Rick Ormsby

Welcome to the restaurant boiler room season five, episode 6. I'm your host, Rick Ormsby, managing director at Unbridled Capital. Today in the boiler room, I'll be combing through the recent survey results from 39 lender responses regarding the state of the Union on the current environment for franchise M&A lending. As of July 2023. The restaurant boiler Room is a one stop shop for multi $1,000,000 merger and acquisition activity and financial complexities affecting the franchise restaurant 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 all of our content at Unbridled Capital's website at www.unbridledcapital.com now. Let's enter the. The room. Well, hello, everybody. And thanks so much for tuning in. Let's see, as of today, it's the day before the 4th of July. You'll probably be hearing this in a couple of weeks, so it's always delayed a bit, but happy 4th of July, man, this is kind of one of my favorite holidays. I love them coming cheesy like this, I suppose. I love the old. America songs that that, you know, we all learned. Kids, I kind of just love to hear those replayed on the 4th of July and watch the fireworks and eat the hot dogs and hamburgers, all the good stuff, right? So hope you all had a nice 4th of July in Pensacola here where we live. They do a huge Blue Angels show twice a year because of the Naval Air Station. Pensacola is right down the road and it's and they and just the Blue Angels. Come by and and they and they. Do it up big so they have like a practice. This run on Wednesday and then they have a practice run a rehearsal on Thursday and then Friday and then as well. And then on Saturday is the big day. So they have like in hundreds of thousands of people come to the beach and watch these F18 air shows. It's pretty cool in some cases the F eighteens actually hover less than like 20 feet above the Gulf of Mexico. On the beach. And so it becomes kind of a big deal that happens every year around the 4th of July. Now for unbridled. Capital this year, just before we get into today's topic. And I think it's going to be a good topic. I mean, I try to do this once, if not twice a year. I don't want to get the lenders angry at me with too too many emails, but at least once a year I try to get a lender response solicited on the state of the Union of of the franchise industry, and this year was. And no doubt the same. There's a lot has been changed. Changed and in you know just a couple of days ago I got 39 responses here and so we compiled those. I believe there's 16 or 17 kind of responses and then you know I changed up some of the questions this year, but most of the questions are the same. So I have last year's kind of study too and survey results. And so most of this episode will be me. Just going one by one and talking about the results and you'll hear kind of a series of kind of high level data and then you'll hear like you usually do me kind of talking between the lines about what I think it all means. So that's coming up here. A couple of things before we start. Just as a note for this year's M&A industry, it's been, as you all know so far year to date quite slow. Our pace is probably looking to be about the same as 2022, which is down substantially of course from 2021 and then also down you know. Significantly, from kind of a a four or five year average. So the the deal activity is still on the low side, phone calls are picking up. I think kind of what's? Happening generally in the industry as you have, you know, comps are really getting better for most franchisees. They were slow in many cases to take pricing in, so 2022 was rough because because our commodity costs moved up so much and and sales were trailing because of the commodity cost increases. In other words franchise, he saw the cost increase and they immediately. Two or three. Or 4 periods thereafter started raising their prices. In many cases, a lot of franchisees have lower traffic, lower guest count, but they have higher sales that greatly offset it and profitability is starting to look good in 2023. But there's still not a full year of good results for. Many franchisees if. Unless you're in a couple of the real premier brands that are doing great right now. So for that reason and with. Increased interest rates and a little bit less availability of capital. You see kind of like a a little bit of a quiet market. I think this is going to improve and increase in 2023 as we move towards Q3 and Q4, we're just going to have to see. Watch it. I mean, it seems like every other month is something crazy in this. In this world, right? So it just seems like there's more variability in everything we do than I've I've ever seen before. Certainly coming out of COVID, but that's kind of my view at the margin right now. You know we've had five Closings at on Bridle Capital so far and we have about 13. Or 14 other assignments that are active. Four of those five Closings have been in Taco Bell. Believe it or not, which which is a little bit kind of rare for us. I mean, we do a lot of Taco Bell work, but but not but not this high of a percentage relative to other. You know, we've got assignments right now in Taco Bell, Pizza Hut, KFC, Burger King Freddy's, Popeyes, Little Caesars, possible assignments upcoming and Sonic Panera and Wendy's, and then several non restaurant franchise deals that are out there too of various sizes, some really large, some first generation franchisees that are that are small and medium size. You know, Sellers founder on buses. Prices and some private equity family owned businesses that are either looking for a new equity partner or looking to sell their investments. So it's really a variety in array of different types of assignments out there in the marketplace. But I do, but I do think it should pick up it's, it's it's stayed again a little bit slow two of our most recent assignments I'll tell you about just recently one one was. Just a six unit Taco Bell assignment. That franchise in the Midwest sold to an existing franchisee, Shamrock TBC, incorporated, led by Dan McHugh and Dan is actually a second generation franchisee. In the Taco Bell and KFC brand, his dad, Steve started the business in in Illinois years ago and is a wonderful man who just recently, you know, passed away, was a friend of mine. And Dan is a is a really just one of these exciting young franchisees who's taking the family business and intends to grow it. So congratulations to him. He kind of you know, so that was one assignment and then we were also involved recently in a in a wing stop deal is a 20 unit wing stop transaction in Ohio that was sold from a franchisee who it's interesting this franchisee is a great guy and he started off in the northeast with a, you know, a big Northeast Ivy League degree. And a lot of great work experience in the financial industry and then became a franchisee and and he did it differently than other franchisees do. He did it by kind of becoming an operator and a franchisee himself from the wing stop brand instead of like finding a family office and buying 50 or 60 or 100 locations and being like a being the franchisee of record and being the President and CEO of the company. But but not. Actually putting on your boots and and actually building stores and and operating in in the stores. But this franchise he did. And you know the Wingstop brand was one of those incredible brands that really, you know, has grown recently. I mean, they had a bad swing of things in 2021 in the early part of 22 with really incredible wing pricing. I mean, wing pricing almost doubled, and so food costs at that time were in the low to mid 40s, which is a business that's kind of difficult to make money. And your food costs are that high, but now as weighing pricing has basically dropped in half in many cases across some of these brands. Brands and the brand has done so well, Wingstop, particularly because of their model, is so heavily digital, right? I mean, this wing stops. Not really. I mean, it almost functions like a an IT or a digital services company. You know more than it does at Restaurant Company. In that way it kind of thinks a little bit and acts a little bit like a Domino's or a Starbucks. Instead of the. They have such a high digital penetration, small footprint, small cost to get the new units open and high growth rates. So all those things kind of make make the brand a little unique and it's grown a lot, right. So it's not as big of a deal to go from two or three units and then to build 3 or 4A year or even if you're a small operator and to do so relatively cost effectively. And quickly if you can find strip center locations and and then you just go for it, right? And you get the stores open and so he had built 20 locations in the Cleveland and Columbus areas and. And really had done a great job with it and we were able to to sell that company. It was big pricing. You've heard me talk a lot about some of the premier brands. You know this was a premier kind of multiple paid for wing stop business largely because of the the huge sales growth increases and also the availability of new unit growth in the brand. Which is different again from some of the more legacy brands out there that have been around for 60 or 70 years. I mean go. Drive down a street in your hometown and see some of these brands that were been around a long time and and what you I think you'll find is, you know, it's hard to find some of these legacy brands and to dot them across the country because they've already been dotted across the country by various franchisees and their growth rate on the new unit growth perspective is just relatively low. It's just necessarily how it is they were already. They've already been built out, but some of the new concepts that are a little more asset light and a little more friendly to digital have proven to be ones that can grow. And I think that's what excites people, is if they can add new units and do so at a pretty profitable clip. And so that really kind of showed up in, in this transaction. You know, we hadn't done much wing stop business before, but it was a it's a great deal, big prices, lots of interest and kind of want to do do more of it. So those are a couple of recent assignments for us and with that and then we you know, we just closed at almost 30 unit Taco Bell business, I'll talk more about that in the next. Podcast but but that was a also very heavily subscribed deal on a major metro U.S. market and had you know, kind of record prices, both the Taco Bell and Wing stop businesses were trading above 10 times EBITDA on a on a historical TTM basis, so. So big numbers, especially as you look at interest rates being so high, you wouldn't expect it to. Be that way. Like I've said in the past though, combination of things, you know the cream rises to the top when you have really good assets and businesses, right? That would be the first thing in. And the second thing is that when there is a scarcity of supply. There are always people who want to buy things, and so when there's a real scarcity of supply the the pricing, the demand is high and the pricing stays high, may change a little bit as. The P&L gets full. Or as we head towards the end of the year, A&B, you know we continue to feel the effects of interest rates and a little bit of a credit squeeze and then see, yeah, we see more deals on the market. I mean, those three things may cool off the the multiples a little bit as we move forward, we'll see how that. Progresses, especially as we move into 2000. 24, OK, so so now I want to just chat a little bit about about this lender survey results. Just so you guys get a bit of perspective here, perspective here. So we had we we posed these 15/16/17 questions to lenders, sent it out, we had 35 responses last year and 39 responses. That's one thing, and we put out this survey on e-mail to everyone on our e-mail database. I think it's really valuable. Last year got picked up by the restaurant monitor and franchise times, and they published a lot of the results of the article in their in their monthly publication. So check that out. I think that was maybe in October of last year. The goal is to keep this thing going. I mean this the the survey results do help the franchisees give them directional understanding. Most franchisees, if you're not in the business, not all, but most franchisees who borrow money from lenders have to have both, you know, money for their businesses and and most of these loans have have like a five year term, sometimes A7 year term on them, but most of them are. Or only for a certain term that's shorter than the amortization of their business, forcing them to have to refinance their business every five to seven years or so. So the condition of the lending market is actually very important. A lot of these folks have locked in rates that are they're really competitive right from a couple of years back and they're eyeing like I would be what the current state of the lending market is when it comes time to refinance their business. With their existing lender or have to look elsewhere to to do that. So that's part of the reason why we. Do this the first question. Was what is your opinion of the operating environment right now OK? Again, this is 39 responses this year and it's as of again July 1st of July basically of 2023. So about 50% of the responses said difficult but improving operating environment is difficult, but improving 25% said normal, just a bit challenged. And then you had it kind of an even keel. The remaining 25% was divvied up between difficult and likely to get worse or a multi year correction could be in motion. Which I thought was interesting and I think the take away here as you look at the October 2022 results was you know you, you you have a larger percentage of people who say that it that the current operating environment could be a multi year correction or could likely get worse, not significantly. But that portion of the of the crowd has. Has has. Own and then also the not actually that was back from our June 2022 survey from October of last year. Look, pardon me here from October of last year, actually the number has shrunk and and I guess the the, the, the, the take away here would be that the mood of the lenders is actually in pardon again that the mood. Has actually improved a little. That that difficulty you're likely to get worse or multi year correction was about 25%, but it was more like 40% in October. So it's actually dropped, which means that more people think that the environment is normal. I was, I was pleased to hear that we're still in a position where, you know, 25% of the people think the respondents think that we're in kind of negative. So it's interesting to watch. There seems to be a bit of a bifurcation amongst the lenders too, which is something that, you know, I've kind of been watching as I've gone to these conventions this year and talked to the lenders, you know, you'll have some lenders who are either open for business and lending, you'll have some that say they're open for business and lending, but really aren't. And then you have some that are generally pretty cautious and think that kind of goes alongside with the results here. The second question was what is your opinion of the likelihood and severity of a recession? So let's say we. Had about, you know. It was kind of a. 3rd 1/3 a third third said recession as possible, a third said in recession is very likely bounce back quickly and then a third said recession is very likely. Effects are are going to be somewhat lingering and I think again that if I look back to October of 2022, the results are you know. Clearly a little bit better. I mean, if we look back then I think we felt like and I did at least that we. Would hit a recession a lot quicker. More forcefully than than we really have. I mean it's it's been as I look back on it and I'm not overlapped in Mystic necessarily, but but I think I I would have said last year that we would have been in a worse place than than we are from a from a a cooling down of the economy perspective. So that's question number two question #3, how many new corporate borrowers or new customers have you added in the past six months and this was kind of a new question that we started to ask so. About 44% of the respondents said they only have between 2:00 or 4 new buyers and new customers or borrowers in the next 6. Months and then and then you. Have another 18% have zero to 1. So that's over 60% of the respondents said they have between zero and four new clients or customers in the past six months. And likely that's not zero and four likely the average of that is one or two. So 60% of the respondents only have a couple of new customers or less, right? That's not necessarily indicative of how difficult the market is. It may somewhat be, you know, indicative too of the lack of of volume of opportunities, but it's a very notable nonetheless, right? And then you have a 20 about 1/4 of the respondents said they have five or six new customers that they've added in five in the past six. Once and then just a small sliver had more than that, so there is a contingency here of the group of lender responses that are actually doing a lot of business, right? They're actually picking up a bunch of new customers, likely because of, you know, either some M&A activity, some refinance activity that will from other banks that are closing down shop or that are trying to get out of the loans that they're currently in. So again, back to this point of you know, it's kind of a bifurcated market, right? It's it's a little nuanced here. The next question how many new corporate borrowers or customers have you added in the past 12 months? These results are are are kind of similar although you know over 44% of the customers said between. Five and six. Pardon me. Over 44% of the lenders said between 5:00 and 6:00. New new customers so, but the allocation and you know looks about the same. You know you again I've come to the same conclusion that over the last 12 months there have there, there's been a you know, a contingency of folks that are lending. It looks like you know, if you if we if we have 44% that have added new customers that added five to six customers in the last 12 months. And we only have. 23% that have added five to six customers in the last six months. I guess we come to the conclusion that that it is it that it's slowing, you know quite you know quite substantially in the last six months, right, which would be consistent with what we've seen it's it's been pretty chilly right now in terms of the the volume of M&A activity. To finance, quite frankly, and so you have a bunch of people who are sitting on their hands looking. For deals to. Do OK, Next is how much is your loan volume currently dropping because of rising rates or weaker credit? 46% responded modest drop, but should turn around later this year. That was, you know, up from 31% in October of last year. 25% said not much change 40% last year said not much change. That's interesting. And then about 25% said things are chilly right now or there's a modest drop that will get worse, which is pretty. Similar to what it was back in October. So I'm I'm looking at this response and thinking about what I would tell you. I think what I would say is that there is more. Optimism, right. So if? Almost 50% of the respondents this year said that there's been a modest drop in loan volume because of, you know, rising rates and weaker credit, but that we expect to turn around later this year then I then that's a pretty strong kind of endorsement that they think things will get better, which is good. Right, which is. I guess I would also say that these respondents are largely the people who are trying to make loans at banks. I don't have as much, you know, kind of access to the special asset division, you know, kind of people who do workouts or the underwriters of these lenders. I wonder if their responses would be. Different than kind of the more. Out front salesy people within these banks who are trying to get more deals. But but, but there's probably a little bit of a positive optimism or or spin on some of the responses here. You know what I mean? But that's a good. I think that's a fairly good sign. OK. The next one is how many franchise M&A deals are you personally trying to fund right now? Interesting 1 S 2030% say 0 to one. Wow, that's a you know, that's a that's a. That's a big number back. In back in October. It was though it was 67% said zero to three. We changed, we changed the results here. This year, 28% almost 30% have between zero and one M&A deals that they're currently trying to fund. My guess is that most of them are 0. So that's a. Big percentage and then 46% say between 2:00 to 4:00. Deals are trying to personally fund right now. You know, and then and then the remaining 25% or so have between 5:00 and 8:00 or more deals that they're personally trying to fund. By the way, on the margin, 25% of people sound to be really busy. I don't know what type of M&A deals they're they're, they're they're trying to fund. And clearly I included both large lenders and smaller lenders too here. So could be that there are some, there are a couple I know SBA lenders here they we don't do much business with with those types of lenders. That they could be, you know, have a have a higher volume. Most of the business that we do is going to be kind of the large, you know, restaurant and franchise deals that are $30 million and up transaction, a lot of their transactions, a lot of them syndicated and so, so there's a a difference in responses here that that needs to be noted. But still there seems to be some optimism in a lot of lending in a small portion of this market. And then there's a. Big chunk of the market that's doing nothing, you know, and then there's the majority of the market that's doing between 2:00 and 4:00 deals right now. OK, the next response is in the past year, how many of your M and AM and A deals have been retreaded repriced or restructured? Good question, right? 36% said a few, but isolated in circumstance or brand, 30% say some have been retreaded repriced or restructured. 25% said not many, no change from normal and then 8% said many or. Most as I look back to this to October of last year. The results are somewhat similar, somewhat similar, somewhat similar, so not, not really meaningful to note the differences so. OK, so how do I feel about this? Historically speaking, on the deals unbridled capital does. I would say no. I would say that very few of our deals get retreaded. Now maybe it's the case that we are working with higher quality clients, maybe we're just. What we do, I'm sure that's part of it all. That so I would probably in a normal 10 year window, look personally at our deals and say I would look at at the results here. And I think they're a little bit negative that there's been more retraining, repricing and restructuring than normal. This is certainly what I would say. Just anecdotally by eyeballing the current state of the marketplace. So for the survey results to say. Say 30% say some deals are and then another 8% say many are 25% say not many from normal and then 37 per 30. 6% say a few, but only isolated to the brand or circumstance that certainly seems to be more than normal. I do make note. Of a lot of. The difficulty in getting some of these deals closed is brand specific, so that 36% doesn't surprise me a bit. I mean, as you all see in the headlines and reading the tea leaves right, there have been certain brands that have been. Really, really, been been performing poorly. They're harder to finance. They're harder to get closed. And so we've we've seen alternative financing structures, a lot of seller financing, you know, kind of creative ways, you know, to to do earn outs and things like that kind of unconventional lenders coming into the space. To take down some of these deals, they might be distressed and maybe larger and not have a home necessarily. It's hard to do a bank syndicate in a difficult brand that has, you know, a big a big need to be financed. And but it's going to take like 6 or 7 lenders to do it and to get all of them on board. When when you're above the kind of the $35 million threshold, it's difficult to do in certain brands right now. So I do think there's very there's there, there's nuanced news here. I mean it's kind of the same thing that if you're kind of in the brands have been languishing and there's a lot of M&A. Distressed M&A out there in that brand at this time, it's going to be harder to get your deal closed through a lender without it getting repriced alone. In the way, whereas you know some of the brands that are performing well, it's just the opposite. They'll sell for if performance is good and and there's a lot of demand from the lenders. How many of your deals are not reaching closing 39 responses here? 46.2% said. A few are not recent closing, closing, but just isolated to brand or. Circumstance again, I think it's consistent with my last commentary, 25% say not many, no change from normal, 15% say some and 12 1/2% say many or most aren't reaching, reaching close. I think this again is kind of consistent. With with the. The comment and their survey results from above about retreading repricing and restructuring deals pretty similar, right? You know, so you have kind of a mismatch of responses leads me to the same place. If you're in certain brands that are difficult, deals aren't going to be easy to close in 1/4 of the respondents, it's no change. Normal there are there, you know, 13% are saying many or most of my deals aren't reaching closing which is a little bit higher obviously than normal would be but but I think it shows a mixed bag. If you're willing to be a participant in a syndicated credit facility in the past, would you today, this is a new question that we asked this time and I think it's an interesting, right, interesting one. So if you were willing to be a participant in a syndicated credit facility in the past, would you today, in other words, if it's a big deal called $100 million deal and it needed a lead lender? To take 35 million and then like 5 four other lenders to take the remaining $65 million. You know, would you be willing to participate if you were one of those junior lenders coming in on it? And so here's the answer, 44% said yes, but only with depository participation. I'm just a good old country boy, right? So, like, what does that mean, right? Only with depository participation? That means that they're not going to do a deal and come alongside a senior lender. You know, kind of a a left-leaning lender unless they get a deposit with it, the deposits or their share of the deposits. This is a new trend and the new trend here, and this is what I wanted to kind of tickle out of this question and it sure as heck came through over 44, almost 44% of the people won't come in on a big deal as a junior lender unless they get a portion of the deposits and it's because their deposits, their loan to deposit ratios. Are really, really bad right now and they've deteriorated. Well, there's a number of reasons, but one of the reasons is because banks have been slowed off for any sort of interest rates, right? And so what's happened? You know, think about yourself. If if you are chasing a little bit of yield on your money and looking to get a little bit in front of this inflation way, I mean, you've probably moved your money out of a traditional bank, haven't you? Who's offers you 0.0% you know, on your, on your, you know, checking account, right. And you probably put it in money markets or you put it in T-bills. Some of these areas where you can get higher yield to keep up with inflation a little bit. You know, even if you can't fully keep up. With it. So for that very reason, you've seen a lot of people you pull money out of out of banks in the last 12 months and deposits have dropped and and so loan to deposit and existing loans are are on the books, deposits have dropped. So loan to deposit ratios have gotten much, you know, have gotten much worse for these banks and now they're seeking deposits and it's kind of like a. Pretty binary formula for them, so this is a big deal if you are going out to to get a A, you know, syndicated facility you will probably find even a A you know smaller lender coming alongside saying I need to have some of the deposits here in order to be able to make this loan. So 44% said yes. But only with depository participation. 26% said yes, nothing has changed, seems to be, by the way, that about 1/4 of the respondents and almost all these questions kind of answer that way, right? Like nothing's changed. Nothing's changed from normal. So just note that particularly and then 17.9. Let's just say 18% said no, only a sole lender is what I would be at this time. Since this is the first time I asked this question, I'm not sure how I feel about that, but almost 20% of people say, hey, I'm only willing to be a primary lender, not a syndicated credit facility lender. And then 13% said yes, deposits not required, but pricing is my #1 consideration. OK. So take that for what it what it's worth that's. Interesting results. Next question, what percentage of your clients are currently out of compliance on their loans? All right, so back in October? 54% said zero to 10% or you know only zero to 10%. Now 64% say zero to 10%, so that's good so. It's it's improved. Right. So less folks say their franchisees are out of loan compliance. Which is great. I think it's consistent with this time, you know, October of last year, we've been through kind of 10 really tough months. Things have improved this year. Financials have gotten stronger, generally same store sales are up and almost all the brands and profitability is significantly higher and most with most of the franchisees at least on the restaurant side who we've talked to. And and who are doing business with over the last six months. So that's good. Back in October, 2240% said between 10 and 25%. Are out of loan. Compliance, which is that's a kind of a bigger threshold here. It's only 20% or or that way. But it's interesting that. I think there there was hardly anybody who was 25% or more out of. Loan out of. Covenant compliance in October of 22. Now I see that that number is more like 1615 to 20% now. So again, what that probably tells me is some of the, you know, some of the brands who have languished either have not been able to turn it around substantially or their turn around has not been forceful enough or quick enough to get out of the penalty box. So you know, sometimes when you have. It's like compound interest you, you know, you pull it out and and over in a long enough time and the results actually get larger, right? So I that's that's what I. Take it there is that you probably have a it it says a good 64 almost 65% or only between 0 and 10%. You know out of. Compliance, which is which I think is a healthy. You know percentage, you know, improving good news and then you have kind of this kind of this languishing 15 to 20% that are actually of lenders who actually you know say that up to upwards of 25 to 35% of their clients are out of compliance. Next question. All right, hope I hope I'm. Catching you guys still awake? I kind of feel like this. Is a little dry. Oh, by the way, and I'll mention this again at the end when we, uh, next month we're gonna have a webinar that I'll put to a podcast with with a, you know, Mike right now it's Mike Eagan at Synovus Bank and Nick Cole at MUFG, and we're going to talk about this. You know we're. Going to get their viewpoints on on, on how the lending market is going right now. So stay tuned for that. I think that'll be better commentary and more kind of, you know, read between the the lines and even I'm providing here. OK, next question which deals are most likely to get done through your bank? 44% said tier one smaller low leverage deals. Interesting 33% said tier one larger high leverage deals. When I say Tier 1 here, these are the brands vaguely speaking that have 3 or 4000 units or more. So these would be the big names that you see on every street. So fully 77% or are wanting to loan into Tier 1. And then you have 20% who are wanting to loan into Tier 2 larger low leverage deals and those would be the second tier. So you do have a nice and this is if you're listening to this in your franchise and you're not a Tier 1 lender, you can go to call the big names. And oftentimes the big names, you know, the big banking names aren't going to want to. Loan to you. Because you're not one of their tier one brands that are approved from the top down, but this survey seems to indicate to me. Something I've already. Known that there's a probably 1/5 of the lenders really want to work with the the larger low leverage Tier 2 clients and there's a market there, some it may have to be like dug through a little bit, right, find the needle in the haystack with which lender wants to work on a brand that has 1000 units and you're a 50 unit franchisee wants to buy another 50 unit franchisee in that brand. For example, but that, but that market does exist, you just have to look for it, otherwise you know the kind of. You kind of see an equal. No, you don't. You see. About 2/3 of the respond. Responses want to do low leverage deals, and a third want to do higher leverage. Larger tier one deals you know I I can imagine like for example on the on the higher leverage deals like the Taco bells of the world. You know, some of the lenders are really focused on the higher quality deals and those come with higher leverages because the prices are are higher, right, so that. May be an indication of. Of of lenders being more comfortable with the more premier brands, at least from a a recent person. Effective good results there. Let's see what segment are you most positive on right now and the choices were pizza burgers. Chicken, Mexican and specialty. OK, pizza 7.7 percent 8% of respondents said pizza. They're the. Most positive on. Burgers 23% chicken, 28% Mexican 28% and specialty which would be all basically all others you know 13%. I said specialty because there's a big movement with some of these, you know, sub sub shop brands and some of these you know kind of you know other kind of growth emerging emerging market kind of kind of brands or smaller brands that have been growing unit count a lot. And so that is not though a primary focus here the most positive. And it seems like either Mexican again, AKA Taco Bell, I'm sure is most of this response, or 28% is. On chicken and. You know, goodness gracious chick, the chicken space continues to to like really. Over index, doesn't it? I mean it just seems you know, it seems like every day that you know, you hear more positive news on Zaxby's or raising canes or chick fil AI mean you know you have some of the historic brands that have given up some market share, but you still have big brands like KFC and you know and certainly Popeyes and and some of the others. But the chicken segment. Has just really grown tremendously it it's been a good place to be. And certainly is, is competitive now, isn't it? You know, you see, you see one of these chicken brands on every on every street corner. But still, lenders are pretty positive in those. So when you consider chicken burgers and Mexican? You make up what? Over 80% of the responses here, leaving the remaining. 20% to be either pizza or specialty. And so I'm hopeful that that pizza will kick back up in there because because pizza I think is an an area that has a that's on a pretty decent upswing, at least with my good friends at Pizza Hut. And I'm happy for them that they've seen some great sales growth this year and some good promotions and some good traction. Some of the other pizza concepts have have languished a little bit this year in terms of same. Your sales and profitability, some of it's coming off some of the highs that they've had a little bit of competition these days right from from third party delivery like dirt, DoorDash and Uber eats, in other words used to only be able to get a pizza to your front door five years ago. But now you can get everything from a Taco. To you know, to a, you know, coffee, you know, delivered to you now. So I think that's eating into some of the pizza business a little bit, but I've got Good Hope that that will improve a little bit for our pizza folks here coming forward. Another question, just a few more. What part of the loan process is getting the most scrutiny from your risk department? There are four choices, interest rates and. Fees, amortization and term deposits and ancillary business and personal guarantees. Now if you're if you're awake and paying attention. You should be able to guess which one's going to get the most answers. Yes, 41 percent is deposits and ancillary business. Again, banks saying I need to have your deposits, your piddling deposits, because, I mean, you know, most people pay them credit card, there's not a whole lot of deposits that. Are going to come in. But I need those little posits in order, or a portion of those little deposits in this in this industry, in order to make a loan. So that's, that's something to keep in mind. 31% say interest rate and fees, 20% say amortization in term and only 7.7% say personal guarantees. So isn't that interesting? That's some. That's some news that you might be able to use to your advantage when you're negotiating a loan. Maybe the personal guarantee isn't as big. Of a deal. It maybe. It's certainly less of a deal than some of these other things. So if you're negotiating with the bank, maybe you can use that to your advantage. If a personal guarantee removal burn off or not inclusion is something that is important to you.


Next one, what metric is the most important metric to you right now? This is one of three more questions. So there are three answers, a debt to EBITDA, B fixed charge coverage ratios and C lease adjusted leverage. OK, so lease adjusted leverage is came in number one at 39%. Basically no change from last year. Fixed charge coverage is 33%, it was 40% last year and so that has become. And I think what's happened was although fixed charge coverage ratio kind of bears the weight of interest expense a little bit more, I'm actually surprised by that answer. I would have expected that. That number to stay the same or increase, since interest rates have been higher. There there, you know it would. It would have been my supposition that that lease adjusted leverage would have given up more of its lead to fixed charge coverage ratios in terms of compliance and and metrics from making loans as interest rates have increased. But but maybe not and then debt to EBITDA was 20%. Now it's 28%. There's been a little bit of an increase in the debt to EBITDA calculation is a factor for making a loan, not necessarily a surprise in a market where we're getting a little bit more conservative and a little bit more scared to make loans. OK. What's your expectation on lease adjusted leverage movement in the next 12 months? All right, kind of a geeky question. This is again, but barely. So the most prevalent kind of kind of term or or or metric that that, that, that lenders are using to make their loans to figure out how much they're willing to advance to a client and and at what interest rate basically to on a transaction, whether it's just a refinancing of their business. Or an acquisition to add on. You know new restaurants or new profit streams to the. The business so for lease adjusted leverage 30 or let's see 55% said we expect it to drop between 15 to 25 basis points lower. What that means is that it will be harder to buy a business or finance a business with the same down payment if the lease adjusted leverage drops. So you can either so that the respondents are basically zero to 15% or pardon me, zero to 15 basis points. Up, that's a B is 15 to 25 basis point drop C is 25 to 45 basis point drop and D is the big old 45 to 60 basis point drop and you had 54% were in the 15 to 25 basis point lower a range and then you. Had a little over. 20% were zero to 15% lower, so not much change, 20% were at 25 to 45 basis point lower, which is pretty negative. And then just a very small sliver for the worst kind of metrics. So I mean, I guess if I look at this. I come to the conclusion. And that that lenders are going to tighten that calculation and that metric a little bit, probably the average of all of this stuff might be somewhere around 25 basis points. You know, I I don't know, it looks like. It so if. You were, you know, at A5 and 4:45 point 75 lease adjusted leverage. You know, depending on kind of the brand. The history, the success, the kind of the metrics of the transaction. Then you might kind of generally feel like by the end of the year would move down to 5 to 5 1/2 times or you know lease adjusted leverage so. What does that mean? I mean that amount of movement likely means that there you know. That it'll be. If you have embedded equity, it may not be as big of a deal for you, but if you're coming out of your pocket with new equity to buy a transaction, it likely means there's going to be a slight. Of down payment, you know equity, you're going to have to bring to the business or a little bit of a strip of of, you know, financing in the middle or potentially the price may have to be negotiated lower slightly maybe, let's call it by 5%, who knows or there might need to be a little sliver of seller financing or earn out to make the purchase price. None of this stuff. Should be surprising. And then the last question again also had 39 respondents are based on the feds actions. Where do you see interest rates settling in the next 6 to 9 months?


So you had you had a was 0 to 25 basis points higher. All these answers are higher, right? B is 25. To 50 basis points higher C is 50 to 100 basis points higher and then D is 100 or more basis points higher of which. There were. No D answers, so a had 33%. So 33% of the respondents said zero to 25 basis points in. And then we had 41% said 25 to 50 basis points increase higher and then you had 25% who said 50 to 100 basis points higher from here. And of course, that has come down a little bit from this time last year. You know from October of last year simply because we've already seen quite a few interest rate hikes and it it indicates what we all know that there's probably a. Little more to go. But that but but that we might be closer to the end of the interest rate increase in environment, who knows, I guess we have to continue to see, but that's at least the expectation relative to last year's study for these lenders. So as we kind of conclude here. I I would again kind of remind you that that next month keep an eye out if you're on our e-mail distribution list, we're going to be doing a webinar with right now. It's Mike Egan at Synovus Bank and Nick Cole at MUFG, and we'll we'll we'll be going through kind of just their views on the the lending market, which I think. Will be a good one. I'm also toying around with the podcast later this summer on the difference between an asset sale and a stock sale and a transaction and the difference in process that's driven by. By the smallest types of M&A transactions mid sized asset based kind of asset deals you know and then the larger private equity type of M&A transactions. The differences between them as it comes to transactions, due diligence and all that stuff. So I think that will be an interesting one that will probably come out in early September.

But other than that.

I I guess in closing I would say the general take away from this survey is things. Seem to be getting a little bit better. Lenders are not very busy. You know, there's not a lot of deals in the marketplace, but it sounds like if there's a modest uptick in activity that there's going to be folks there like to do these transactions. It feels like the lease adjusted leverage will come down a little bit. It feels like for syndicated. Deals, and certainly maybe with other lenders too that you're going to have to come up with some deposits to satisfy them because that's a big hot button since their loan to deposit ratios have changed so much over the last 9. And it also sounds like there is a pocket of negativity that is driven by and positivity that are driven by the specific differences in the brand. Some brands have done really well and there are lenders ready to go aggressive with them right now at high leverage and with great terms where there's also a sliver. That is bad and getting worse, and those types of brands have have have been unable. It looks like in in many instances to dig out of the hole that was created during COVID. Stay tuned if there's any questions that we can ever answer, you can always reach out to us on our website or you know you can call me or our staff otherwise and hope you guys enjoy the the rest of this July and look forward to to talking to you soon. Take care. Thanks so much for entering the boiler room today. You can find our podcasts on iTunes, Google Play, Stitcher, TuneIn and. Modify if you like these podcasts, please listen. Rate and review. I also encourage you to visit our website at www.unbridledcapital.com for the best franchise M&A and financial resources in the industry. Our website includes webinars, podcasts, videos, white papers, and a list of our past M&A transactions. Please note that neither Rick Worms be 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 emissions therefrom.