Rick Ormsby:

Welcome to The Restaurant Boiler Room, Season three, Episode 10. I'm your host, Rick Ormsby, managing director at Unbridled Capital. Today in the boiler room, I'll be covering various topics such as this month's view of the M and A landscape, how franchise are thinking about tax legislation, observations from recent franchise conventions, tough operating conditions right now in the franchise industry, franchisors becoming more involved and aggressive, and what happens when a business starts to underperform during M and A due diligence. The Restaurant Boiler Room is a one-stop shop for multimillion dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk money deals, valuations, and risk delivered to the front door of franchisees, private equity firms, family offices, large investors and franchisors on a monthly basis. Feel free to find our content at a Unbridled Capital's website at www.unbridledcapital.com. Now, let's enter The Boiler Room.

Rick Ormsby:

Well, hey, I'm glad to be on the mic again here and thank you so much for listening and I've wanted to shout out to a few folks. I tell you, I've started going to conventions again, kind of in our franchise industry. I have kind of annual national conventions or regional conventions that happen across the country and it's so great to be able to see people in person. Although, I'll tell you the attendance, hasn't been a hundred percent. I would say by just kind of an informal estimation of looking around at old friends and clients and all this kind of stuff. I see couple of conventions we've been to, and I'll talk more about this later, the Taco Bell convention and the Wendy's convention seems like there's probably 60 to 70% attendance, right? So it's down 30 to 40%, which is understandable. A lot of people still aren't traveling, but it's good to see everybody again, or not everybody, but some of you and some of you who are listening. A lot has happened.

Rick Ormsby:

Friends of mine, several have had health challenges, people who are acquaintances and friends, and you just kind of lose touch after a year and a half of not being able to see people. So I make note of that and for those of you who are listening, I keep a quote by my desk. It says, be completely humble and gentle and be patient bearing with one another in love. Sometimes the humility and patience and some of these things that I struggle with, and love or what we need to show people who been quietly going through a struggle in their lives with a health challenge or something with their families. And so I encourage you just as a side note, to ask questions and to reach out to folks who you haven't talked to in a while and show that love to them, man.

Rick Ormsby:

I know there's some quiet, struggling that's been going on with a lot of folks who are friends of mine in this industry, let alone your friends and going to acquaintances that you're talking to. First thing I wanted to talk about today, state of M and A deals. So let me chat about that for a minute. At any point in time, we probably have somewhere between 20 or 25 or 30 assignments that we're doing and so I'll just give you a quick update on kind of some global things I'm seeing in our assignments. The first would be we got kind of rocked a little bit with the house Democrats coming out with the tax legislation policy saying that maybe taxes would be increased as of September 13th if legislation gets passed. Some sort of a retroactive tax increase, and there are components of the tax legislation, and mind you I'm not a CPA, but there're some components of it.

Rick Ormsby:

I follow-up pretty closely that look to be pretty aggressive, but one of the things that really kind of surprised me in a positive way was the capital gains tax proposed increases. Looks like we have, what, a 20.3% plus the 3.8% Obamacare ad for 23.8% capital gains taxes currently at the federal level, I believe that's right. And it looks like that number would go from basically 23.8 to 28.8, which is a 5% increase, which that may actually get negotiated to nothing or reduced from what the initial proposal is, because obviously if you read the tea leaves there's not complete agreement amongst the Democrats and there are several more conservative Democrats that have said, hey, we're not going to pass some of this crazy legislation on a tax perspective. So the point being that a couple things, I'd say number one, when that came out I was quite pleased because the initial thought coming from the Biden side from several months ago was that capital gains taxes he was proposing them to come up into the forties.

Rick Ormsby:

And I was frankly afraid that that was going to just shatter the M and A market and probably the whole country that we live in. Thankfully that's not what has been proposed and I think since the legislation has been in introduced, I've seen kind of more comfort. I wouldn't say that franchisees whose deals that we're doing right now are excited if their deal drifts into 2022, right? The reason why the spring and summer were so heavy and fast were because franchisees were selling, a lot of them had COVID gains, really good sales and profits in their income statements and they'd been making a lot of money, evaluations are up, but they really, a lot of them wanted to sell to try to get in front of any pending tax increases, assuming they would've sold in the next couple years anyway, but I've seen a little bit of relief there that sellers especially are looking at 2022 with a little less consternation than they were before.

Rick Ormsby:

So I think that's one item that I've been noticing in the current deals. Another thing is there's a lot of business in the market and a lot of these third party people, right? Facility inspectors and people doing appraisals and environmental and banks doing underwriting. And I'll talk about franchisors in a minute, but all these people are really busy right now. So it's one of the items I've noted it all the franchise conventions. There's a lot of lenders that are there now that weren't there in the past, several groups are building national franchise, particularly restaurant practices, and they're busy. They're really busy. And it's a pride in a lot of capital in the last quarter of the year. So the press is on to finish the year and close these deals, but my guess is that probably maybe 25% of the assignments that we're projecting to close by the end of the year may drift into January or maybe February.

Rick Ormsby:

So, that's something that I've seen. So number one, tax legislation is not sounding like it's going to be as egregious as we thought, therefore, operators are a little bit more willing to sell their businesses in 2022 even if they're going through diligence now, that's number one. And then, number two, we're seeing PNLs that are starting to be a little bit challenged too, and it's really sporadic. And it is true that several brands, a couple of the burger brands particularly and several other brands are starting to see kind of flattening trends or negative trends on sales is a lot of it too across the country is not so much brand specific, but it's like location or geographic specific. We've seen even great brands, won't name them, but some that are up seven or eight or 9% still year over year in sales nationally.

Rick Ormsby:

But here we are going into some particular market for it, one reason or another and I can't even make sense of why it isn't performing the way the national trend is. There's a lot of variety in performance across markets, but one thing that you see particularly is that commodity inflation is starting to show up and labor is particularly a problem. And part of, I've heard it a lot of times over the last month, some friends of mine are saying, I'm having to work in the restaurants again. I'm having to work in the stores and I would have higher sales if I could staff my restaurants. I've heard this in North Carolina in burger brands. I've heard this in the Midwest in chicken brands and pizza, that the staffing problem is really hindering kind of the recovery nationally with restaurants, but that it's also taking a chunk out of comp sales growth on a year over year basis in some of these brands, especially as they're rolling over some pretty difficult comps from 2020 at this time, right?

Rick Ormsby:

In October, September timeframe, in 2020 we had kind of started to see the turnaround and I kind of challenged you to listen back to what I was saying back then when everyone was still scared of their shadow. And I was like, yo, we're going to start to see a turnaround, not only in M and A, but in sales and I'm really positive about it. And really in many cases, my wife will tell you I'm never right. So I was actually right this time if you go back and listen, but nonetheless, we had really strong and growing sales trends as we hit Q4 of 2020. So that makes the comp sales look in 2021 much more difficult. I was just kind of pulling through some numbers, but just out of the blue, I'll just tell you, this is some data that I've just kind of seen. For 2021 Q2 now, not Q3, but this is looking back a quarter. A two year stack of comp sales looks to be around 20% for chicken and pizza and a little over 10% for sandwich and coffee is around 10%.

Rick Ormsby:

And then of course you start seeing casual and family dining that are just having these wild swings from late 2020 hugely negative comp sales numbers to Q2 of 2021 massively positive numbers and it looks like on a two year basis, they're back to about normal or a little bit positive. So, I think we do see some decelerating sales and some PNLs challenged by both commodity inflation and the lack of availability of labor, unable to keep the restaurants or the establishments open as much as you want to. What else would I say about the state of current M and A deals? I would say the franchisor is becoming a little bit more of an impediment that I've seen in the past. So in several cases I've seen for the first time in a long time franchisors really saying, being very discerning about the deals that they're letting come through.

Rick Ormsby:

Several franchisors are now not allowing franchisees who are non-contiguous to their operating market, to a market for sale to buy the restaurants, several deals. And so some of them it's an existing policy. Some it's a new policy. Kind of like one of these things if someone has a 10 unit business for sale, and then let's just say it's in Kentucky, and the buyer happens to be in Texas and wants to buy the stores. Franchisor says, well, if you operated in Texas, what you plan in Kentucky? And I'm not so keen on approving you to buy a market that's non-contiguous, unless it's of a certain size and scale. So we're seeing deals having that component in it quite a bit. I'm also seeing that franchisors are sticking their hand in the pie here and continuing to push for big development and remodeling requirements.

Rick Ormsby:

It was a little bit muted over the last year and a half or so, but now that performance is a little bit stronger. You're seeing them kind of step back in. Several brands are getting close to announcing some pretty big new remodeling requirements across their systems, so be on the lookout for that. I think the franchisor also is really slowing down the transactions and in their defense, I think it's probably largely because there's just such a high pace and high volume of M and A work right now. And the franchisors, of course, they get the right of first refusal and then they have to approve the transfer. And over the years, a lot of them have been cutting their staffs and they don't have maybe the GNA that they used to, but I'm seeing more delays than I'd like. I'm seeing a lot of growth approved operators. Operators who meet the operational and financial qualifications that are getting turned down by the franchisor.

Rick Ormsby:

What else would I say about the franchisor? Oh, yeah. And I guess I'm starting to see the franchisor play a more active hand in either exercising the right of first refusal, or in two deals we have the franchisor is actually exercising the right of first refusal, but then shuffling and giving the deal to another franchisee and they're in different brands. And there's a third that's looking to do it too. I haven't seen any of that in the last decade I think of. And that's a really different shift and trend at the franchisor level than what we've seen in the past. Overall, I guess when I bucket the franchisor in my comment about the state of current M and A deals, I would just say that they're more aggressive and they're getting more involved. So that's a broad statement with some of the specifics behind it, but something that you ought to know going forward.

Rick Ormsby:

And if you're a family office or private equity group, that's listening to this, you know man, and if you are what's up and thank you for doing that. I would just say, get a little better knowledge of the franchisor for the brand that you're looking to pursue. Don't just sit here and do a shotgun approach of any kind of franchise deal that has the lights turned on, right? Don't do that. Get narrow in the type of deal and the type of brand that you're looking at. Pick two or three brands and get to know the franchisor because there are lots of surprises and as they kind of change their modus operandi, or however you say it, it's just there're surprises there, things that you don't know, some attitudes at the corporate level, some different requirements, some different philosophies on how they want you to grow, or when, or where. It may impact the investment decision you make and how you get into a brand and what type of unit economics you want and what type of returns you'll get.

Rick Ormsby:

So you can always call us. I've got a lot of this knowledge and our team does too, but just investigate that. Don't go into it willy nilly and take the franchisor way down the road, but just look at the deal of it for itself and say, ooh, I like this. This is a great deal with great unit economics and a great area of the country and it's got a lot of good operator and a lot of stores. If you do that first and ignore the franchisor, I think you're going to be disappointed in many cases, especially as we go forward here in 2022 and beyond. So, that's some stuff on the current status of deals. All right. So I've got another point here. I just kind of got a notepad here of nine or 10 things I wanted to kind of update you guys with.

Rick Ormsby:

So that's number one, number two, new deals hitting the market of various sizes. So, it's a normal course of events in M and A. I think across any industry, really, although there might be some cyclicality in seasonality across different areas, but in what we do, obviously people, you will get their year in PNLs and they'll look at their business, they'll make their investment in planning decisions usually in January and February when they get those year end statements and they talk with their families and pray with their families and talk with their business partners and you see a lot of M and A hit usually in mid February through the end of April, right? And then you typically see a bit of a lull during the summer. We're working on deals always, but it's not as much new activity.

Rick Ormsby:

And then in the fall, usually August, September, it's pretty slow. And then it starts picking up in October and November when it back to franchise conventions and people start looking at the end of the year. So, we start seeing some new assignments typically in this time of year and then we're pushing to get deals done by the end of the year. And then the cycle kind of continues, right? And then the deals that we brought on in October, typically close sometime in March or April and there's typically six months plus or minus to get a deal closed from soup to nuts. That's kind of the cycle. And it was kind of going this way this year too, but I thought we've had so much of a pull forward of sellers and so many buyers in the market because interest rates are so low and the conditions of improved so much.

Rick Ormsby:

And there's so much capital sitting around that wants to be invested and lenders are swarming again, right, that I kind of thought that all this pull forward of business from people, especially trying to race to get their deals done before 2021 ends, meant that the spring and summer would be really busy and it was, and then I thought the fall would be kind of like you could hear a needle drop, right? And so I would just say this, in the last 60 days, it kind of is reacted like I thought it would, which was August and September were kind of slow, but something has happened that's a little bit different. Here I'm talking to you now on the 1st of October 2021 and yesterday I got six phone calls from would be sellers of franchise businesses and I think one brand there's two sets of people who called me and then the other was four different brands, one deal.

Rick Ormsby:

So it's wide, it's not narrow to a specific brand or a specific segment of the business, but it kind of surprised me a little bit, because I would've thought that things would've been quiet for a while just because we've pulled the demand forward because of the tax year and tax stuff. And now any deal that comes forward is going to be a 2022 deal. So I'm left with a couple of things in the last couple of days. I think the number one item is got to be that, and I've heard it is that this is the most money I've ever made, but the most I've ever worked for it too. And I think the phone calls to us are maybe coming in because it's hard out there, man. There is some real fatigue at the RGM, the restaurant general manager, level at the store level.

Rick Ormsby:

It is hard to operate right now. And there's a record number of guys who big franchisees tell me that they're working in their stores on occasion now. I'm like, what really? Actually making tacos and pizza and chicken and burgers and everything else. So I think the operating conditions in the last couple of months have really gotten worse. And I know with the return of Delta for a while, you've had a lot of stores that just don't physically have enough people to operate. And they're only operating for lunch and dinner and all the other hours they're closed. I think it's taking a real toll and I think that's maybe one of the reasons folks are kind of raising their hands. The other thing I think too is this tax thing has maybe got a little bit more clarity.

Rick Ormsby:

And I think people, again, like I mentioned earlier, are a little more comfortable with the idea of paying slightly more in capital gains taxes, because most of us franchisees sales going to be at the capital gains tax level. There is some obviously ordinary income tax if you have depreciated your equipment and your furniture fixtures and equipment and you have to recapture that at ordinary income tax rates, but for most franchisees, I mean the majority and a big majority of a sales going to be taxed at a capital gains tax rate at the federal and state level. So these operators, I think are comfortable with the idea that no one wants to, but if paying a little bit more in taxes and knowing that they could still sell in 2021, 22 pardoned me, if they missed the boat this year and then of course we're starting to close deals.

Rick Ormsby:

I think we've closed 15 deals or 17 deals or something like that this year and they're going for huge prices. And so, we send out if you're on a database and you see the deals that we do, you see the close losing announcements and people talk to one another and they hear, oh crap, we're getting these enormous prices for these deals. And I think that's motivating them too, but probably in the face of what's become a difficult operating environment. And I've actually seen quite a few second generation folks who are the people operating these businesses. The first generation is kind of mostly retired and then the second generation is probably in their thirties and forties and they're really maintaining the business. I've seen this in five or six situations and they've come to me recently and said, man, I don't know that I want to keep doing this.

Rick Ormsby:

It's such a hard way to work. And these are talented guys who've got gain gals, who've got a lot of experience as a second generation and they're just not in it for two or three years. They've been in it for 10 years. So I think some of these things are kind of coming to fruition. And for that reason, I now think that it's going to be a very busy fall. I think after a couple month hiatus of new deals, we're going to see the deals start to press and to come back out, especially once we get final clarity at the federal level of what the heck's going to happen with taxes. I project now that it's going to be a really busy 2022. Will it be as busy as 2021? I don't know. As long as we don't hit a major recession and the credit markets don't lock up or the business conditions don't flip really poorly, or the stock market doesn't by 20%, I think you're going to see a steady pace of sellers in 2022.

Rick Ormsby:

So that's a little bit of a prediction and I think too, you're going to see, I may have mentioned this before, but you're going to see some casual dining and fast casual businesses come back out on the market. Like I was saying, on a two year stack of comp sales for casual and family dining, they were now in Q2 up over 2019, right? So on a two year basis, sales and profits are actually, well, I don't know about profits, but sales are up and I think as that starts rolling itself through the P and L you're going to see folks looking to either sell or refinance or recap their casual dining and family dining and fast casual businesses, but I have to put an asterisk by that when lenders bring liquidity back to those segments of the market. And right now I was talking to some guys out at the Taco Bell convention and right now there's just so much QSR deal flow that's looking to get closed with all the activity for year end that I just don't think there's much attention on it right now.

Rick Ormsby:

And plus most casual dining operators are sitting on four or five or three or four months of good sales and profits, but before that, they still have some really mass CP and Ls and some noise and some big declines. So the timing may present itself for a return to M and A in that segment probably, or those segments may be in Q1 of 2022, who knows. We'll see, right? Okay. So I wanted to talk about new deals hitting the market, and there are various sizes too. So of the people who called me just in the last couple of days, we've got huge operators to tiny ones.

Rick Ormsby:

So I don't think it's one particular brand, one particular area of the country, or a certain size of franchisee. I think it looks broadly like a big bucket of different types of operators who are investigating. I did come back from the Wendy's convention in September and the Taco Bell convention just a few days ago. There's not much to say on either of those conventions, other than it was great to see everybody. I thought there was a lot of positive sentiments in both brands, a lot of optimism. A lot of what, and no one was saying it, and I'm not sitting in on any of the corporate meetings, I'm just talking to franchisees, but a lot of what I would say is take market share type of sentiments and feelings. A lot of the Wendy's, both of them, a lot of the Wendy's and Taco Bell franchisees are positive on the focus on breakfast.

Rick Ormsby:

I think breakfast is an area for both of those brands that you're going to see a continued acceleration in 2022. I didn't have a chance to, they don't let us see any of the new marketing campaigns or anything like that, but there just seem like a lot of marketing and new product optimism in both brands. And so I think particularly in the burger space, Taco Bell is in a segment, right, where there's no true national competitor. No one really looks at Chipotle as an example, or Qdoba, or any of these brands as being a direct competitor to Taco Bell. Actually, Taco Bell's biggest competitor, this is my opinion, could be Wendy's, right? If someone might make the same purchasing decision on the value menu at Taco Bells, they would at Wendy's.

Rick Ormsby:

I remember Amy Broeck once famously saying that at a convention about 12 or 13 years ago, maybe more when he was Taco Bell's CEO. And then of course he became CEO of Wendy's several years after that. So, Taco Bell, it doesn't have the true national competitor, but I do sense that Wendy's is on a bit of an upswing. I think they're probably also in a position to take some market share from some of the other burger competitors if they don't get their acts together. So those are some comments. Talking about another point I wanted to make was talking a little bit about the difficulty and fatigue plaguing the business. I was just kind of jumping on cnbc.com the other day and saw kind of an article that said the majority of restaurant operators say their business conditions are worse now than they were three months ago.

Rick Ormsby:

And it says something like that only 9% of people of franchisees were saying that their business conditions have improved wildlife. Vast majority say they have gotten worse. 83% said they are at least 10% understaffed, 39% are missing more than a fifth of their needed workforce and food costs have been rising dramatically. So I just make kind of note of that. Several friends of mine out at these two conventions are telling me that they've had multiple RGMs, that they've had employed almost as family members really for 20 plus years just come to them and say, we're just going to retire now. This has just has gotten too tough for us. We've been holding the line, kind of military analogy, right? We've been holding line. We've been in the bunker for a long time, but we can't do it forever.

Rick Ormsby:

And so I think there's that fatigue that's hitting the industry for those of you who are franchisees or who own franchise companies who are listening to this, you're probably like nodding your head and saying, duh Rick. The commodity cost situation too, is pretty rough. Doing a couple of deals in brands that have chicken wings and my goodness gracious. Those things can get expensive. It's interesting when you're in a brand that has a heavy percentage of your sales in chicken wings. It's like the pricing goes up and down so much within any given year that some years your profits could swing by a dramatic amount. And oftentimes you have to make sense of the fact that you're paying more for a deal in one of these concepts when the chicken wing prices are high, because you look at the four or five or 10 year trend and you see them becoming cyclical and you have to get comfortable with the idea that even though you're buying them on high commodity costs now couple years from now, unless the sky falls, their probably going to be coming down, right?

Rick Ormsby:

So we've seen commodity cost pressures quite a bit, but I note particularly in the chicken wing area. I have another item here someone wanted me to discuss. What happens in due diligence when comp sales and profits start to decline. I think it's becoming, like I mentioned earlier, an issue a little bit. Of 25 or so deals that we're going through due diligence in right now. At any one time, right? At any point in time, if I have 25 deals going, I ask my guys and we kind of go through it, you're probably going to have, I don't know, maybe a bell curve, but most deals are going to have sales and profits are about flat because historically this industry has been upward down one or 2% in comp sales and profits are fairly controllable, right?

Rick Ormsby:

So in any one point in time you typically have a big swath of deals where sales and profits are pretty close to even and then you have some people on the other side of the bell curve near the middle that they're up or down a little bit in sales and profits, right? And all of those kind of deals typically proceed to closing. It would be rare in my mind to see a buyer re-trading a deal if the sales and profits are down a little bit. Obviously if they're flatter up, they're happy.

Rick Ormsby:

It would also be rare to see a franchisee, a seller, walking away from a deal. Most of our clients almost never walk away from a deal. It's why our closing rates is 90%, but a seller walking away from a deal because their sales and profits are up and they now don't want to sell, that's a rare case anyway, but it would be rare to see it within the bounds of the bell curve that I just described. But in the world we live in now we're at the extremes, right? We're at the extremes probably politically and culturally and all this other crap that we see out in the marketplace, but we are at extremes in sales too because of COVID. Some clients have businesses that crushing it and as we're going towards due diligence and closing, their sales and profits are really high on a comp basis over last year.

Rick Ormsby:

And then you have others who are starting to see some pretty dramatic declines during due diligence. To address first, the ones that are going through big inclines. If you're a seller and you put your business up for sale, and then you go through the 30 day process with us in finding a buyer and then we negotiate a purchase agreement. And then you're 45 days thereafter into due diligence and your sales and profits are way up, you want that to be the case. I guess we could all time the sale of anything, whether it's our car in our front yard, or our pickup truck, or our house, or our boat, or our business, we would all love to sell it at the very moment where it's at the highest value, but that doesn't really happen all the time. Does it?

Rick Ormsby:

So if you're a seller and your sales and profits are going up during due diligence, you should be happy that they are first off because it almost 100% of the time means the deal will close. I'm sure there's a case in 20 years of doing this where I've seen a deal that's falling apart when sales and profits are really doing really well during due diligence, but it's not very often let me tell you. The other thing is you can kind of dictate some terms during due diligence. If you have a buyer who wants to push back and say, oh, the facilities need to be improved, oh, I need 20,000 for this store for a new parking lot repair. Oh, this roof is busted and leaking. And oh, this HVAC unit at this store is as old as the hills.

Rick Ormsby:

And you come into here and our headset equipment's missing. And over there we got lights that are out in the parking lot. If you were doing a big deal with 100 units and you can start adding up some pretty massive numbers on the facility inspection side, when a buyer comes and looks at the assets, but you have a lot more leverage when your sales and profits are up, don't you? And so for a seller, I just tell you that if your sales and profits are up during due diligence, good. It means the deal's likely to close unless you got a weird circumstance and it also means that some of the terms and any kind of push backs during the due diligence period will be limited because a buyer's going to be like, whoa, I'm getting a good deal here.

Rick Ormsby:

So there you go. That's on that side. Now let's move to the way on the extreme other side of the bell curve. We'll have one or two deals now, and it's not many, but one or two deals now where there's been significant comp sales and profit drops over last year during due diligence. The first thing I would say is when we see that coming, we try to present the deals. At least verbally when talking to buyers. We try to make them aware that what they're seeing is potentially moving downward. And of course they have to do their diligence as well. That's the first piece. The second piece would be if sales and profits are down substantially, especially during the COVID period. We always encourage people look at the two and three year sales and profit trends.

Rick Ormsby:

And all of our deals have all of that, right? They've got sales, income statements for at least three years, including the trailing 12 month period, so that a buyer and operator can look and see where they've been and where they are now and make their own determination of what they think the steady state will be, right? So all good buyers are going to be doing that, looking at fluctuations and looking at the increases and seeing how much they might come back. And then of course you've got your opinions if you're a buyer. You may say, oh, well, the Sonic brand, gosh, they've been up 35 sentence sales. When we roll over those periods, man, they may be down five or 10% or someone else might say, I'm going to keep all of that revenue, but those are personal opinions based on your experience.

Rick Ormsby:

And a lot of people, obviously you have different opinions on that. The other thing I would say is when a deal does have significant amount of sales and profit degradation on a comp basis, lenders are going to start asking questions, right? And lenders are going to start changing their opinion, especially the risk department, which I've talked to several of them in the last week and these national franchise lenders, they're risks and credit departments are now taking note what's happening during due diligence, right? And as we start rolling over some of these big COVID numbers for last year. So if you're a buyer and you're taking a deal to your lender, you should have that discussion with them right away. Obviously take your opinion, take all the historical financials, get a proposal letter, a term sheet from them, and then start to discuss with them if you're in a brand or a situation where you feel like there's going to be a pretty high amount of sales and profit degradation over last year.

Rick Ormsby:

As we go into due diligence, you need to ask the lender, or your multiple lenders, how they're going to be viewing that and come to some sort of plan, right? And then between the buyer and seller, if it's not expected, you really open the door for a kind of discussion on price in some instances where it is continual and it is dropping pretty badly and not stopping and there's no real reason. I've seen deals right now where several stores in a 10 unit package have been closed for X, Y, Z amount of days because they can't staff them because of the Delta virus, right? Well, that's not a real reason of itself in my mind.

Rick Ormsby:

Other people might disagree. To be looking at a drop in sales and profit and to say I'm not going to pay the same price, because that's a temporary item. Now, if it's a brand specific item, for example, sales are down 10%, the whole leadership team at the corporate level gets fired and we've got X, Y, Z problems going on in the brand and everyone's suffering it across the country, then it's a different dialogue and discussion that has to be had, I believe, in many cases. So I hope that answers that question. Appreciate the person who sent that one to me. Talked a little bit, there's a couple of other items I want to just chat about. We've already talked about franchise orders becoming more aggressive. That's something to make note of, again. I'll just mention that one more time and then two more things. I'll just kind of give a quick shout out on a recent deal that we closed, and it's really not about our company or whatever, but what I wanted to bring out to you is we just closed a KFC deal.

Rick Ormsby:

A couple of KFC deals actually in the Indiana area, right? Both of these franchisees had been in the business for almost 50 years. One of them was saying the decision to sell our family KFCs was not an easy one. The second generation owners and they made some nice comments about our work and our integrity in the process. And I just want to give a shout out and help you guys remember how wonderful this franchise industry is and how many lives across this country it has changed. On the franchisee side, these are middle America, everyday common folks, or immigrants, or people who have come into this country and have come to the American dream and they have a story. And a lot of the stories are crazy, especially for these franchisees that have been in business for 30 or 40 or 50 years and saw an advertisement in their newspaper, or they were driving on their way down to Florida and pulled over at a location and they never heard of it, but they went in and loved it.

Rick Ormsby:

And then they called the franchisor and drove to see them and got an interview back in the day. Other people who say, I didn't have the money to do it, but I borrowed some money from my mom and I threw it on a one pager and handed it to the franchisor and begged them and they let me open a franchise location. This industry started, whatever the reason was, by people wanting to live the American dream man. And I'm telling you there are some awesome, awesome careers and awesome legacies that have been created through the franchise system. And these two KFC deals, just wonderful people. We got a picture from one of them. It was the first generation franchisee and his son, the mom. So the dad and the mom, and then the son and the daughter-in-law, and they were holding a picture in their backyard.

Rick Ormsby:

It was in Indiana, they're holding a picture of a bucket of chicken and they texted it to us and said, this will be our last free meal at KFC after all these wonderful years. And it kind of, sort of, I don't know, it got to my heart a little bit, because sometimes in what we do, and I challenge you, who are in New York and LA and in Chicago, wherever you are, but if you're thinking of this as an investment business, it is so personal and there's so many legacies and it became even more real to me of all the lives that have been changed. Another thing I'll tell you too, is when I was out at the Taco Bell conference, someone who I really have a lot of respect for and has a great story that I just learned about.

Rick Ormsby:

I bet he'll listen to this podcast too. And you'll know who it is. You'll know it's you I'm talking about. And he's had some trying times in his life recently. He made the comment to me that this business can do amazing things for you. He is an operating partner and a part owner of a Taco Bell franchise, and started as a teenager with probably very little, but a little bit of gumption and some hard work. And if you just put your head down, and this is really the same in any field, but just think about this. If you could start as a team leader, or you could start as a team member and become team leader and become a shift leader and become a assistant manager and a manager and an area manager, and then a district manager, and then you become a part owner of the franchise, it could be something that you never would've dreamed of.

Rick Ormsby:

If you keep your nose clean, do what you say you're going to do, and you have integrity and good work ethic, and you do a good job. So that's Rick's american dream type of charge today. I guess I would just say that, let's not forget the wonderful people who've helped build this legacy of franchising across this country. Lots of them are selling now. Lots of them who own five to 10 to 15 locations are the very ones who may be older in age and they are going through the tough business conditions and they're looking at the future. They're going to make a graceful exit and I don't want their legacy to be forgotten because it's so special. Finally, I guess I'd tell you guys and gals that the restaurant finance and development conference is coming out in November. It's going to be in Las Vegas. The fine folks out there are back in this year after last year's hiatus in person because of COVID. Unbridled will be there.

Rick Ormsby:

I'm going to be bringing I think Derek, Tony, and Raymond with me from our Unbridled team and we'll have a booth. And so come out and say hi to us if you're going to be there. Be honored to meet you. It's really a good convention to kind of, if you're in the deal making space, if you're an attorney, a CPA, a private equity firm, a family office, a franchisor, or really a larger franchisee, gives you some great tools and insights, and we're going to be there excited about it. So I hope to see you guys out there in November and thanks so much for listening today. Be good.

Rick Ormsby:

Thanks so much for entering The Boiler Room today. You can find our podcast us 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 and A and financial resources in the industry. Our website includes webinars, podcasts, videos, white papers, and a list of our past M and 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 their end or emissions they're from.