an opportunity when you have, let's say 30 restaurants that you're selling and you have 5 existing stores that need, or new stores that need to be built over the next couple of years. Sometimes that's like, oh, awesome, that's great. We want those stores. Certain brands are like that. Other brands, it's the opposite. It's like, man, you're trying to sell me 30 stores and I got to build five more in the next couple of years. That's A whammy to me. And so it may have a negative impact on the valuation. Either way, we want to know what that is and just kind of see what that is and then kind of make, in that case, a qualitative assessment of like the impact of that, right? And we have that, so we have the P&Ls, we have the leases, we have the franchise agreement expirations and remodeling actions. And then we have the development obligations or opportunities. And then we wanna know kind of the circumstances. So one circumstance could be, well, I've got new stores that are either under development. I mean, it's almost always the case when we're selling these larger companies, let's say 50 locations, where there's gonna be at least one or two new stores that haven't been open for 12 months. or we've signed a lease on this one store and we're under construction, but it hasn't been opened yet. And it's set to be open 60 days before this deal will close. How do we value that? So that's something that we have to call out and come to some sort of an understanding of what the valuation would be. Oftentimes the way I just generally think about it, and it's brand specific and what we think the sales and profits will be and how attractive the brand is and how much people want to develop in this brand. But typically if you're going to sell a store that is going to be open at the time of sale when the sale closes. I think it's reasonable that you'll get some value above the return cost of the store. Minimally, you'll get your cost reimbursed, but in some brands, you might get the pro forma value of what the store will do relative to maybe the average of the other stores in the portfolio, but just maybe not the full purchase price of that store will be included in the buyer's offer. Typically, they may hedge it and give you part of the money at closing and then let's see a 12-month look-back period to pay the rest of it, something like that. In some cases, they'll take, if it's just one or two stores in a big portfolio, they'll take the whole thing at the average per form of value of the other stores. Sometimes in stores that, you know, businesses that aren't performing well, they won't take it at all, or they'll only take some portion or all of the construction costs. In some brands, if you have, even if it's a good brand where there's 50 locations that we're trying to sell, but there's like 15 new locations that are in various stages of like lease negotiations, construction, and just opened up, that becomes such a big number that it's much more nuanced on a store-by-store basis. And you can't not expect a buyer to swallow all of that without some sort of a hedge or contingency because most lenders are going to be a little bit leery for that too, right? So these are some of the things that we would just ask, and a lot of them, I'd probably see 75% of these kind of pro formas and nuances have to do with new stores that are either under development, just opened, having been opened a full 12 month post launch period. in most restaurant concepts or non-restaurant concepts, but not all sales typically start strong and then they settle at somewhere between 25 to 35% of their opening day sales after four to five months. Now it's like totally a swag sometimes with today's world that's mostly digital and people are ordering online, like that number may not be like a typical drive-thru main and main type of a QSR asset, right? If it's like a Massage Envy, a European wax center or some of these more like, or a fitness brand, like Crunch or maybe like Planet Fitness, you don't open up and in day one have huge sales. It builds, so it goes the opposite. Like your opening day sales may be a fraction of what your revenue is like a year or two years down the road as you build out a clientele and a predictable business model in the community. So all that stuff matters and just figuring out new locations, new development plans, stores under development, stores that are newly opened. So that's one element of it, and that probably is 75% of the adjustments. There are other small adjustments, and some of the typical ones will be. Rd. construction in front of a location, or a location was closed for remodeling. That's another big one. You might have, oh, we were closed for eight weeks for remodeling and we had only the drive-thru open, or we're also paving the parking lot. Or you'll have people talk about more and more it becomes difficult to adjust for this because weather is weather. But if you had a hurricane in Florida, you know what I mean, that wipes through and sends the restaurants offline for two weeks, right? That's something that probably should be accounted for in some way so that everyone knows that those two weeks of total closures aren't part of the everyday operation of the business. Sometimes we'll have remodels where, or like we'll have huge massive snowstorms in unexpected areas like this past year. Remember like in Tennessee and in Mississippi especially, one of our guys in our office lives in Mississippi and he in Northeast Mississippi, and they had some incredibly terrible amount of freezing ice that downed all the trees, and they had no power in a lot of these cities for like 7 to 10 days. And something like that only happens once every 20 years or 30 years or never. And then you can have a big goose egg for your revenues in those markets for that 10 days, and you have to incur all the expenses. That is a reasonable way to adjust, right? So there are things like that. So we do that during the valuation phase. We put all the information together. We get to the point then where we have a final valuation. And that takes, again, 30 to 40 hours. Typically, some businesses are cleaner than others and usually involves, if it's an owner operator, they got to dig through their files. It can be a little laborious to find all this information and then stand before us and ask all these questions because we typically come up with a questions list that's 40 or 50 items, depending on the size of the deal and the number of adjustments and what we see. And we'll go in the backdrop and look at all the line items in the P&Ls and compare them with other franchise deals in the same brand that we've done. So we kind of can see where, oh, in this brand, the guy did a bunch of remodels this year. It was like his remodel year. And so his R&M line is enormous relative to what is normal and relative to what it's been over the last three years. That may be worth an adjustment as an example, right? Because that's not an ongoing thing. So we do all of that. We present the final kind of valuation to the client And then we say within probably 3 to 5%, this is what we really think the valuation is going to be. And then they make a determination of whether they want to sell the company. Now in this initial call, all this stuff in the backdrop, I probably don't talk about all this. I probably just spent, but for your benefit, you get to hear what goes on in the backdrop. But probably I spend a minute or two talking about the next step, if you like our initial valuation that we're just kind of talking like high level on the phone. And then after that, I'll say, okay, here's the timing and process. We get to this place where the value situation is finally buttoned up and complete. Now, Unbridled has a document if you decide to sell the company, and we haven't charged you anything yet in many cases, in most cases, but at that point, we Unbridled have a document that should you say you want to sell, we have the models and everything built to almost be ready to put the business on the market. We have to put together a SIM, which we call a confidential information memorandum, which is typically, depending on the size of the business, can be anywhere from 20 to 150 pages. It's usually in PDF format. And it has all the details of the brand, details of brand's performance, details on things like unit count of the brand and how much it's grown, and then the particular business, pictures of the stores, P&Ls, and all the lease information, CapEx spend expectations, and then procedure on how to be interested if you want to make an offer on the business, and then what the date of the bid deadline would be, and all these things. So I'll tell this potential client, okay, so once we have a valuation, the valuation takes maybe 2 weeks to complete, and it depends a little bit on you and how fast you move, but we can typically get the final valuation pulled together two weeks after you send us all the information. At that point in time, you have a decision when we present that to you. Our findings to you, have a decision, talk with your family, pray about it, talk with your people like your CPA, obviously, your accountant, your attorney, any partners, and look at your after-tax proceeds and all the things you have to do to decide whether it's the right decision. But if you then say, I'm ready to go, Then typically we put the SIM together and that maybe takes a week, maybe less, and we send it to the client and then we go through the SIM with the client. The client kind of reads through, checks off on it. These SIMs are very similar. We sign an engagement agreement. And the engagement agreement has the terms that outline our representation of the client, the fees and the process and everything involved there. We get that signed and then we get to the place where we're ready to move forward. And once that SIM is complete and the engagement letter is signed, we're typically a week away from putting the business on the market. We put businesses on the market throughout any time during the week, but we send it out via e-mail and then phone calls and just kind of the marketing of a business. We'll tell the client because most clients or prospective clients are very interested in confidentiality and they don't want their employees to be unduly alarmed and alerted to a process that's uncertain. So we make, and I know this is customary practice, people who want to see or learn anything about the business to sign a confidentiality agreement just so they won't speak out of term. They sign a confidentiality agreement and we send them the SIM. And then there's usually about a four week bid process where we have the business on the market. We send it out to the prospective buyers. We will ask our client if what type of process they want to run. And this is important to know. We either typically say A, B, or C. If you're in process A, as we send it out quietly to 10 to 20 buyers or 30 buyers or less, process B as we send it out to 500 buyers, let's just, I'm just throwing crazy numbers. And then process C, we send it out to 10,000 or 5,000 or thousands and thousands of buyers, right? Each different bucket has a purpose and has a different potential outcome. If you're in bucket A, you're in a closely traded asset that typically sells at a high price and you have readily identifiable buyers and you don't need to go to some crazy market of outsiders to try to make the price, and that's typically not beneficial anyway, and you risk the confidentiality downside of having it out on a broader market. So that's typically A. B is a tighter process, but involves maybe all the franchisees and a brand that could buy the business, or it could be a larger business where we have a slightly uncertain buyer, but it could be a business that potentially is attractive or could be interesting to private equity and family office groups. You want to send it to 500 of them, which would not knowing exactly who the buyer is going to be, but knowing the type of buyer it's likely to be like on a larger deal or on a deal that's just going to be, let's just say a sonic business and it's only going to be a small sonic business and it's 100% going to go to other sonic franchisees, but we're not sure which franchisee in the system it would be. That might be an example, but it's mostly larger businesses that are most suited because of its size to institutional buyers, of which 500 to 1000 might be the right number, right? If you're not sure who's going to be the buyer. There's not an obvious in-house 5 to 10 buyers who might be there. And then bucket C is Any business of any size that we want to know what the client wants a broader market to know how the market would react in its totality is not as concerned about confidentiality. And the business may have a slightly uncertain buyer. It may be a buyer that is really attractive to an existing franchisee. Maybe it's also attractive to someone who's not a franchisee. It may be attractive to someone in a brand that does not compete with that brand. And it just may have a large universe of prospective buyers with no one individual aha buyer. And so they want to go to a larger market and subject to signing confidentiality agreements with buyers, don't mind that the initial outreach is larger. So we talk about that. Seller makes that decision with some feedback from us and then we go to the market. It's typically a four week process. And it takes a week to get the information out there typically in the hands of the people who want to see it. And then there's usually a kind of a dead week of quiet where the buyers are kind of noodling on it, thinking about it, talking with their partners and lenders and such. And then we start getting questions about the business pre-bid. And then a week before the bid, they kind of step up a little bit with questions and such. And then there's offers are given on a bid deadline on a certain day and a certain time. We ask buyers to come with a letter of intent. some letter of assurance or term sheet from a bank, and then also some amount of information about if their growth approved, if they're an existing operator in the brand that were for sale, right? Because you want to be able to layer that into the decision factor. If it's a bad franchisee or whatever, that's not going to get approved by corporate, then you can't really take their offer seriously. And then we internally then on the bid deadline for our clients, we'll rank and stack, not rank and stack, we'll just put all these things together in a document. summarize them all based on the key terms and the price and the strength of the offer, the strength of the financing, the approvability, all these things. And we'll deliver it to the seller, sellers, if there's more than one seller. And then we'll have a series of discussions and we'll talk about all the offers, go through all the LOIs, and then the seller will typically have a day or two to talk with their loved ones and their advisors and then kind of make a decision on next steps. Typically the next steps involve one of a couple of steps. Step #1 would be, and the most common would be to two to three to four best offers, not just highest prices, but the ones who have the best balance of price plus terms plus likelihood of closing and ability to get approved and to take them to a second round process. And I'll put a pin in that for a second, but there's that process where there's a second round process. And then sometimes there's a clear winner and a clear group that's the best party in the seller's eyes and they don't want to go through that and they just want to make a deal with the offer that they like the best. And they'll either direct us to accept it or to negotiate it a little bit and accept it. And so that's why I typically tell people who make offers to make a competitive offer up front, maybe you leave a little bit in the tank, right, for a second round or for a negotiation, but you don't want to lead with a really low price that's not near where your highest price will be. That's not the way our deals work. Our deals typically work where the first offer and the final offer are fairly, within reason, fairly close to one another. And if you don't operate with that kind of transparency, I think it'll cost a buyer a deal for sure. So you want to put a good offer up front. Now, when it comes to a second round process, if we do that and the client wants to do that, when it's tight and unclear who the best buyer is, they'll typically do send out a process letter. The three or four parties will get an invite. We'll do a Zoom call to ask questions with management. We'll enable them to submit questions to us being a seller for the seller to answer, to clarify their offer, just to make sure their offer is they feel good about their offer. And then they'll have the opportunity to have a dialogue with the client, a two-way dialogue with the client for maybe an hour and a half, whatever it is. And then there's typically a second bid deadline and a final date of offers being made. And then this client typically receives these offers through us and then looks at them finally and then makes a decision. And not always does the highest price win. Probably half the time it does, half the time it doesn't. Sometimes the highest price isn't overly qualified. Sometimes the highest price is. And so there's a number of things that matter And then I would say, if you're a buyer listening to this, I guess I would just say again, make a strong initial offer. Be a reasonable person when you're on, if you're invited to a second round, be the type of person that you would want to choose if you were a seller, right? So the little things matter. If you really want the business, compliment the seller about their business, show interest in their business, ask questions that are meaningful. Like all these things I would tell my son when he was like applying to college, right? Present yourself as charming. and is someone who someone else wants to choose, right? That's something that doesn't come through all the time, especially with the, frankly, with the institutional buyers who are selected for the second round. Oftentimes they'll put analysts and junior people on these second round kind of deal calls and they're like robots and all they're doing is asking P&L questions and there's nothing really human about the whole thing. And what you have to remember, and of course, if you're one of these institutional buyers, you have a 30-year-old kid on the phone, I mean, they don't on the Zoom, what a business is. They never owned a business and they're also young and they haven't lived through a full life yet, right? So they just naturally are going to need coaching about showing empathy and showing interest. and giving good eye contact and listening and being engaging. Like these little things that may not matter if you're a robot talking to another robot, but they sure as heck matter when you're like trying to buy a 65 year old person's business that they've put their blood, sweat and tears into over a 40 year period. That type of person is like a real fleshy person who has emotions and feelings and pride and humility and love and hate and excitement and depression all these human emotions that God gave us, right? And so that would be my counsel in that way. Some of the institutional buyers too will usually make offers. Their initial offers may have a range. Sellers don't like a range in their initial offers, and they will then go into the second round and eliminate or lessen their range to either a single number in their offer, in their final offer, or a really tighter range. And that's very typical and larger kind of business acquisitions, especially for these financial buyers who make offers on franchise companies. And that's something to definitely know and to plan for and why a second round process can become necessary if that's your intended target or the best target to buy your business. So we get to that place, we get to the place where the offer is like there's one group wins, the seller decides, negotiates an LOI and signs it. Now again, if this is a business that is being sold to a strategic buyer, they already really know in most cases about the business because they operate other locations in the brand or in a similar brand. And so the due diligence is really confirmatory due diligence afterwards. But if it's a financial buyer at that point, the financial buyer is like typically hasn't performed all kinds of diligence on the brand, on the brand's performance. on the products in the brand, who the CEO is, what the relationship agreement's like, and all this stuff. And they typically are gonna do the lion's share of that during their due diligence before signing a purchase agreement, if they can, if this makes sense. But typically in our industry, that's not the way we do these deals. And so it always becomes a difficult way to bring in a new family office or private equity group into a significant franchise deal because the way these deals happen is different and in almost all cases with strategic buyers and historically, then the process that's run by the professional buyers. So typically what we'll do is we run the process of sale, put the SIM out, four weeks to get the initial offers, maybe a up to two weeks for the secondary second offers. And then you have a signed LOI between a buyer and seller. At that point in time, buyer and seller work towards a purchase agreement to be signed, which becomes the defining document in the transaction. And it typically goes back and forth over a period of maybe we like it to be 30 days, but sometimes it lasts 45 or maybe even stretches slightly beyond that, but let's say 45 days. During those 45 days, the purchase agreements typically kicked back and forth between the counsel of the seller and the counsel of the buyer, and they work out all the terms and all the indemnifications and all the conditions and deposits of any reasons to walk away when the deal becomes hard, when the diligence has ended and the conditions to close and all these details that the attorneys like to talk about. And usually every deal is different. Some attorneys are more sticklers than others. Sometimes some attorneys are on vacation and there's only one guy in the office. So the timing sometimes takes a little bit longer. Oftentimes, it takes four or five back and forths with renditions of the purchase agreement and markups to the purchase agreement until we get to a place where there's three or four business items remaining and they have to be negotiated between the business parties, but that's not always the case. piece of it to get to a signed purchase agreement becomes a little bit variable, but it takes typically 45 days. Every deal is different. Every contract that's signed is different. Every purchase agreement's different. And so each one has its own authorship to it. But I think that's a pretty decent way to think about it. And then in terms, if you're a client who's a seller to know, like in our processes, like 90% of the deals close, right? So, but I would say the ones that don't close almost always would not close before a purchase agreement's signed. Once the purchase between a buyer and seller, it's very uncommon that a deal doesn't close. It would be greater than 90% in our deals that it would close at that point in time. So that becomes the document that everyone's excited to get to a final signed version. Once that's signed, and let's say it takes 45 days, now we submit that to corporate, whatever corporate is for right of first refusal and transfer approval, whatever brand it is. And that process typically takes between 45 and 90 days, which is a long time. Sometimes it takes 45 days. If it's 90 days, it probably includes, and we're going through one now, where there's like a buyer who's outside of the system, doesn't own restaurants, but wants to be a franchisee and is going through training with corporate and can't buy the stores until training happens. So the training happens alongside the transaction, but it elongates corporate saying yes until that training is completed. That's not the majority of what we do. Most of the time we're selling larger companies where the buyer is an existing franchisee already, or if they're a financial buyer, they're keeping the existing management and the existing franchisee in with the business so that requirement of training has already been fulfilled since the management stays the same, if that makes sense. But every situation is different. just say for a placeholder, it takes 60 days for corporate to approve a transaction. During that time, corporate's going to be negotiating with the buyer on a development agreement on how many stores that they want them to build as a condition of buying the business. Some of these franchisors are gonna have like what's called relationship agreements where they're gonna dictate how you can buy and sell and what are the personal guarantees and any, in lieu of personal guarantees on the franchise for the bigger entity, what lines of credit are they having to guarantee and what financial leverage ratios do they have to keep under in order to not be in default of the franchise agreement. and what the management structure has to be and how many years they have to hold the asset. Every brand's different and every franchise agreement discussion and negotiation is different. So I can't really kind of single out the two or three things, but this is a decent kind of idea. And so that happens. Some of them are quick. Some of them take, some franchisors are really easy and they don't require a lot. They may be a smaller brand and they're just happy to have new franchisees. Others are very, very particular and they'll take four weeks to negotiate 6 words and a transfer transfer document, right? And then once corporate renders their right of first refusal, and most always they will waive it of all the hundreds and hundreds of deals I've seen, not very often will you see a franchisor jump in and buy the assets and exercise their right of first refusal, but it does happen occasionally, very occasionally. And then there's the transfer approval that's issued. And then in most brands, once that happens, you've got things like new store numbers are issued and then POS systems have to be updated. And then there's typically some sort of tri-party agreement that's signed. You have to have like do inventory counts and then final royalties and advertising is settled up between the three parties, closing and then post-closing. But then during the process of franchisor approval, you also have lease assignments that have to happen. And that can take an unexpected turn, but typically happens in the context of the 60 days roughly that it takes to get the franchisor to approve the transaction. action. And anything else, some of the leases are a crazy thing, but it depends on who is the lessor. It depends on who the buyer is and how strong they are relative to the seller. Depends on whether you got Grandma Tilly who owns the real estate in Nebraska and she's on a cruise to around the world cruise on Silver Seas, right? So you can't reach her for four months and it can be crazy like that. And usually assignments are sent out. Most of them come back pretty quickly and easily and then several of them takes longer and some of landlord tries to goosh you for higher rent or won't accept the initial assignment without some concession. It's just all kinds of crazy stuff. So that typically takes 60 days and can be a little bit disconcerting at times and there's unpredictability there, but they've always closed for us. So we just know what you don't know and know that you have to allocate some time for that. The attorneys do that. We sometimes will help with that process too. And then During that same 60 days, the buyer is continuing on getting their financing. And depending on the type of deal, how big the deal is, whether they're gonna use their existing business and recapitalize it and infuse equity through the recapitalization, but not come out of pocket. Sometimes if it's a smaller business and it's a new business and a new franchisee's coming in and they're just putting the down payment like you would with a house, That's a different kind of situation. And then if it's a smaller deal, is it an SBA loan? We don't do a lot of those anymore. If it's a large deal, is it a syndicated loan with six different lenders and a lead lender? And how does that look? All this stuff has to be ironed out with the financing. That typically starts before with the buyer, before obviously the purchase agreement is signed. So the buyer's working on that for the 45 days that it takes to get the purchase agreement signed. plus they're working on it for the 60 days thereafter while the corporate right of first refusal and transfer approval are happening. And then usually we say another 30 days thereafter and then typically the deal closes. And that other 30 days just has mosh pit of things that happens, usually delays or whatever it might be with little things that we can't control or items along the way that needed more time. Maybe there's real estate diligence that has to happen and there's a couple of properties that are sitting on dirty ground or whatever it might be. Or maybe there's new stores that are not completed but are yet almost ready to open, right? So all these things all come together. And then if you're following the timeline of this kind of podcast, you typically, you can go from that initial call to two weeks valuation, like one week to get the business on the market, a month to have the initial bid process, let's call it one week for the second round process. Now we're at two months, right? Is that right? Two months? So you kind of have a buyer around the end of the two-month mark. And then you go through 45 days to get the purchase agreement signed. That's 3 1/2 months. You've got 60 days to the right of first refusal. That's another, so that goes from 3 1/2 to 5 1/2 months. And then 30 days thereafter is another month. So that's 6 1/2 months soup to nuts to close a business. with the variability there being somewhere between five months and nine months. And I think the fastest that I've ever seen a business in all these years close, directionally speaking, was 90 days soup to nuts. And that was incredible. We only had one or two of those that have gone that fast. That's from the time we put the business on the market till the time the deal closed. And it happened a little bit less than 90 days. We had a couple of them. And of course, when I give you that 6 1/2 month time period, that includes before we put the business on the market, which there was about a month there, three to four weeks there. So that initial discussion I just went through probably means from the time the business is on the market till it closes is on average 5 1/2 months with a six and a, like five month to 6 1/2, seven month window, not including the initial underwriting and just the discovery phase before the client makes a decision to sell. But most of them happen in that all in six to seven month range, including the initial conversation with the client and the initial underwriting. Sometimes they can get pushed out for various reasons over the last three or four years as we've been hit with a big inflation in food and same store sales have been dropping a little bit and cost of borrowing went up and then the banks really tightened in some of these brands that were showing poorer performance. yada, yada, yada, right? It's been one thing after the next, and then some of these deals have just naturally drifted and taken longer to close. It's very difficult to close a business that's not at least flattish or close to flattish, down 2 or 3% or less during due diligence, because then the buyer, as we're going through due diligence, is constantly having to engage in retrading discussions with their lender as they're changing the terms and conditions of the loan to meet different coverage and ratios and lease adjusted leverage, fixed charge coverage ratios as sales and EBITDA drop and the lenders are going to key on sales A lot. That's what they care about because sales has such incredible leverage on someone's P&L, right? Just a couple of percentage points in sales up or down have a huge impact on incremental flow through and EBITDA. So if it starts to materially drop during due diligence, deals oftentimes lengthen and that six month time frame period can become nine months in no time because of the difficulty of getting the financing has to have a discussion of a retrade on the price with the seller. And then that has to be all worked out and all this stuff has to be repapered. There's a lot of start and stop and go and stop and all this stuff. And so it gets elongated. So that's something to know. And then corporate heavily influences the decisions. Some of these brands will be really quick in telling you, some brands will let you know, will start their right of first refusal process on an LOI. but most won't. Most will do only with a signed APA. So you don't really start getting corporates first real eyeballs on a deal other than a phone call to them to say, hey, would you approve this person verbally? But that's never a guarantee. But you don't get their like official legal and finance and executive management eyeballs on a deal until after the purchase agreement is signed and submitted to them. And that's going through our process here. That's quite a bit into the transaction, right? So corporate can heavily influence things and they can require, they can take curve balls with what they might require, new documentation, new FDDs, new processes, new franchisee requirements, like new development asks. Maybe the franchisor just got sold, right? And they've got a new management team that's behind it. Or maybe there's a new CEO in the brand who has a different goal for the company relative to franchisee transaction. where there's just lots of things that you don't exactly know, but we know pretty well, but we don't know fully. So you have to anticipate that in the timing of a deal. And then if you're a new franchisee, one last comment to coming in to buy a business, just know that they take longer to close those deals. It's not that they're worse or better. It's just that they typically involve training requirements and the buyers who are coming into the brand are typically not as knowledgeable of the brand than an existing franchisee, either of the brand that's for sale or another brand would be. That's just human nature, isn't it? So then the deal closes and then there's the closing and then typically the buyer takes possession of the stores and there's a true up on the inventory and cash on hand typically that can either be typically negotiated, but typically the purchase agreement will call out how that operates and then off and running with the new buyer and then the seller sails off into the sunset. I usually like to tell clients though, don't go off and move to Fiji just yet. Typically you're going to be doing this during a year and you're going to have to file your tax return during that year. There's going to be vendors that are going to always be calling. You have the float that you're going to be dealing with. You're going to wrap up your relationships with your lenders and vendors. And there's going to be the garbage bill is going to come to you for three months until you get it transferred properly to the buyer and their entity, right? These things, these little things just happen. Oftentimes there's six months of kind of declining. Every couple of weeks you'll notice a step down of post-closing kind of things that you're dealing with. And it does scale after six months or so. But it can be a little bit more than what sellers think once they sign up. There's like, oh, as soon as the business closes, there's nothing more to do. It takes a while to wind down the business. And certainly the tax piece of it will keep going until the following April 15th or beyond if you extend your taxes. And that becomes the process to sell a company and the timing. Now, out of just a little giggle, you think I could have all of these three episodes into one hour call with somebody? So this is a little bit more detailed than that, clearly, but most of these high level items we'll talk about in a quicker kind of canvassing and then follow on conversations. If we get to the second point of doing the deeper dive evaluation with my team, then we kind of fill in the gaps and have these like more detailed conversations so that most of the bases are covered and clients know what to expect when they go through a process. And they're still surprised. Can you believe that? Because no deal, no two deals are the same. That's what makes the business that we're in such a blessing and so much fun to do all the time because it's never the same. And I think knowing me, if you've listened to this for a while, you know my personality, I'm an extrovert. I love the fact that our business changes. deal to deal, a year to year, brand to brand, all of it. always creates challenges and fun obstacles. It's solving crossword puzzles all the time. I love it and I hope you can tell that. And I thank you for continuing to listen in and hope you've enjoyed this three-part series over the course of this year. If you have any questions along the way or want to talk about buying or selling or raising capital for a franchise company of any kind, you know how to reach me or anyone on our team, feel free to holler at us and be an honor to talk with you and I wish you the very best. and go get them. Thank you.
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