Rick Ormsby
Welcome to the restaurant boiler Room Season 7, episode 3. I'm your host, Rick Ormsby, managing director at Unbridled Capital. Today in the boiler room, along with some of our unbridled team, I'll be discussing the results of a recent 19 Question survey. Franchise buyers to learn about what they were buying in today's market, it will discuss their overall sentiment, what segments interest them, how much they're willing to pay, their biggest concerns in getting deals closed and which brands are most attractive. This is our first survey like this and I think you'll enjoy the wealth. Of findings here. The restaurant boiler Room is a one stop shop for multimillion dollar merger and acquisition activity and financial complexities affecting the franchise industry. We talked 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 Embrittle Capitals website at www.unbridledcapital.com, now let's enter the boiler room. Thank you so much to everyone for joining a if you are listening kind of afterwards here on our podcast, the restaurant Boiler Room. Thank you for tuning in and listening. We're very thankful for those who listen and subscribe to the content, you know, and don't we. I've never done it for the purpose of making money just to get good information out to the marketplace. About the beloved franchise M&A industry that we've been a part of for so many years, so this is going to be a survey that we put out and we're here with with Derek Ball, with Peter Fisher, with Raymond dinner and I and we're going to talk first time we've done this. So we so we asked 19 questions. Of buyers, you know, it's been a pretty volatile. Volatile is not the word maybe subdued M&A market for franchise businesses and really M&A as a whole over the last three or 3 1/2 years. Now as a matter of fact, I was just told that April 2025 last month was the lowest amount of M&A. Closings across all sectors in our country since the Great Recession in 2007 and eight, I think maybe 2009. Was the time, yeah. So yeah, so it's been pretty, it's been pretty slow. There have been some Closings, we just you know, closed a big Taco Bell business a couple of days ago. We have six other assignments that we have active, which is really low for what we normally.
Rick Ormsby
Do, but we want. To just pause and ask the questions that we've never asked before in mass of buyers and potential. Hires and franchise businesses and let them opine and send out their answers. And I hope that this is a blessing and a benefit to everyone who listens here. So thanks again for. Joining us and if you have any questions along the way, feel free to raise your hand. We'll try to answer them as we go and we'll send out, you know, a link to our this content, which will be both on the restaurant Boiler Room podcast on all platforms and also on our website and our YouTube channel, unbridled capital.com. And with that, ladies and gentlemen, let's get it going. So let's go to question #1.
Speaker
That was a 19 question.
Derek Ball
And just real quick before that, you know, to the 49 people who responded to our survey, we appreciate you obviously we wouldn't be doing this pod.
Speaker
Yes.
Derek Ball
Yes, if it wasn't for y'all's responses, we'll be doing this similar to our lender survey annually. So you know about a year from now we'll we'll send out similar with similar the same questions and we'll be able to kind of do this annually and kind of see how buyers minds are are potentially changing year to year. But thank you to the 49 people that responded and yeah. Greg, take it away. I'll. Go to the first question.
Rick Ormsby
Yeah, sure thing. And it well said. Thank you guys so. The first question that we asked was which of the following would best describe you as a buyer and out of the 49 responses we had existing franchisee with no outside capital, 47% of the people, well 49% of the people a little. More than a. Little about half family offices, or 16% of the response. Tenants private equity were 14% of the respondents. Independent sponsors were 6%, personal investors were 10% and then former corporate franchise executives or franchisors or 2%. Just one response comprising the 49. So gentlemen, what do you make? Of this, as we get started.
Derek Ball
What we expected, keep in mind we don't. Know who responded? We didn't get the. Names of anybody who responded, it was all confidential, but generally about what I would expect, you know, in terms of our deal launches, this is in line with the type of people who generally respond signing our NDA's and looking at our deals. It's usually half people are just kind of owner operator franchisees of various sizes and and the rest or are often some sort of institutional group. So about 5050 here Ish maybe 60-40 if you include the personal investor as well. It's about about what we expected.
Peter Fisher
Yeah. And I would say that I mean, it's kind of all lines of what we've been saying for the past couple of years. The main buyers we've been seeing recently, we've been strategic buyers. And so that's kind of what we see here.
Raymond Buehner
Yeah, I'd say this is pretty representative of our, you know, our current buyer pool, you know, seeing over or nearly 50% being basically strategic. Those are kind of who are winning our deals right now. So I think I think it lines. Up with what we expected.
Rick Ormsby
I think so too. It looks pretty consistent with how I'd think about it. The family office and private equity group being around 30% is maybe a little light, but then again, the environment has not been as friendly to those types of buyers that rely more heavily on new unit growth and low cost of borrowing. New unit development like I said, and some of the. Traffic in sales increases that we haven't seen, so there may be a little underrepresented here, but a 6040 split looks pretty good. How about? Number how about? Question #2. Let's go to the next question. Do you prefer to own the underlying real estate? And there's somewhat. Of a scatter of these questions you know, so they may not be in the in exactly the right order, but just stay patient. And and there's some really good stuff throughout here. So do you prefer to own the underlying real? Said and 51% of the respondents said yes, which I think was maybe a little surprising to me to have that.
Speaker
High of a.
Rick Ormsby
#24 four 5% more or less we're indifferent and 25% said no. We do not want to own the underlying real estate. Any comments here from you guys?
Derek Ball
Yeah, we usually say the owner operators are more interested in owning the real estate thing based on that last slide, 30%. Of the respondents for PE and family office, and generally speaking, they don't want to own the real estate. I was a little surprised that the no might not have been a little bit higher. Maybe some of those family offices would be more indifferent to the real estate. I think generally private equity doesn't look at it as a great use of capital. So I would generally expect them to say no. I think it's one of those things though. You know, we tell a lot of our potential sellers, you know, if they're looking to sell the real estate separately, we tell them, you know, it might might veto some of the buyers that would otherwise be interested in your business. I do think this. Kind of supports. That comment at least give the buyers the option to take down the real estate. Yeah, that'll just bring more. People to the table, I think I. Think this validates that a little bit.
Peter Fisher
Yeah, they always an option to purchase the real estate, is it? It's always a positive even if the buyer doesn't want it, want the real estate always keep it or sell the 1031 market. You know if you're not maybe a less desirable brand or reach of the country option to purchase the real estate could be you know key to getting a deal done as well.
Raymond Buehner
And for potential sellers out there, if you own the real estate and your business is maybe average to below average including the real estate in the deal you know is almost a requirement in some cases just to bring a buyer to the table. Not as important in some of the higher growth you know maybe higher multiple brands but for average or below average business that's something you should definitely be.
Rick Ormsby
Now certainly agree with Raymond's comment and we talked. We went through a kind of a dry run of this yesterday and you made that same comment. And I really honed in on that. So I'll I'll just repeat. That that's the. Key learning I I come away with here. If you operate a small to mid size business franchise business in a brand. That's kind of the. I don't want to use the word languishing, but just kind of a legacy Tier 1 brand that's not overly, you know, exciting from a growth perspective. Or attract a ton of buyers naturally. Just know that if you go try to sell your real estate through a sale lease back at, you know, before you sell your business, you're probably cutting out a lot of your buyers and that's, you know, it's just you don't want to do that. You don't want to do that and be left with the business that you can't sell or you know or have a hard time selling. It's just something to to keep note of. OK, good stuff. Question #3 is, do you currently own any franchise branded assets? OK, so 92% said yes and 8% said no. So I look at this, I don't know what you guys think, but we're relying upon people to respond. So 49 people responded. Those are probably the people who are most interested in buying, you know, businesses, right? It's just a little bit notable that so few people who don't own restaurants already responded, maybe that.
Derek Ball
This question was really just to get to know who was responding. You know, we didn't ask names and there's confidentiality there. So just know, you know, based on the responses we see throughout this, you know, 90% of them currently own restaurants and A and a handful don't I think this is just more they get to know your respondent type of question for us.
Peter Fisher
Yeah. Agree. I think it just validates the responses that we got from the survey.
Speaker
Hmm.
Rick Ormsby
Yeah, may may mean that we have fewer people not owning restaurants in the marketplace right now. You know, it's not perfect. So question #4 and if you're, if you're listening but not watching, you know, I know some people are on, you know, zoom and and certainly podcast too. We do have a presentation that we're going to, you know that that we're going through that you can actually physically see and it'll be on our website. So if you wanted to, you know, kind of see the responses to these questions. You can tune into the tape delayed version of the webinar or go to our website. You know in the next. Couple of days. So for question #4 how many brands do you currently own? This is an interesting 1, so 0 brands there that's 6% of the respondents, 1 brand, 26 1/2 percent, 2 brand franchisees 30.6% three brand franchisees 14.3%. 4 BRAND franchisees, 16% and then five or more brands, franchisees than 5 or more brands. You've got 14.3%, which is a pretty healthy percentage really and a nice distribution. Any comments here?
Speaker
Sure.
Raymond Buehner
I'd say this response to this question, you know, surprised me a decent bit. You know, if you add up the percentages, over 65% of people who responded to your and two or more brands which you know tells me that there's probably increasing diversification among existing franchisees wanting to get into other brands.
Rick Ormsby
Mm-hmm. Mm-hmm. In the good old days, when I first started getting into this business back in, you know, I I guess I started working for. Yum in 2001. You know, Yum was kind of like the big ooh, ah, consolidator they had three brands under their roof and, you know, and they they were doing multi branding and stuff and it was kind of a I don't want to say it's a new concept, but many franchisees at that point were just single brand franchisees. It is changed a lot. You know, I think first we had some innings in a baseball game. Consolidation, when that still is ongoing, always. But then you started seeing these large franchisees start entering a second brand and the third brand. And and I think now you know what I what I would note and I guess you guys probably would agree with me. We talked to quite a few smaller franchisees, even now who own multiple brands. They may own 12:50 brand and 15 of another or three of one brand and 25 of another brand or so. I think it's much more common and it maybe looks a little bit more like a diversification play like buying stocks, bonds and mutual funds for smaller. And mid size and larger franchisees to be diversified across multiple brands. Any other comments? You guys would.
Peter Fisher
Yeah. I think diversification is is key here. You got you got 1 variant struggling. You know you can all set with another. And Rick you left at my comment yesterday. But the form and analogy you know I come from a farming background with my parents and you don't see a farmer just growing one the body it's multiple you know just hedge against heels, pricing, weather, etcetera. So and then many view on just.
Speaker 5
Yeah.
Peter Fisher
Completely different verticals in your portfolios, not just restaurants, your others.
Rick Ormsby
Yeah. Did you say?
Speaker
Say the word.
Rick Ormsby
FARMING again.
Peter Fisher
Don't need to do that.
Speaker 5
Come on, man, he said farming. You know what I mean? I for.
Peter Fisher
Said said farmer.
Speaker 5
My first time I was like. What? What? What did you just say?
Rick Ormsby
Man, I love it. Mississippi, you have fear comes from a farming family in Mississippi. I see. Got to tease him a little bit. Right. He's good. You're good-natured about. It though, man.
Peter Fisher
Oh.
Rick Ormsby
Yeah. Really, really good. It's a that's I think that's a great. That's a great point. And the point too is outside of restaurants, you know, we'll talk a little bit more about that in a minute. Whether this diversification is happening inside restaurants only or outside restaurants, but I mean usually historically there wasn't much cross polonization it was either restaurants and restaurants and more restaurants or it was like fitness and you know Wellness or you know like the the two didn't cross very much. We're seeing a little bit more of that. Now I think that may be a new wave that we see a little more so in the future question #5, how many units do you currently own? So our choices are again an interesting distribution, zero to 10 units that was 16% of the respondents, 11 to 25 units, 18% of the rest. Contents 26 to 40 units. That's 6% of the respondents, 41 to fit to 60 is 14.3%. Of the respondents, 61 to 80 is 10 percent, 81 to 100 units is 8 percent, 101 to 150 is 8%. And then franchisees that on 151. Or more. Locations represented 16% of the group, so pretty even distribution, don't you think? What do you what? Do you make of that?
Derek Ball
I mean, it's not for us. You know, I'm brother. One of the things we we talk about is, you know, you don't only see in us, you don't only see us doing the huge deals. You don't only see us doing the small deals. We working across a pretty broad spectrum. Of assignments from $5,000,000 to 9 figures from 5 units to well over 100 units, it depends on the deal. A lot of our competitors are kind of only at the top or only at the bottom. This fits in terms of the types of buyers we talk to and the size of buyers that we're working with and sellers that we're working with. So it's not surprising to me. And you just, we bring a pretty broad spectrum of people to the to the buyer pool though you know, we're not only talking to the people looking to. Buy a couple. Of units, there's a question later that actually asks the buyers what size deal they're looking for, and it's it's fairly mixed as well. I think it just we have a pretty broad reach in terms of who we. Work with until we speak with.
Rick Ormsby
MHM, MHM. Any other comments guys?
Peter Fisher
I think it kind of shows if you look at the you look at it, you know it shows that some are either new operators or don't want. To grow above. 25 You know, but the majority of the rest were above 100 and. So it's like either stay small and you know maintain what you have or or grow as big as you can.
Rick Ormsby
What I gather from this as I look at it is we have a nice distribution. I mean, if you multiply these respondents by the number of restaurants, you're going to see that the overwhelming number of restaurants are held by the largest franchisees, right? However, the distribution of average unit per franchisee is pretty even across it. And that's what I've said for years about. The cool thing about this business and the American dream that is manifested through franchise is you have all types of people, all walks. Life all nationalities, all different sizes, different geographies and it really is represented here. You have small single unit entrepreneurs, you have mid sized legacy franchisees that have that have grown to a you know still independently owned and operated, may have family involved but are first or second generation. And then as you move down the list and you get into larger sizes, you start seeing more institutional investors and larger multi branded franchisees. And there's just. Room for every. Study across the industry. We did get a question that popped up and it was like, which are the top three brands I was like, oh, great question. So I hate to be a tease here, but we're gonna answer that question. That's the last question we answered, OK, we asked that question and the person who asked this question, you should know that. Your brands in the top three, how about that? So that'll get you. OK. So so number six. As a buyer. Which franchise segment are you pursuing most actively? This is a good one, I think.
Derek Ball
This was a check all that. Applies, by the way.
Rick Ormsby
Yeah. So you can sum to more than 49, right? So yeah. And what I don't know what we sum to here probably, I mean, someone did math here probably 80. So average person probably responded to a little less than two answers out of the out of the group, but quick service restaurants, 84% of the people responded that they that they are pursuing that. Segment most actively, fast casual or casual dining, restaurants, 22.5% health and Wellness. 20.4% pretty big number really. So you know there's something to to learn there. Fitness was 14.3% a little lower than I would have expect. Coffee and tea was 24 1/2 to almost 25%, which is a pretty big number actually. The second highest number on the survey year. And then we had an other line which was 12.25% what comments guys.
Peter Fisher
But it's not surprising that the majority eaters did come in for the QSR, since that's the majority of what we market and our audience reflects that. But I did think it was. It was interesting that a lot of the responses were looking for non food related concepts. It was kind of goes back to the diversity thing we were discussing earlier for the portfolio. So I just think that, you know speaks volumes about that.
Raymond Buehner
Yeah, I think the the interesting, you know, 2 responses here. Obviously, we expected QSR to be #1, but there's a pretty strong interest in health and Wellness and coffee and tea. You know several very hot coffee concepts. You know, you think of seven Brew and Dutch roast that are kind of exploding right now. I think it makes sense that. A lot of. People are looking at those, you know, same thing with health and Wellness. You know that gets back to the idea, are they not looking to add a second restaurant concept, but a health and Wellness concept is a diversification play as opposed to a different brand, I think is interesting.
Peter Fisher
And the coffee could be a lot. Of dunking as well.
Speaker
MHM. Yeah, yeah.
Rick Ormsby
You would say, Duncan, you would say 7 Brewers. One that you you're starting to hear a lot about, right? They've had some pretty extraordinary results in many cases across the country, which is exciting to see and they're really building out those models in those locations. I don't know if any of you've been there and then and but they're exciting. Those Dutch Bros, I mean, they they have a pretty good following. I'm. I'm down in Miami at the moment and I was at, you know, dinner last night with the with the guy. Who is invested in a, you know, 50 unit coffee chain in the Northeast mostly, I don't know much about it but but I just learned a little bit about it yesterday. So. And he says it's going gangbusters. So there is a, there's a lot of interest in the coffee segment. You're right. I mean, historically, when you think of when you think of franchising, I mean, the first thing you're going to think of as restaurants, right, they kind of. Built out the model starting in the 1920s and 30s. You. Know, I guess it was. A and W was one of the first ones right, and then in California. Heard the franchising trend that eventually moved its way back in the Midwest and then throughout the country. It's still that way, probably 80% of the of the franchise businesses across the country are restaurants, but we do see these other segments starting to step in. I was again, I I think there's something really unique and special about the health and Wellness space. Problem is clearly that have to start with something new. There's not a lot of existing, you know, large multi unit franchisees in that segment. But I think I've seen some concepts, I've seen some performance in this healthy lifestyle thing. Thing that really I think Gen. X is probably the the group that's really kind of driving driving the spending and the discretionary spending towards health and Wellness services. That's something to watch for these next couple of future years and. How interesting would? It be to see quick service restaurant franchisees marrying up their portfolios with health and Wellness. Services, huh? And that would be kind of a that's some peanut butter and Jelly, isn't it? You know what I mean. Any. Comments. OK let. See how are we looking on time? Let me pause for a second. So we're looking pretty good. OK, question #7, describe whether you are currently in the market to buy franchises. OK, this is good. This is an interesting 1. So one response, 37% of the folks said absolutely looking aggressively and would like to close the deal this year. Excellent. The second group is 30. Almost 31% of the respondents say actively looking might or might not buy business this year, so we're almost at 70%. People really want to buy. Ohh OK yeah. I mean that might fly in the face of what you're seeing on TV and what you're hearing in the marketplace. OK, big learning here. I think we'll talk more about it looking but unsure on current market valuations, unlikely to buy a business this year. That's only two people. 4% of the respondents selectively looking at a few brands, but not too aggressive. That's 8% of the respondents. And then mostly on the sidelines, unless unless it's a great strategic fit, 16%, finally not looking, is it just 4%. So not looking but unsure or or kind of out the door, what do you guys kind of say to this?
Derek Ball
I would expect the people that respond to a survey to maybe skew toward toward active buyers, since since we kind of marked it as, you know, asking current buyers the market, but it's a little surprising to me. I guess what we what what I've been saying the last few weeks is there's still a little bit too big of a gap I think for most most deals to get done. I think the buyer. Expectations on multiple and the seller expectations are still a little wide in most cases. I think this this year. Loan. You know, we've taken, I think 2:00, maybe 3 assignments and we've done 25 to 30 valuations. And generally speaking, if we don't engage, it's usually due to evaluation gap and it's just where the market generally is. I think if that if that gap closes, it's a quarter turn in both directions. I think you'd see a a boom in the market in terms of deal flow.
Peter Fisher
Mm-hmm.
Derek Ball
You know, bringing bringing expectations about 10% closer, it's not extremely surprising when we get calls from buyers all the time looking for deals still, there's just not a lot out there because while buyers want to buy deals, they are being a little more selective and they're a little more price conscious. It's not 2021. Where you just throw a. A 6 1/2 or 7 multiple on anything you know, it's just not where the world is these days. So I think you've got a lot of buyers out there and I think you have a ton of built up seller demand. If that valuation gap just closed 10 or so percent, I think you'd see a ton of deals closing and. Coming to market.
Rick Ormsby
Yeah, I mean, we give an example like the the few who choose to go to market right now who have businesses that have been doing well, you know like I think this year I I can just think of like 2 Taco Bell deals and a Wendy's deal that we've put on the marketplace. I mean those head gangbuster response. That's right. I mean, this recent Wendy's deal had I, I don't know, you know, it's a big Wendy's business we have on the market. I'm thinking 8 or 9 offers on the business and good valuations. So the Taco Bell business we had recently on the market had had, you know, over 10 offers and high valuations. So there is lots of buyer interest here and this kind of says that that. We're looking 70% of us are looking for a deal. I think there's not, like Derek says, enough deal flow in the market that's healthy deal flow that's likely to. Those, I mean, the bad thing is it's sellers are often tempt to think about buying a house. Sellers are often tempted if they think they might be ready to sell their house, they throw it on the market and put a high price on it, and then it doesn't sell, right. It's like the worst thing you can do. So, you know, I think sellers are tempted who might want to be sellers now or tempted to put their business for sale. Even though the performance may not be great or they want more than what it's really worth, the market knows when they see the business that you know how serious it is really. Quickly, it's kind of a damaging situation if you put your business up for sale and then you have to pull it away because it doesn't close our competitors, you know, frankly do a lot of that type of work where they just put it up and it doesn't close and then they tuck it back in their pocket and their deal is made. But I think it is that you know, once we do find a little bit better of a market and and then the second. Comment would be if you do have a business, just know that there are buyers out there who want to look at it and the supply demand curve is definitely in your favor. If your performance is strong enough to meet your expectations.
Derek Ball
That doesn't mean if your business is worth 4 1/2 to five times, you're just going to magically get 6. The buyers are still going to be select. On what they're willing to pay. Yeah. So they're still they're just still that. A little bit too big of a gap in most scenarios, but here here's Question 8.
Rick Ormsby
Yeah, and well said, I think we're gonna. We're gonna actually ask the question about what buyers are paying in terms of. EBITDA multiples in. A minute so question #8 is what is your opinion of the macroeconomic environment in the next 12 to 18 months. So we have very +6%, mildly +20% neutral, 37% mildly negative. 31% and then very -6. Percent.
Derek Ball
Just for context, this was asked in the middle of when the stock market was cratering and the news was negative, and it was everybody. The world is ending. Tariffs is is killing everybody. I mean, this was, I think, sent out like, right in the middle of that. So I bet you if we asked this again today, it would be skewed a little more positive as my gut. Just based on the timing of when. We asked this.
Rick Ormsby
Any comments? Any other comments you make to to this?
Raymond Buehner
How many?
Derek Ball
People are pretty neutral or mild. You know there there's very few. There's only 6 total responses out of 49 that are that are either very positive or very negative. Generally speaking, it's it's kind of skewing in my mind toward neutral maybe slightly mildly negative. You know, there's a few more responses for that than mildly positive, but. Generally speaking, it's. It's actually a little less negative than I would have thought, especially based on the timing of when we asked it, which I think is a good sign, tells you that buyers are still somewhat positive or or at least neutral on on the state of the market.
Peter Fisher
Yeah, I agree. I mean, well, 30% are are mildly negative. That's not necessarily doom and gloom outlook. You know only three of the responses were were worried about that or worried about it and the rest were were neutral or or bullish or positive on the future. So you know I I view these results as as very positive. Especially given when we. Set the survey out like you said.
Raymond Buehner
I mean, this is definitely encouraging given the context. I mean, even you know when the stock market is down 15%, there's very few people that were extremely negative. And if we did ask this a month later, I bet it would be skewed more positive than negative. So definitely encouraging for potential sellers. There.
Rick Ormsby
It's a barometer too. Let's let's make sure we we remember that this is an overall barometer of like the M and a kind of, you know, kind of the juice in the M&A market, right. The more positive this this pie chart looks over time. I would say the more just healthy M&A activity, you're going to have. So if we ask this question every six months and. Started it when you see it improving to the positive, you're probably going to see more deal flow better, same store sales, better traffic in the stores like all the, all the, all the good things that you'd want to get to get deals on the market and get them close. First, OK question #9 and just for heads up.
Speaker
So.
Derek Ball
You know, we've got the graphs and the spreadsheets. I think our eyes and unbridled gravitate toward the spreadsheets better. So sorry if your eyes will. On the graphs. You can pull this off our website after. The the webinar.
Rick Ormsby
Yeah, I'm the old guy, so I'm going to put on some reading glasses here, you know?
Speaker
But.
Rick Ormsby
As I look at these small, small charts so Question 9 says outside of price, what's the most important selection criteria for you in acquisitions, we had five answers here far and away number one was the brand. And then a distant second was geography and then kind of a third place was existing acquisition opportunities and then distant fourth and 5th are going to be existing management team and new unit growth opportunities. What do you make of?
Derek Ball
This guys, it's quite a bit different from from a handful of years ago where people. I bet you knew you in the growth opportunities would have been second on. This. List. But given costs these days it's it's just. Taking a pretty big back. The existing management team, not surprising, you know, if you're an outside group looking to make your first acquisition in restaurants, you know existing management teams usually pretty important, but that's not the majority of people we sell to the majority of our buyers are our existing franchisees whether in that brand or another brand that already have a management team, it's just not usually that critical for most buyers. Brand being number one is not surprising. Geography being number 2 is is also not surprising. People do want to be able to roll. Up opportunities, but. But that's kind of a a distant third.
Peter Fisher
You go back to your original comment about the new growth opportunity. Easy day, we compare it to the existing acquisition opportunity. You know the existing acquisition was #3 on the list and unit growth was last on the list. You know most brands of flying stores have become a a better, more affordable option rather than you. You know development, we'll touch on that a little bit later.
Raymond Buehner
As well, there goes.
Derek Ball
The show brand is king. If you're in a struggling brand, it's an issue whether you have a premium business in that brand or not.
Speaker
Not.
Derek Ball
The brand and the quality of the brand itself falling away in the most important criteria when. You're selling a. Business and there's certain things if if you've got the number one business and a struggling brand. Unfortunately for you, it's just not going to usually save the day. It's not going to get you that premium multiple in, in our opinion. And I think this show. Uh.
Rick Ormsby
Yeah, there's a. Huge gap between the brand being the most important selection criteria and then everything else. I mean like the brand was like 4.5 out of five like and then second was geography at 2.9 out of five. So a massive difference between the brand and everything else. Go ahead Raymond.
Raymond Buehner
I would just say this also tracks with, you know, the current buyers and respondents. The bottom 3 answers here are more important for the financial buyers. the PE and family office groups, which Frank.
Speaker
With.
Raymond Buehner
Really aren't in the marketplace today like they were three years ago. So the fact that these are the three least important, I think tracks with who's actually buying businesses today.
Rick Ormsby
The total opposite, like you know, three years ago, people you could hear people say it couldn't you I can't pay 10 times EBITDA for a Taco Bell. I can buy it. I could build them for 1/3 of the price. Of that or half of the price of that now it's now, it's quite the opposite is, isn't it? It's like I want to buy some because it's. Too expensive to. Build and I have too much competition, so it's just been a big switch over the last three years or so. OK, well, let's go to question #10. Which type of acquisition situation do you prefer?
Derek Ball
Her.
Rick Ormsby
There and we had three answers. #1 acquire a top tier top tier assets that are best in class typically at a higher relative multiple. So really good businesses at a really at a high price that is less than 25% of the respondents. With this, but by an average business with some operational upside for an average price. Bam, 61% of the respondents here and then by distressed bankruptcy kind of businesses at a below average price only 14%. So what do you think?
Derek Ball
Most existing franchisees only use their their operational expertise and their knowledge and their management team and bring a little bit of upside to the table. You know, it's nice to have that A+ operator with with great sales and great EBITDA, but at the end of the day you're you're unlikely to be able to improve it and some people like that like showed here about quarter of the respondents like that. But most people want to be able to improve it, they want to be able to buy something with 3 million of EBITDA and. Turn it into four or four and a half million of EBITDA. You know, not buy something at 4 1/2 EBITDA and hope it stays there. So it doesn't surprise me. I think it tracks with the deals we do. You know we sell average businesses, we might get 10 offers, we sell top tier businesses. We might still get 10 offers but. You would think there would be kind of a delta. You know, you'd think there would be more for. The top tier, but there's. Just not so. Still a lot of. Interest and and just. Middle of the road average business.
Rick Ormsby
No doubt I would say this too. I mean, I feel like a broken record here talking about the private equity and family office groups, but they tend to buy into a brand, consolidate around them and then they, if they do decide to sell their business at some. Point. They're typically squeezing every line item in the P&L for every 10 basis points. I mean, they're so focused on the financial returns, perhaps maybe overly so, you know, at the expense of sales, right? And and operations, they're tracking down to 1/10 or 2/10 of a point on every item on the on. The. P&L, but when you have a P&L? It's really, really, really optimized like that. What you have to remember is you certainly want to operate that business and collect the cash from it. But when you go to sell it. People typically, unless it's a premier brand, don't want to pay a full price on a maximized P&L. So it's just a common theme here that we see these private equity based businesses. We look at building evaluation for them. They're really tight on their margins and they want the Max multiple and it's like the collection of the two. Put the thing 30 to 40% out of range for what most buyers are. Willing to pay. And you know, it's going to take high profile distress situations and private equity guys holding on to their businesses for way longer than they thought in order to kind of wash the country of this kind of thinking that you can just take a business, tighten down the hatches and then sell it for a huge multiple with like no P&L upside, just not. It's just not realistic for most cases.
Derek Ball
Eating a good a better overall price. You're just relative multiple might be a little bit lower multiple. You're going to be disappointed.
Speaker
Sorry.
Derek Ball
But if you look at it and you just compare the actual, you know you got times with multiple, your price is still going to be better. But if you're if you're focused on a pride full high multiple it, it's usually not there.
Rick Ormsby
If you have a business that has, you know 23% margins and the average in the country for that brand is 18% margins. And the average multiple is a is A7. Don't expect A7. Expect maybe a 5 1/2.
Derek Ball
Or a six just now moving a little quicker. We've got 9 questions left in 21 minutes, so we'll start focusing on a few of these questions a little more.
Rick Ormsby
- Yeah, it's good. I've probably been rambling too. #11 is what type of brand best suits your acquisition profile, super high growth, low unit count, 6% high growth, large unit count, 25% modest growth low to mid unit count, 27% legacy Tier 1 brand high unit count 3635% and then struggling legacy brand mid to high unit. About 8%. Minutes.
Peter Fisher
Yeah, I think just, I'll go ahead and.
Raymond Buehner
I say go ahead. Here now I just say this is consistent with the the response to question 10. You know, it's difficult to close really high growth deals and it's difficult to close, you know, near bankruptcy deals. You know people want average businesses where they can recoup the upside. So I think this tracks is what people are looking for.
Speaker
MHM.
Rick Ormsby
Very good. OK, no other comments. We'll speed it up. #12, which segment of restaurants most interests you for an acquisition? OK, now we segments number we, we we stacked them all up and we you could rank so you could you could answer first place second place third place. OK, so it's not just a linear response here chicken was. Far and away the highest. 2nd Place was a clear Mexican and third was a clear coffee. And then you had sandwiches, then burgers, and then there is a decent drop off. Down to pizza. And then desserts, what do you guys make of that?
Peter Fisher
Yeah, not much surprise here. I mean, the chicken concept has many platforms available to choose from. You got Wingstop, Popeyes, KFC, you know, raising canes, some chickens. It's interesting that the Mexican is right next behind it because this is mainly touted by Taco Bell. If I had to guess versus the many options for all the chicken concepts that you can, you know, right. So yeah, I thought that was quite interesting.
Derek Ball
And also tells me that maybe we had 11 Taco Bell franchisees respond because, like Peter said, Mexican surprised me a little bit simply because it's pretty much Taco Bell and and nobody else from a national QSR perspective. Chipotle you can't own. So the Mexicans surprised me a little bit. Chickens. Not surprising just based on how many? How many massively growing brands are out there in the chicken space? And then you've got the big legacy brands too. Coffee. I think it's it's kind of the, I don't know, the rage right now, Duncan, you've got, which is just the classic coffee brand does really well and has for a long time. And then you've got the new ones. Throwing, you know, sandwiches and burgers, being kind of right in the middle. Not surprising at all. Those are usually largely kind of right down the middle average QSR concepts, usually between those two brands or two concepts. Pizza and and desserts at the bottom is is not too surprising. You know, a lot of people. Are scared of the pizza wars and then desserts. A lot of people view as fads being at the bottom, whether that's. True or not a lot. Of people view it. That way. So I think it's an interesting, interesting chart. I don't find it too surprising though.
Rick Ormsby
The big difference between chicken and burgers just look at those two. Quite a difference, quite a difference, you know, and might not have expected that. You have a gap between the two. OK, 13th question is what size of a franchise business would you be most likely to acquire? And? We asked this by EBITDA. So we had between 1:00 and 3:00 million EBITDA. We had 37% of the respondents, one of one to $3,000,000 EBITDA business 3 to $8 million EBITDA is 43%. So that's really our biggest group. Well, biggest group wants a three to $8 million EBITDA business 8 to $12 million EBITDA business, 10% twelve plus. $1,000,000 EBITDA business 8% and so I would just kind of throw in here just real quickly what I've been saying for quite a while in this marketplace, particularly with fewer family office and private equity groups, the large EBITDA businesses just appeal to fewer folks. And the multiples typically, unless it's a handful of of really, really strong brands. But even in that case, in most situations, the higher EBITDA businesses actually sell for a slightly lower price than these businesses that are kind of in this 345678 million dollar EBITDA range because those are the type of businesses. That the average buyer can't afford to buy and can do so, you know fairly easily and get a traditional bank loan for any comments.
Speaker
Guys.
Derek Ball
No, I think this probably would have been a little different. You know, back in 2021 where you had two and a half 3% interest rates and and everyone was wanting to build a little bit more into private equity and family office were out there. It's not surprising to me the one to $8 million is where? Most people can. Afford the majority of people we work with now we work with the Family Office at PE. Groups that can afford the $100 million deal, but the majority of franchisees just can't take down deals like that, whether they can financially or practically, or whether it's smart for them to grow that quickly or aggressively. They just can't really do it. So 80% of people want 8 million. Or less. In an ideal world, which? Tracks with what we're used to hearing.
Rick Ormsby
If you're a family office or private equity group, my only thing is to tell you is it's OK if you're if the model that you created when you got when you decided to consolidate in this business was to build a something up to thirty $40 million of EBITDA and then sell it to another private equity group, it's OK that that model doesn't really work and almost all situation. Now every phone call I get from someone who has a business like that. Now I say you gotta sell. It in pieces and most of the time. The franchisees look at me and say no, that's no way you know and then guess what happens. They put it out there, you know, for sale in a big EBITDA you know and then no one offers anywhere near what they want. For it and then they come back and they say you were. Right. So the model is not a model of build it up to thirty $40 million of EBITDA and sell it. You don't have the, you don't have the buyers anymore for a business like that unless it's super super attractive in terms of people that were responding to this survey as well. I don't disagree with anything Rick really just said but the big.
Speaker
Now.
Derek Ball
You know, private equity groups that are wanting to buy 500 million. Dollar companies or? You know 50 million plus of EBITDA. They're probably not the ones responding to this. Survey to be. So it might be a little skewed away from them, but what Rick just said is true. We've had plenty of people look at him like he's crazy and. Regardless of what he says, that's usually the look we get. And and then come back.
Speaker 5
So whatever I say, people think I'm crazy. So what you saying? They just look at me and say you're crazy, Rick. You know what? I mean ohh man, that's good.
Rick Ormsby
That's important. Yeah. Yeah, yeah, yeah. Yeah. What is the most common price range in which you expect franchise assets to Transact 3 to 4 times EBITDA?
Derek Ball
All right, we got 6 questions left in 15 minutes.
Rick Ormsby
8% four to five times EBITDA, 39% five to six times EBITDA 33% six to seven times EBITDA 8% and then seven or more times post G and a EBITDA is 10% of the respondents comment.
Speaker
Here.
Derek Ball
Yeah, say a few years ago, we rarely quoted below 5 times. And as you can see here, almost half the respondents think it should be the the typical multiple should be less than 5/20/21. I'm not sure we did the deal below 6, so you can just kind of see generally speaking, very few respondents here what nine people out of 49 thought the typical. Multiple should be 6 or more. So to anybody out there thinking my business is 6/6 and a half, seven better be a premium asset otherwise. You know you're going to be in that 4 to 6 range depending on on the. Storage you're holding.
Rick Ormsby
For this will show the graph real quickly and go ahead Peter somebody this this may be visually.
Peter Fisher
So I. Think it? I think it ties directly into the question we mentioned earlier. I think it was what type of acquisition situation do you prefer? And for that one, I think 60% said they prefer to buy in at a average multiple and here the top answers were about 70% for the for the 4:00 to 6:00. Times range, so that's what we would consider an average multiple year. So it just ties in and validates that that question as well.
Rick Ormsby
Historically, this probably graph goes around 5 * 5 and 1/4 times EBITDA and that's historically over 2025 year period. What most assets sell for in our space. You know take the highs and lows out, OK, 15 question #15 how would you fund an acquisition and hold on here the best questions #19, but we'll we'll deliver it on time. There small print here, number one. Personal down payment plus a bank loan that's 29% recapitalizing your current business, unlocking embedded equity.
Speaker
3.
Rick Ormsby
27% existing family office or private equity money plus a bank loan that's 37% and then you know then in in A is like 8%. So thoughts here as well?
Peter Fisher
Yeah, kind of. I view the the 2 answers personal down payment with bank loan and and recapitalizing your current business is most likely the same kind of buyer and this is. And that's a strategic one that makes up over half of the list, you know, family office and private equity represent 36% here, but the only two of them haven't identified their outside equity yet. So overwhelming what you're already here are ready to purchase for the right. Any.
Raymond Buehner
Yeah, thing. I'll think I'll add here. You know, if you're a seller, in all likelihood, you prefer to be one of the first two options. Buying your business just with the third option with the private equity or family office buyer. You know that typically requires multiple sets of approvals and just experience working with both buyers. We know which one is more likely to go. Smoothly. Which is typically why you know, family office buyers or private equity groups with financial money, you know, are usually slightly higher in their price in the past. And that's why a lot of those deals are closing with those group.
Rick Ormsby
Well said, very well said 16. What is the most important when considering the brand's franchise or for? Those of you. Who are thinking of getting into a new franchised brand, number one, general market reputation for being reasonable or difficult to work with. Boom number one and there ain't no second place. If you're a franchisor is not reasonable. To work with.
Speaker
Yes.
Rick Ormsby
You're not going to attract the right franchisee, #2 franchisors attitude towards new unit development. The 3rd on the list is clarity and flexibility on remodeling obligations and then descending order. Of course, #4 is turnover of corporate staff in recent one or two years and then #5IS non compete with other brands and companies. And then the least consequential is the personal guarantee on the franchise agreement. Go for it, guys. What do you?
Derek Ball
Think. Yeah, I like this one quite a bit. It's just an obvious and very clear, you know, #1, if you're a franchise or out there and you're kicking ****, you know, you can be unreasonable. You've got a right to do it, depending on what you consider it, right, I guess. But. But you can. Do it and you can get away with it and still get good franchisees. If you're an average brand. Which we'll get to here in about 3 questions, and you're being unreasonable. You're just vetoing all the potential good franchisees that wanna come into your system. There's a lot of franchise owners out there that just can't get out of their own way. They would just, I think, kick **** if they would just get out of their own way a little bit. I think this answer proves that point quite a bit. Franchisors attitude toward new unit. Development is a clear #2 as well. New unit development is just tough right now. Five years ago, when you could go build a QSR asset for a million. Five. That's great. Now that it's two and a half million, if you're pushing big development obligations on people, you're going to scare them away. Same with the remodeling obligations. Some brands are really good about having very clear plans, some aren't and it's it's tough for a buyer to underwrite a deal when when you don't know if you've got a half million dollar remodel coming up on all your assets in the next three years. The bottom three I think are pretty clear, personal guarantee. People getting into these brands know they got to sign a personal guarantee usually. So it's not a surprise. Same with the non compete once you make the decision to get into say Popeyes, you know you're going to sign a the chicken non compete at minimum turnover a corporate staff. It seems like that's just the norm these days. So so not much of A concern. But if you're a brand and you think you've got a reputation for being unreasonable, and you're an average brand, not kicking **** like a few of them out there, you know, maybe look in the mirror and see if you think that's you.
Rick Ormsby
It's pretty pitiful. I I I make a comment. I should probably not make about. Could the corporate staff of a lot of these franchisors, it is a revolving door and who operates these brands anymore. I mean they put in many cases you know partially qualified people who stick around for 18 months or less. It's like what's the point? You know what I mean? Why am I paying royalties for that? Type of the device so. We'll keep. We'll keep going. Question #17, what would be the most likely reason you walk away from a deal post lol. Hi 5 answers number one reason would be the business is dropping in sales and profits. The number 2 answer closely on its heels is the franchise or is asking for too much new unit development or excessive remodeling requirements. A distant third would be sellers unreasonable and slow during due diligence. 4th place is franchisors. Too strict on personal guarantee, non compete and other general franchise agreement terms. And then finally in way 5th place is negative change in macroeconomic environment probably not much really to clean here other than the most important thing when you get into a deal is that your sales and profits are not tanking during due diligence. I've been famous and saying this over the years that if you know your sales are down more than 5 or 6%. You know, during due diligence, I think I usually see 7%. I don't know that I've seen too many deals in my career that have actually successfully closed. So you have to protect that as a seller and time that a little bit. If you expect a successful result, everything else other than just getting whacked by the franchise or tons of new unit development pretty much is not not as important. And let's go to #18 since we only have 7 more minutes, #18 is what is the most concerning trend when you are considering an acquisition. #1 traffic declines dominates.
Speaker
Now.
Rick Ormsby
OK, the industry, that's the most important for people #2 heavy remodeling versus the return of the remodeling #3, the ballooning cost of new unit development 4 is the expensive and difficult labor. Market the 5th on the list is food cost inflation in the net. In the past two or three years and then way down there is difficulty in finding capital and loans, which is good news. It means that there's still plenty of liquidity in the market. People aren't. Concerned about that? Any quick comments here on this on this slide?
Raymond Buehner
I would say that finding liquidity in capital being last is probably the most encouraging thing from this question. You know it shows that buyers you know I think you hear a lot about how it's a much tighter lending environment than a few years ago. But based on this, what buyers are telling us is that's not the concern for them when they're looking.
Peter Fisher
At an acquisition right now, you think there's top 3 answers were you know we expected that the one I found interesting was the expensive and difficult labor market. You know it being towards the bottom, you know, three years ago, I think people would have said that this was higher up on the list, but. Pricing has come up. To kind of offset the expensive part of it and the difficult part, the labor part of it, you know, it's kind of become a new normal and people are just kind of getting used to it now. So a couple of years ago that they have been higher, but it's, you know, kind of towards the bottom now.
Rick Ormsby
Mm-hmm. Gotta get traffic back. Gotta get sales and traffic back. I'm hopeful across with probably 3 or 4 brands, just so I've talked to franchisees in the last week, you know here and you know they're doing a little bit better in the last couple of weeks here. You know when you're when you're looking to find some positive results, sometimes you you just look each week to week, maybe a little more than you should, but we need to get the traffic up. We need to get the sales. Up and then the deal flow will start cranking because the EBITDA will be higher. And keep in mind, most sellers sell their businesses on a trailing 13 period or 12 month EBITDA. So we want to have some strong historical EBITDA and traffic and sales in order to get the best price. OK. Our final question today, which I think is a really good one, take some time on this one and it's question #19, which is to rank these restaurant brands in order of what you would be most likely to acquire as a franchisee now.
Derek Ball
I'll keep it on. We couldn't list 50 brands we picked. What do we have? I think 13 brands here that are generally. Pretty regular in the in the name market, you know we're not taking up and coming brands that have 100 units. We're growing fast. Like like 7 Brews not going to be on this list or something like that. So keep that in mind. We had to kind of selectively choose which brands we included here.
Rick Ormsby
And we will, I wanted to put like, you know, health and Wellness or something and fitness or other brands on here too that weren't. Response, but since 86% of the respondents in the prior question said quick service restaurants were what they wanted, we just stuck with the restaurant. Question here for the final question. So your choices were and you ranked them. OK, well, I'll just go through it. The number one brand far and away, far and away higher than anybody else on a different planet really is Taco Bell. OK, so far away. I mean it garnered a 10.6 response. That's kind of an arbitrary number. The 2nd place was only it was a 7.6 response. That's a huge drop, right? So number 2 was wing stop. #2 is wing stop. #3 at 7.0 is Duncan. #4 is Wendy's at 5.57, so there's a there's like Taco Bell. Is is by itself, and then you have Wingstop and Duncan or pretty close to one another. And then you have Wendy's, which we're going to see here, is kind of by itself too in fourth place and then Pizza Hut was fifth at 4.37 Popeyes 6th at 4.2. 9 Sonic, also six, tied for six that 4.29 Papa John's was 8th at 3.9. Little Caesars 3.94, in 9th place, 10th was KFC at 3.6. Three 11th was Arby's at 3.57, twelfth was Burger King at 3.47, and then last was Hardee's and Carl's junior at 1.88. If you take Hardee's and Carl's junior out. At the very bottom, you certainly see a coupling of a lot of brands around. You know, really close to one another. So I wouldn't get too worried about where you are in that list in kind of the middle there because they're really close to one another. What do you guys think, comments. A few minutes.
Derek Ball
Yeah, between pizza and Burger King, it's a very small difference, really. You could. You could probably ask a different group of 50 people and have those mixed up a little bit, but what it says is they're just kind of in that average space, they're going to be in. You know, we had a multiple question earlier, where do buyers expect multiples to trade the biggest?
Rick Ormsby
Yeah.
Derek Ball
Spot was four to five times at, I think 39%. You had a pretty big gap there or another 36% I think at at 5 to 6 times. That's generally where these brands are going to be. And I think what what's important is have something. That maybe stands out if you're in one of those brands, you're going to need something that stands out, high sales, high EBITDA, strong management team potentially even though the question before it kind of showed that's not critical.
Rick Ormsby
Real estate. Maybe you know what I mean? Yeah.
Derek Ball
Real estate, potentially good geography is going to be critical for these brands. If you're in these brands and you're in a, you're in a tough state to do business, it's it's going to Ding you a little bit more. So you need something if you're in this grouping of eight brands or brands similar to these brands, you just kind of need something to stand out in. Mark it in order to potentially get your price higher than you. Might otherwise want.
Peter Fisher
Yeah, I would add negative EBITDA locations to that list as well. You know, I mean if your stores are underperforming out of say 100 stores, if you have 20 underperforming locations, so that I would say that's a a big positive as well.
Derek Ball
What we see, we we usually talk about a handful of brands there. At the top. You could throw that with Taco Bell wing stop and. Dunkin, we often say Wendy's is kind of in a no man's land.
Rick Ormsby
In a good in a good. No man's land. Yeah, yeah.
Derek Ball
Yeah, and not in a bad way. It's obviously not the others, but it's going to have a little premium of a multiple over these other brands. And then you've got just a big grouping of legacy franchise concepts that are still sellable and attractive assets. But you need something to maybe separate yourself from the field a little bit to get the most eyeballs and. The most interest?
Rick Ormsby
Yeah, great.
Peter Fisher
Then goes back to brand reputation. Here too, you can see at the top and those those typically have the the best brand.
Rick Ormsby
And that's great. I I really appreciate this. This is a very interesting, you know, question and thank you guys for your participation and bridal team. Really appreciate your insights. All three of you. And for those of you who tuned in, listened watch today or or in the future. Thank you for subscribing and listening. We'll send out copies of all this information that will be available at unbridled. Capital.com on our website and on our YouTube channel. And if you have any questions or you want to talk about buying or selling or financing franchise businesses in or outside the restaurant business, we're always happy to help you. And so thanks so much, guys. God bless you guys and have a good day, huh?
Derek Ball
Thank you everybody.
Raymond Buehner
Good care. Thanks.
Rick Ormsby
Thanks so much for entering the boiler room today. You can find our podcast on iTunes, Google Play, Stitcher, TuneIn and Spotify. If you like these podcasts, please listen, rate and review. I also encourage you to visit our website at www.unbridledcapital.com for the best franchise, M&A and financial resources in the industry. Our website includes. Webinars, podcasts, videos, white papers and a list of our past M and a transaction. Please note that neither Rick Orms being nor Unbridled Capital Advisors LLC give legal, financial, or tax advice. These podcasts represent opinions that have been prepared for informational purposes only. We expressly disclaim any and all liabilities that may be based on such information. Errors therein or admissions therefrom.