Rick Ormsby
As we get started here, I just want to thank you for watching and listening. This is season 8, episode 4 of the Restaurant Boiler Room. It'll be out on our podcast series in the next week or so. if you don't have a chance to listen to watch all of this or you want to replay, you can always listen. It's on all the channels for podcasting. And you can also find this will be emailed to people who signed up and You can get it on our website at unbridledcapital.com. If you go to unbridledcapital.com, by the way, if you've never done it, we keep all of our resources, all the podcasts, all the webinars, all of the deal closings, all this stuff is there. So it's really a treasure trove of information if you ever want to use it or need it. And with that, we are going to get rolling here. Is it 1 o'clock? Yeah, it's 101. So let's get started. So what we're going to do for our mid-year update this year, and we do it twice a year, right? So I have these four gentlemen, me and three gentlemen on the line here. We do a State of the Union in January where we talk about what happened in the last year, what we expect in this year. And then we do a mid-year update. And in the mid-year update this year, since the messaging isn't overly different than what it was in January, I thought we would take 12 or 13 commonly asked questions and things that I think are going to be really narrow and very interesting and very technical that'll help you as you think about franchise M&A. And then through that discussion, you'll kind of get our update on what's going on and how everything is. So with that being said, we'll start with question #1. And question #1 is, a common one. How long does a sales process typically take if I'm selling my company? And when would I actually receive funds? So go for it, guys. You jump in and let's spend about 3 or 4 minutes on each question.
Derek Ball
Peter, you want to start with this one.
Peter Fisher
Sure. I'd say as far as a typical deal, it should take about six months from our initial conversations to the transfer of assets to a buyer. Our initial underwriting is anywhere from two to four weeks. The marketing phase, probably four to six weeks, depending on if there's a second round involved. From there, it takes about a month to negotiate and execute an APA. One to two months from buyer due diligence and probably another month to coordinate the closing with the brand. However, there are a variety of different factors that do come into play for all these. We've seen some brands that only take about four months, but those are very rare. Another factor is the deal size. Is there a ton of assets involved? If there are tons of assets involved, then it will take a lot of time dealing with title work if there's a lot of exceptions or if there's a lot of lease assignments. Some landlords can be quite difficult to deal with, especially if they aren't responsive. If it's a due buyer, they expect it to take a little longer as well. They have to go through brand approval, training, A lot of different times they're slow to the process because they haven't been through it before. Another thing, one final piece maybe is the financing. If the brand is struggling as a whole or this particular portfolio is in decline, then financing could be a little bit difficult in the closing stages of the deal. So that's kind of it in a nutshell.
Rick Ormsby
Yeah, it's good. And I would just add one of the comments you made, you're working on a couple of assignments now where new buyers, whether it's a kind of an institutional new buyer or an owner operator new buyer is buying a restaurant business or a franchise business. And that takes longer, doesn't it? When you have to do the training, when you have to go down and get brand approval. And when you're going down to get brand approval, they're doing their background checks and they're wanting to interview, get you interviewed. And then multiple people typically have to approve of you to become a new franchisee. So that can become a bit of an elongating factor in these deals, especially if it's a small deal or if it's a deal in a brand that doesn't necessarily, hasn't had a lot of M&A historically, right? That those kind of businesses typically tend to attract outside new franchisees more than maybe large existing systems do.
Peter Fisher
The good news is with the training, I mean, it could take four to six weeks for training with the new brand. But the due diligence is ongoing as well during that time. So it doesn't add much time, but it does add a few weeks to the deal.
Rick Ormsby
Yeah, that's good. Okay, that's good, Any other questions? That's one of the questions we get all the time, right? From people, how long does this take from soup to nuts? And Peter said five to six months. Sometimes it takes as much as 6 to 8 months. And transfer approval sometimes takes longer. all these factors is a really good rundown. Maybe we'll just go to item #2 though. Let's go to the second question. Let's see. Question #2 is how many offers should we expect on a business? So some of these questions are going to be questions that naturally sellers going to ask us. And then as we move through this, there's going to be ones that buyers who call us are going to ask us too. So just be patient if any one of these questions doesn't catch it fancy because other ones will. So how many offers should we expect on our business? Derek, Pete, Raymond, do you guys want to tackle that one?
Derek Ball
Yeah, I'll take it. I mean, it's heavily dependent, like all these answers typically are. There's no one answer. for any specific business, but it's going to be dependent on kind of brand, region, size, and the quality of the specific assets themselves. Have they been taken care of over the years or not? I would say most average franchised businesses have anywhere from three to six. That's kind of the general range that we usually look for. If you have a really strong business, just one of the brands that's really hitting home runs and everybody looking to get into, you might have double digit offers. I think the highest amount of offers we've ever had on a business was 22, but 10 to 15 is not uncommon for a really heavily in demand business and specific brands that are just hitting home runs all the time. If you're a struggling business, you may be surprised. You usually will still have three or four offers. Three or four offers usually for a struggling business. It may surprise you. Oftentimes it just ends up coming down to the quality of the offer itself, lower multiples, more contingencies, more financing risk, things like that. But you'll usually still have the offers. When you start dipping below a few offers on a business, it's usually specific to a relatively small business in a more isolated region. So if you're, I don't know, just no neighboring cities, you're in the middle of a large expanse like the Western United States, heck, even Denver. You got no cities hardly within 8 hours of Denver. So if you've got two stores in Denver, oftentimes your business is going to be sold to somebody already in Denver. If you've got a larger business, then you can make a national market, of course. But yeah, usually three to six. I don't know if that surprises most people or not. Some of our sellers are pretty surprised by that. They think we're just trying to get one or two. You only need one, of course, but it's nice to have three to five to six to kind of pick from.
Rick Ormsby
And I don't know that this is, as I search through my foggy mind of 25 years of doing this, I don't think I've seen a business that's got no offers on it that we've been a part of. So there's a market. A couple things I'd say. Number one, supply and demand. My son is now a freshman at Florida State and he's got to take macroeconomics for his major. And so I've been talking to him about supply and demand since he was four years old. And I think, how it is. You talk to someone about something and they go stonewall with you and they don't want to listen, know what I mean? But hopefully he'll hear this lesson that I've been telling him and you guys know it too. Like when you have something that's in high demand and there's not a lot of supply in it, right, then there's going to be higher prices. And so that's kind of the idea behind some of these offers. You'll get more offers in businesses that there aren't opportunities very often or opportunities of scale or good opportunities in the right geography. Whereas if you have somebody like a brand where there's lots of stores for sale, then all of a sudden it's going to be more difficult and more choosy. I guess there's one other comment I was going to make. Let's see if it's off the top of my tongue or not. It is true, is it not, that we've had a little bit less interest in our industry over the last couple of years. Fewer people are making offers on businesses. It's not dramatic, but fewer. So the opportunity here, I think, is if you see an asset or a business that you want to buy in the franchise space and you like it, you like the brand, you like the geography, you like the unit economics, you like all these things about it, could actually take in a contrarian view and seeing all the bad news on the headlines, right? Could actually be a good time. There's a little less competition, relatively speaking, than there was to buy these assets five or six years ago. Agree with that? I mean, it's not like a major thing. But the timing may actually be a decent time to step into what could be an undervalued asset. You have to make those determinations yourself.
Derek Ball
We've got one question here in chat. And keep in mind, we try not to answer super specific brand specific questions. Not looking to say, really talk about brand specifically on these webinars too much. But one of the questions was just, what impact are you seeing on multiples from same store sales declines or increases? My answer to that is usually when you have brands that are in pretty consistent same store sales declines, what it ends up doing is just lessens the interest from buyers. And when you have same store sales increases and they're doing really well, you have a lot more buyers looking to get into that brand. And when you have a lot more buyers trying to get into a brand, generally that's going to pop the multiples. It can very reasonably change from a six to a seven multiple in about a year. Usually it's not overnight that these multiples shift up or down, but it usually takes a year or two to really have them. So in a brand with same store sales declines, you will usually just see multiples drop a little bit just because you're going to have fewer interested buyers. Fewer interested buyers usually results in a lower price. If you've got same store sales increases, you're going to have more interested buyers. and effectively you're going to have a higher price.
Rick Ormsby
Lower same-store sales during the transaction. You've heard me say this for years. That may not be like, okay, you'll have less interested buyers, but the real issue is will the deal close? And I think that's the bigger issue is with whoever the buyer is, and there may be plenty of buyers, even though there might be fewer if it's in a brand that's not performing well, but the issue then becomes, can the deal close if sales are going down precipitously or even moderately as you go into due diligence? And that's an equally big kind of question to ask, although that wasn't maybe the genesis of this question here. Let's go on to the next one. Then the third question is, what are the top three things to plan out one to two years from closing? So this is presumably, we get this question a lot. So someone who might be unaware and they're a couple years away and they call us and say, how shall I prepare to get my business ready to sell when the time comes? I guess that's kind of the nature of the question. Go ahead, guys, jump in. What do you think?
Raymond Buehner
Yeah, I can take this one. So I think the first thing, you know, kind of number one item here is clean up your P&L, kind of get your operations in order and get with your account and make sure your GNA is hitting the right accounts, whether it's store level versus a G&A or holding company P&L. A lot of experienced restaurant buyers, they can kind of understand what's going on, but if it's likely that it's a new buyer into the franchise space, it's going to take a lot of diligence in explaining to why certain things are where they are. As advisors, we obviously help you with that, but if you can kind of get rid of some of those one-time adjustments before going to market, that'll definitely be an easier conversation with potential buyers. The second thing, try and get your leases in order, not only organized, but kind of one of the things buyers really like to see in these deals is at least 10 years left on the lease or lined up with the franchise agreement. Now, if it's a negative store, that's obviously a different conversation. But assuming you have a strong portfolio, a strong package of stores, getting those leases extended to where assuming you would run the business yourself for the next 20 years, that's kind of ideal that buyers like to see in a process. And the third thing here is making sure kind of your office staff and above store leadership that you kind of have a plan in place. Obviously, depending on who the buyer is, they're going to want certain employees versus others. But this is something we've seen come up in a lot of conversations recently. It's who are you taking and who are you not? Don't go to buyers with, well, you can take whoever you want. Go to them with the plan of this is who is likely going to stick around and this is who's likely going to leave. That makes the plan for the buyer a lot easier to digest.
Derek Ball
Yeah, and what it'll end up doing is ultimately if the buyer doesn't want an employee, they're not going to hire them or they'll hire them and fire them in six months. So you're not necessarily going to be able to totally shift the buyer's opinion there, but at least may set your expectations a little better. I've seen in the past sellers have an expectation that they think the buyer's going to take certain people And midway through diligence, the buyer tells them, actually, we thought about it, but we decided not to. It ends up just being a bit of a disappointment for the seller. And obviously those people lose their employment. So it just gives you a little bit more time to plan, potentially even tell an employee. Some people just choose not to do that though for certain reasons. So you may not necessarily be able to shift the buyer's opinion on it, but you can at least set the expectation a little bit better internally.
Rick Ormsby
I see a couple soon. I mean, I got a couple of buddies hang out with some buddies who outside of this industry who have companies that they sell. And I just think if you have a larger company and you're positioning your company to sell to a family office or private equity group, you've got to have a great management team in place. And a lot of times there's a lot of work to be done to get that structure in place so they can fit into the model of one of these larger acquirers. So that's something that I know a couple of my buddies are doing right now is building out their management teams for the purpose of being able to sell it and to leave the business and not have to be a part of it when they sell it. That's #1. And then the other thing is we start to run into now is more types of people who sell businesses. They may own a lot of things and they're only selling a portion of one of a lot of the things that they have. And so those types of, let's say you have 500 of something and you're going to sell 50 of it and keep the 450. Well, that 50 that you're selling probably doesn't have a real coherent management plan with it, right? Because it was part of 500. And so understanding that dynamic, getting your plan in place and understanding how to put the management team forward so that a buyer can have something coherent left behind is very important to get the highest multiple in a bigger business for sure. So yeah, good stuff. Number 4, here we go. What are the typical due diligence items buyers ask for and do we need to have handy pre-sale? That's a good one. It's a good question. And oftentimes we don't discuss this enough. So if you are a would-be buyer or seller at any point in time in your life. And we're all going to buy and sell something, right? So be a listen up for this one. So go ahead. Who wants to take it?
Peter Fisher
I'll take it. I mean, we see lists that are extremely long, some that are very short, surprisingly, but most are in the 30 to 50 item range. They can ask for a lot of things. It's a very tedious process, a very time consuming process. So it's kind of best to kind of start on this beforehand. A lot of things we don't think about until the time comes, until we get the list. But things such as business formation documents, tax returns, three years of audited financials. I know most smaller companies probably won't have audited financials, but at least CPA reviewed financials. If you have recent facility inspections from the brand, that'd be helpful. The buyer is also going to perform their own inspections regardless, whether it's to the brand or internally. So make sure your assets should be taken care of. permits, licenses for each store. This can take a ton of time to compile as you're trying to collect it and not trying to alarm the employee. So if you can kind of do it over a longer period of time, it should help instead of asking for it all at once. kind of raises a red flag when all of a sudden you're asking all of your managers for all these documents. Other things such as wage and benefits for all your employees, backup for bills, that's also a considerable amount of time. And then material contracts, many times back in my restaurant days, you just sign a contract and you store it away or it's in your e-mail or you delete it over time. These things are important to collect, especially if you want to try to sign the contract to the buyer. So just try to keep up with those things as you sign them throughout the years. Past and pending litigation, this won't, it's most likely an asset deal. This isn't going to transfer the liability over to the buyer, but the insurance provider will still want to see these details for past history and performance. A couple other things, maybe pricing history. Buyers will want to see where they can improve profitability and maybe raise prices. And then market level details. Buyer will want to know every opportunity available for new builds, relocations possibly if necessary. This also increase kind of the marketability of your business if the buyer can build out more units in the market.
Rick Ormsby
Did you have a contract for that Vicky's Sweet Tea in the Taco Bells?
Peter Fisher
Lost that one in my e-mail.
Rick Ormsby
Lost that one in your e-mail. They had the Peter's family operated Taco Bells in northern Mississippi and they made Vicky's Sweet Tea in the Taco Bell. And that was a pretty popular menu item, wasn't it?
Peter Fisher
Was very sweetened. Maybe double the amount of sugar required by Taco Bell.
Rick Ormsby
It was good.
Peter Fisher
It was good.
Rick Ormsby
Oh, I bet. I imagine.
Derek Ball
And on those lists, just the 20 second blurb, those items Peter spoke of, those are items that everyone's going to ask for. If you're dealing with a family office or private equity group, there's not a shot or anything, but you might get a 5 to 10 page single spaced Word document. for diligence and you're going to look at it as a seller and say, what the heck is this? The people that have been in restaurants for a long time, the list is usually more like 30 to 50 items and it's more transitional in nature. They know exactly what they want. They know exactly what they need to ask for. So I think Peter just railed off 15 or 20 items that are going to be on both lists. Until you know who you're working with as a buyer, You don't need to go and prepare 200 diligence items because there's a good chance if you're selling to your guy next door, they're not going to ask for it. But there are a handful of items here, like Peter said, that everybody, no matter what, will ask for universally.
Rick Ormsby
Yeah, one of the items I just heard, and this is random Rick, about that we may pull forward in the discussion is the pricing history. So that's something that's very valuable. And for those of you who are listening with fancy shoes in New York, you may not know that people have a little bit of liberty to price their products in different bands within a certain franchise. And now there's many systems like I think both Wendy's and Taco Bell use RMS and there are others that recommend what you should price your products at. But even still, the franchisee has a lot of weight, carries a lot of weight to determine what their prices will be. So that's something that we look at fairly closely at the front end actually, even though it's also looked at during due diligence, because oftentimes we'll find ourselves with an older franchisee who has been very conservative with raising their price. but that it's something on the front end that's really attractive to would-be buyers. Because if you come in and raise the prices to what the stores around that aren't owned by the franchise are, and you raise your prices by 5% and you assume that most of it sticks, that's 80 to 90% flow through directly to the bottom line in an incredible way to add EBITDA to your business quickly. Of course, it comes with the consternation of raising your prices especially after acquiring a business and then all of a sudden your demand drops and then you're in bad shape. But it's just something to note that to cull that out when you speak with an advisor and to make sure you choose one that asks those questions because they can add substantial marketability to an asset for sale and for a buyer who's wanting to make more money after acquiring a store or a business. What percentage of stores in a seller's portfolio should be profitable before a buyer loses interest? baby.
Derek Ball
So that's one that not many people think of. Oftentimes we'll be doing our valuations up front and we'll bring this up trying to potentially close underperforming stores. And it's not often something that our prospective clients had thought much about. There's a lot of factors that go into it and we don't have an absolute perfect answer, but we're going to give you an answer nonetheless. Factor one is what's the brand? There are certain brands that will penalize the heck out of you for closing a store, even if it's losing 300K a year in EBITDA. You'll have other stores that you can freely close stores per the franchise agreement with almost no penalty. So one, is your brand going to be conducive to work with or are they going to be difficult? Factor 2, what's the lease liability left on it? Assuming it's a third party lease and not a fee-owned store, what's the lease liability? You have 20 years left at 100K a year. Do you have four years left at 100K a year? That changes the discussion quite a bit. So that's comment #2. But generally speaking, if we go to market, it's not uncommon for you to have up to 10% of your portfolio these days losing money. Now there's a difference. Is it losing 5,000 a year or is it losing 200,000 a year? Obviously not all of those are created equal, but you can usually get away with up to 10%. Once you get between 10 and 20%, it's a little bit of a mixed bag. Is it more of the brand struggling? Is it this business specifically struggling? Is the region of the country struggling? Do you have potentially just underperforming P&Ls? Are you just not focused on the bottom line as much as other people? Or Are your sales 30% below national average? Obviously, if it's a struggling P&L and you've got the sales, it's a little bit easier for a buyer to come in and make the P&L improvements. It's harder to bump sales most of the time. So between 10 and 20%, you're going to lose some buyers. You're inevitably going to lose. If you were going to get 5 offers, maybe you get two or three. somewhere between that 10 and 20% range. If you're above 20% negative stores, which some of you may say there's no company that's like that, you're not right. There are some brands out there that are struggling where you might see 20 plus percent of a package have negative EBITDA. Again, that doesn't mean they're losing 200K a year. It might be 10 or 50 or 60. That's where you're really gonna start struggling to find buyers. And the buyers you do find are gonna bottom out their multiple, which is gonna impact your positive stores. they're looking at a, if the brand goes for five times, but this business is struggling, then maybe you're looking at 4 to 4 1/2, unfortunately, that's going to be 4 to 4 1/2 on your positive stores as well. So it just kind of dings you all over, but up to 10%, you're fairly safe in the franchise business.
Rick Ormsby
I would make the comment, most good entrepreneurs need to be good optimizers. That's one of the things that my personal life and everything that I enjoy doing is optimizing, making things better, making them more efficient. But you need to be a serial optimizer where you can with your existing business. I mean, I've said it before, Pareto's rule, right? 80% of your problem children, of your problems come from 20% of your stores. So like my general philosophy in life is if it ain't making money, cut it. You know what I mean? And I would just encourage, and there's that healthy tension, of course, with landlords and a franchisor who may not allow you to close stores and your desires financially being in different places. But good franchisees spend a lot of time creating, culling, and nurturing the right portfolio of stores that they have. And if they do that well, the outcome when they sell their businesses is vastly different than if they just keep them all open. And this was my grandma's store and this kind of stuff that you sometimes still see. There you go. So #6, what are the... Oh, OK. Me? No, I'm trying to not talk much. This is Rick's alley. This is up my alley? Okay, number six, we had these questions. We prepared them a little bit yesterday, so we all know what number six is, but you don't know yet, right? Number 6 is what are the top three things to ask your prospective advisor? This is kind of me interjecting subjectivity here. But I think it's important, first of all, if you decide to hire an advisor to sell your company or to help you buy a company, but especially if you're going to sell your company, I think you have to do more than just lean on a personal relationship. You should ask something like, how many deals do you take in this space and what percentage of them do you close? Many of you have heard me say for years that unbridled closes about 90% of the deals that we take. And that may not mean a whole lot. It's like, okay, 90%. That's not quite what Steph Curry's foul shooting percentage is, right? But that's a really high number. I suspect that most advisors in this space are probably closing 1/4 to 1/3 of the deals they take. And that makes a massive difference I would rather hire Mickey Mouse or Donald Duck to sell my company and sell it than somebody who's going to take an assignment and not close it because you incur massive depreciation of your business if it goes to the market and it doesn't sell. Then you're basically spilt milk. And even if you can corral the chaos that will happen internally with your employees who find out about it when it doesn't sell, And you can make that right still in the marketplace when you come back to the market to sell it later, people are going to be less interested and at a lower price. So you want to do it once and you want to do it with someone who has a good success record. Another question you're going to ask, you need to ask is, and presuming people tell you the truth, if you give me a valuation What percentage of the time do you hit it? What percentage of the time do you not hit it? Give me some specific examples and maybe let me talk to a couple of references. Because there is a rampant thing, it's all across real estate. Even in your own hometowns when you're talking to a realtor for homes, they'll tell you, oh, my house is worth $500,000 when really it's worth 425 just to get the listing and hoping that you'll take a lower price when we've gone through the marketing and the market determines it's only worth 425. That's a pretty crappy place to be. In my world, where I sit around the dining room table and quickly assess someone and how legitimate they are, I want to feel like someone's telling me exactly what I think will happen, not something that may happen, could happen, or is hedging in some way. right? So you need to get right with that piece of it. There's a couple other things. So I'll let you guys jump in. Do you want to take another couple of components of this question? Come on ahead.
Derek Ball
There's one piece that's just, this is pertinent for certain sized franchise businesses, maybe right in the middle, say the I don't know, 20 to $60 million price range in that range and maybe for lower as well. But what percentage of your deals are sold to strategics versus institutional buyers? That may not be a question you really think is relevant, but those two buyers are very different. They behave differently. They do diligence differently. They think differently. If you're a smaller business, you're more likely to be sold to a strategic. There are a lot of our competitors out there that will work in the smaller deals and They rarely touch the institutional buyers. And then you have some of our larger competitors, maybe some of the big banks, the Wall Street banks, things like that, where they're pretty much only used to dealing with institutional groups and they don't know how franchisee thinks, the strategic buyers. And I know what unbridled we work in both. We know very well how both sides think. So depending on the size of your business, that might be a relevant question. It might not be. If you're a $500 million company, might not be relevant because you're selling to an institutional group most likely. So you don't need someone oftentimes to work in both, but that's a question to ask.
Rick Ormsby
That's a huge question because you have to be able to step between both of those types of buyers fluidly in order to sell a company of even moderate scale, small or large. And too often you have advisors that segregate into one or the other group. I'll just say that this week I got a phone call from somebody and we asked them these questions because they already had hired an advisor. And the question was, does your advisor work specifically in franchise restaurants? And they're like, no, they do multiple things. I'm like, I'm logging this in the back of my head. I'm like, and then I'm like, how many deals do they close in this space? I don't know. It might be the first one they've taken. And then what valuation did they give you? Well, we haven't really talked about that yet. I'm thinking, oh my gosh. I'm thinking the chance of this closing is like the chance of me like dunking on a 15 foot basketball rim. You know what I mean? It ain't gonna happen. It just didn't gonna happen. Anyway, those are important critical things to think about. Well, this is #7, but it's, now we're going into buyer specific questions for a while. So I'll read this first one off. You guys take it. You sharks take it. You ready? I'm a new buyer looking to become a first time franchisee. What can I be doing now so that I can be successful in a transaction when something comes up for sale in my target Great question. I had this question driving down the road in Miami a couple of weeks ago. I get this question probably 15 times a year. What do you guys think?
Raymond Buehner
Yeah, I'm happy to take this one. Yeah, this might be the most common question we get. I feel like all of us have multiple calls a week of potential buyers asking what we have available and what we can do to increase our chance of winning a deal. And frankly, what a lot of the conversations we have that starts out is they're open to anything, any geography, brand agnostic. And frankly, when we hear that, the chance of them actually buying something within the next two years are probably not great. What we tell buyers or potential buyers to do, especially new ones entering the space, is you've got to narrow it down to at least 5 to 10 brands that you want to take a hard look at, or at least a specific category of QSR that draws your interest. Because if not, then you're kind of looking at everything, but also not really anything at the same time. And once you do narrow it down to certain brands, you kind of have to ask yourself, depending on the brand size, are there sizable portfolios that could come up for sale? Or are there only two to five unit franchisees in the space? Is it going to be a long rollup process to actually build a large portfolio? So depending on your thesis and strategy, that can help you narrow down further of the specific brand you're looking at. And once you kind of get to that point, maybe narrow it down to say three to five, we highly recommend starting to call the franchisors and begin their approval process. From our perspective, 99% of what we do is represent the sell side. One of the first things we do when we get offers in, offers look very different in the same price, whether one, the buyer is an existing franchisee, one that's gone or started their approval process, or the franchisor has never heard of them. Those are three very different offers the seller is looking at. So if you can start that process, even if it's just preliminary approval or just starting to talk to the franchisor, that's going to greatly increase your chances of winning a deal versus someone that hasn't gone that step and begun those discussions. And then kind of the last thing here is get on as many investment franchise investment banking distribution lists as you can. Look at all the different SIMs that are out there just to kind of understand how the advisors in this space look at value. That, the learning process of that, even if you're not prepared to make an offer yet, was super helpful, I think.
Rick Ormsby
That's a great answer, Randy.
Derek Ball
Sorry, Rick, to all the buyers looking to get into the space that may be listening to this, you may say that you're brand agnostic and you can go into certain size and certain region, but you're smart people. You have criteria that you have to meet or you want to meet to get in. And I guarantee once you write that criteria down and talk to someone like us that knows the space and knows the different brands, I guarantee you there are no more than five brands. that you're actually interested in once you narrow it down.
Rick Ormsby
So probably over the years we should have charged for this service, because it probably made people millions and millions of dollars with free. like counseling of someone coming in directionless and then we quickly say, okay, like you're a decent basketball player, but can you shoot a three-pointer from the corner with three seconds on the clock at a 45% reliability? You know what I mean? Like you come in like willy-nilly, very generalized and we get them real specific real fast and that ends up being the way you actually get into the space successfully. Let me ask a question. What word do you hear? Maybe I've done this before, but what the heck? What word do you hear that immediately says, oh gee, this person's not real? If you could say one word you hear on a 30 minute call, what would it be?
Derek Ball
I don't know if it's one word, but it's if you tell me. Depending on the situation, oftentimes it's a, we'll figure it out later. I don't like hearing that.
Rick Ormsby
You don't like hearing we'll figure it out.
Derek Ball
If I ask where your money's coming from and you tell me to not worry about it, we'll figure it out during the deal. That's usually not very positive. That's not, I'm not going to relay a real nice message to the seller if I hear something like that.
Rick Ormsby
Okay.
Derek Ball
What about you two?
Rick Ormsby
Anything that jumps out.
Peter Fisher
Maybe when we tried to negotiate something in the LOI stage, maybe a business item for an APA, and they said, and the same thing, we'll worry about that later. And you're like, this isn't going to go well.
Rick Ormsby
That's fine. Raymond, what about you?
Raymond Buehner
I'd say for me, it's agnostic because I hear that a lot. And that's immediate, okay, this is your first ever call to an advisor in this space is what that tells me. Yeah, it's.
Derek Ball
Fine. You have to have a first call. Everybody has a first call, but you got to be specific on what you're looking for. I guarantee.
Rick Ormsby
If you hear the agnostic word, I pull the red flag immediately. You know what I mean? That. And if someone tells me in an e-mail, if they say bespoke, you know, this fancy word, B-E-S-P-O-K-E, I immediately know it's some 23-year-old analyst who's never done anything other than sharpen his pencil. Heck, it never doesn't have a pencil, but you know what I mean? It's just, it's cringy when you hear agnostic and bespoke.
Derek Ball
Oh, I got to get off this call. So the next one, now we're kind of, we didn't have a lot of buyer specific questions. That's kind of the big one. Everybody that calls us is always asking, How can we look at more deals? What should we be doing as a buyer to have a higher chance of success? And that's pretty much the answer. I mean, we'll spend 30 minutes with prospective buyers that just reach out to us having that very detailed discussion. They'll throw brands at us and we'll throw darts in it or not, but it's usually a pretty helpful call.
Rick Ormsby
Yeah, if you're one of those guys who's benefited from that over the years, But now we're moving on to kind.
Derek Ball
Of like general market and M&A questions. We're not necessarily going to give you perfect predictions here. We're not even going to necessarily give maybe specific predictions at all. I think I'm not sure if I don't know. I tell people all the time I'm kind of done giving predictions because who knows what's really going to happen in six months. People that think they'll know what happened in six months, they're just making stuff up. That doesn't mean you shouldn't have something internally. But anyway, Rick, question one on the general questions.
Rick Ormsby
Yeah. Oh, yeah. So we're going.
Derek Ball
I think we could probably skip this one, Rick. Let's go to #2.
Rick Ormsby
Yeah, you've got me confused. So read the question. I don't know which one you want to do.
Derek Ball
The next one on my list I think we should do is what's the interplay between emerging brands and legacy brands? Given that kind of emerging brands are just the hot thing all over the news, what's the interplay there?
Rick Ormsby
Yeah, it's a great question. I mean, there's no doubt about it. What do you guys think? Go ahead and I'll let you answer first and I can just chime in.
Derek Ball
I'll start with it. So it's been a growing, I don't know, Rick, maybe I'm wrong. I've been in the business exactly 10 years now and here in a couple months. So my history is not 30 years in franchise restaurants, just to be very frank. So I maybe have recency bias, but in my mind when I entered back in 2016, I don't recall the emerging brands being.
Rick Ormsby
No, you're right. There's always a line of it throughout the last 30 years. There's been a line of it. And of course, 30 years ago, some brands like Taco Bell might have been more of an emerging brand, but it's certainly faster, like everything in our world, right? Everything is cycling faster than it used to. So you're not wrong about the recency bias. Yeah, go ahead.
Derek Ball
So essentially, emerging brands are all over the news. That's the hot new thing. Everybody wants to be in on. The question is, I guess question #1 is which buyers or franchisees are kind of interested in the legacy concepts versus the emerging brands? And 2, how do you even get into an emerging brand if you wanted to? And I think it's not that complicated of a question, but it's a little bit complicated. Emerging brands, you don't normally have a lot of sellers. The people that are in the brands are still growing the brands. They're doing well. They're looking to build out the market. Maybe the market can hold 30 stores and they're looking to build out 10 to 15 and then let the next step, the next buyer build out the next 15 or so. The issue is a lot of people that want to do that, they don't have the infrastructure in place. We get calls, especially from institutional groups, quite often wanting to get in to these hot new emerging brands. But guess what? The biggest deal out there might be 10 stores. It's not going to be big enough for you. So I mean, one of our maybe best pieces of advice for that is find a legacy concept that you can buy at scale, that's stable, that you feel confident in. Don't just do it for the people alone. Find a good managed business to give you essentially a foothold and then you can keep growing from there. We did this a lot, Rick, back in like 2017 through 2019 with Pizza Hut franchisees. You could come in, get a lot of units, a lot of GNA and back office help, and then expand from there. That was a big thesis for people getting into Pizza Hut in a big way back seven to nine years ago.
Rick Ormsby
Yeah, Sonic 2, there were several systems like that. And I mean, look, it hadn't been overly gentle on some of these brands in the last couple of years to be clear, but the idea and the premise behind buying a stable business developing a management team, having the boots on the ground, having the units, and having three to five to $8 million, $10 million of EBITDA in place. And then to launch a second brand from there is a lot easier mental model than you and me in the pickup truck coming out and just trying to shovel our way into one new unit. I mean, so you see it, like I'll give you a good example right now, play out pretty substantially in the seven brews space where you see a lot of Taco Bell franchisees who have this girthy high EBITDA business, but they're not really building Taco Bells as much anymore because the country's mostly built out on Taco Bells, but they've got lots of money. And so they're placing it into rapid development in their same markets in a different brand. And that's really, I think, a good business model, assuming you pick the right brand to buy and pick something that has legs to it. Go ahead though, Derek. Yeah, I certainly agree. Was there anything else you wanted to say about that point about?
Derek Ball
No, I think you pretty much hit it.
Rick Ormsby
Yeah.
Derek Ball
Okay, so here's one for you. The next one is to give me the bull market case for legacy brands and how they'll be reinvigorated over the next three years.
Rick Ormsby
Yeah, you want me to take that one, don't you? These guys, man, they need an optimist, so I'm the optimist. So if I had my like optimist hat on and I said, when I'm looking into the future and the future looks bright, if I felt that way, how did we get there? And I might We've had some horrific food inflation over the last couple of years, like historically crazy. And some of the prices that you're seeing when you go to the store are high, right? You go get a #3 meal and it's now $11. You're like, what the heck? I mean, part of that, if not most of that, is to cover the inflation. What happens if two or three years from now, inflation moderates and food cost especially moderates by 10 to 15% downward, which I don't think is outrageous to think it could move if it did that substantially. Now, I don't know what the dynamics in place would have to be, But clearly looking at the price of food right now, are we gonna assume it's just gonna keep going up forever? I think there'll be a meaningful reversion at some point along the way. When that happens, you have an incredible amount of EBITDA just cascading to the bottom line. People are clicking their heels like Dorothy on the Wizard of Oz when that happens. And you can make like double or triple the amount of money you make in no time, right? And what happens when a franchise base all of a sudden gets an extra 200 to 300 basis points of margin dropping to the bottom line? They've got time. You've got time to think of new promotions. Maybe you get new management teams in place in the franchise or they then have time because franchisees are doing better to slow down and create the new products and processes that are going to drive the brand upward over the next couple of years. So a bull case could be food inflation mitigates and goes the other direction meaningfully and you make more money. You could get smarter and more dedicated management teams in place who got lazy over the COVID period and now they're like a new generation that comes in with time on their hands because of more profitable stores. And then you start seeing sales turn around potentially, right? Let's say consumer demand shifts a little bit, more money comes back in the pockets of kind of the middle and lower middle income portion of our country. I mean, you could see a pretty violent return from where it's been and where the trends have been downward mostly over the last couple of years. Even a two or three or 4% increase in same store sales could be remarkable. And we're in this era of our lives where things are changing so much. If you could become a franchise based that is more nimble, that can notice that people are on GLP-1s and want more protein and smaller meal sizes and don't, whatever it might be. I don't know what the trend is tomorrow. That's what it is today. And you can react to it profitably because you've got a stronger franchise base. It is not unheard of to think that you could introduce a product that could drive revenue by 25 to 50%. It was in 2000, I don't know the year, call it 2019 or 20, whatever it was. when Popeyes, just with one tweet or one Facebook post, whatever it was, one social media post, kind of challenging Chick-fil-A with the chicken sandwich. And the next thing you had was Popeyes sales were up 50% for a year. I mean, it was a crazy increase. These things can turn quickly. And when they do turn, the momentum, which is hard to read and hard to measure, but it just happens, These businesses can become cash cows in a hurry. And the last thing I'll say, and this is my bull market case, I got a lot of buddies who are investors. And they are now whispering in my ear that this is one of the few types of businesses franchising that can't be easily stamped out or stomped out by AI because it's not profitable to put a robot in a restaurant yet. And it's not going to be for 10 years or more. So these businesses are main and main driven, high real estate, high managed businesses that are difficult to disrupt with AI. And in a world that's becoming AI like this, it may, franchise restaurants and franchises in general may become, these service businesses may become more valuable relative to other industries. There you go. You guys believe all of that or some of it?
Derek Ball
I don't think it's crazy.
Raymond Buehner
I'm ready to go buy a restaurant now, Rick.
Derek Ball
As I said, I'm done making predictions. I don't think that's a, I don't think it's a crazy scenario.
Rick Ormsby
Well, I've always gone against the grain. I mean, it's just part of my life. Not like loudly against the grain, but kind of like quietly. I do the opposite of what other people do. And I think it's kind of time to be thinking that. In my mind, I'm kind of starting to think this way a little bit. We've been beaten down a little bit over the last couple of years. The results haven't been that great. Even like on this webinar, like there are less people, I mean, it's still great turnout, but there's less people listening, looking to invest in franchises than there were two or three or four or five years ago. Well, that to me signals opportunity. It doesn't mean, woe is me, this is a terrible industry. It signals opportunity. Okay, next question. Go for it. Read it. I'll read them out. Okay. What do you think? What are some unexpected positive surprises in our deals and our workings with Unbridled that you've seen, guys? Share some.
Derek Ball
These are going to be fairly specific within kind of several of the deals we've had. But one of the items we brought up earlier, get your leases extended if you've got less than 10 years and it's a good restroom. I often in these like to go to like in my own mind, not necessarily vocalizing, but in my own mind, I'm like, oh crap. what's going to happen with this. But we've had some instances of short-term leases that have actually been pretty pleasant conversations and negotiations with landlords. My mind with a landlord immediately goes to how are they going to screw us? What are they going to goose the rent to? What are they going to ask for? I've had four or five experience with different landlords over the last handful of months trying to get extensions in the course of a deal where they have actually said, okay, we do want a little bit of a rent bump, but it's not 50% or it's not crazy. We'll give you 5 years, 10 years, 15 years in options. So I think people have a habit of thinking worst case scenario with landlords and what they're going to try to goose you for. But I've been pleasantly surprised with how some of the landlord interactions have been recently. Got another one that we've done some deals over the 10 years that I've been here with new entrants. And I think as a seller and as an advisor, you're always a little bit nervous selling to buyers that don't have any franchise deal experience. They might have all the money in the world. They may be really pleasant to work with and talk with, but ultimately until you get into the deal and know the franchisor dynamic and you're working with the landlords and you're doing all this and you run into issues as you inevitably do on every deal, there are no perfect deals. It's nice as a seller to know that someone's been through it before and they got it done. So you're always a little nervous selling to new people. But we've done that recently and the deals have gotten done. If the buyer, regardless of experience, has a true desire to get the deal done and they're not just fishing around, ultimately they're generally going to get the deal done. So that's been a positive over the last year or two on some of our deals.
Rick Ormsby
I'm smiling because Derek has, you see the personality differences, don't you? Derek winds up with the negative and delivers the positive at the very end. You know what I mean? Like he's going to make you eat a peanut butter and I don't know, poop sandwich. And then you're going to have a little something tasty at the end of it. So. I would say I've been surprised by the perseverance and tenacity of some of these new entrants in the space. Like they're getting the deals done despite their inexperience. So that's, but that's absolutely true. Yeah. Anyone else have one addition? Maybe in the past.
Peter Fisher
And maybe in the past that wasn't exactly true. And maybe that's why it's a positive experience now is because in the past it hasn't been that easy. And like Derek said, it's still not easy, but it's really refreshing to see eager buyer having the desire to to get a deal done even if the seller's not perfect. Just as long as we can get a deal closed, both parties are happy, it's great to see.
Rick Ormsby
Let's go rapid fire. I'll make one other comment. I think more people, there's certainly a contingent of groups that do not listen very well to their advisor and the outcome is sub-optimized, but we do have people listening better, I think. Maybe we're doing a better job with selecting clients, I don't know. But when the client listens to their advisor who's been doing it for 30 years, I mean, that's a good thing. And the outcome is better than they expect in many cases. We've got a handful of deals right now where the buyers are getting bigger prices than I think they expected and they hoped on their businesses and the sale of their businesses. And these are, generally speaking, have been very good listeners and people who take our advice and pleasant people to do business with, right? And so I've been really pleased by that at this season in 2026. Rapid fire. Good franchise multiple in 15 seconds or less. Go.
Derek Ball
Average right now, 4 1/2 to 5 1/2. Good multiple 6.
Rick Ormsby
Taco Bells and others. That's 15 seconds or less.
Derek Ball
Yeah, you've got outliers, obviously.
Rick Ormsby
Yeah, there's outliers for sure. How long is a normal due diligence period?
Derek Ball
30 to 45 days and you might see a 15 to 30 day extension as well baked in there.
Rick Ormsby
Okay, this one's for Raymond or Peter. Who's buying these businesses today?
Raymond Buehner
We're seeing both, but it's definitely trended more towards strategic.
Rick Ormsby
Any comment as to why?
Raymond Buehner
Just PE kind of not left the space, but they've been burned recently in the past and everyone talks and there's just not as many opportunities I'd say.
Rick Ormsby
When you had the lever of sales development costs, returns on capital and new unit development, it's been kind of a patchy place for private equity. And so they've kind of kind of fallen off a little bit, but the strategic buyers, in many cases, existing franchisees have stepped in to fill the void. And those are good deals. Those are good deals. A lot of our group, a lot of our businesses are selling to strategic buyers now. Okay, another rapid fire. During a transaction, does the buyer and seller usually lead the lease assignment and estoppel process? Who leads it?
Derek Ball
Yeah, best process is usually collaborative. Usually the seller reaches out first, establishes the contact with the landlord. And then the buyer obviously has to be pretty involved if the landlord's asking for things they have a right to, financials, balance sheets, entity structures, things like that. So they end up being seller deliverables, but the buyer has to be extremely involved and it has to be collaborative for it to get done.
Peter Fisher
Yeah, they got to work together to be done quickly. and efficiently.
Rick Ormsby
Okay, we'll take two more. Are you ready? Number one, do buyers look at three-year averages to get their price? How do buyers look at historical financials when determining their price?
Peter Fisher
It's going to be based on TTM. However, they will look at historicals to make sure there's no outliers. Are you all of a sudden up big just one year where the previous three years you were stagnant maybe? So maybe they might hedge a little bit, but it's going to be based on TTM.
Rick Ormsby
Final question. What's the best time to sell a specific restaurant business? There you go.
Derek Ball
Ideally, you've had two years of same store sales growth and you can hopefully accurately project another six to nine months of same store sales growth to get you through the end of the deal. That's the best time. That's rare to happen these days. With Instagram and influencers, you might be up 20 and down 20. So it's hard to just get consistent same store sales growth, it seems like these days, but up to two years with another six to nine months at least of Good Horizon EDIA, that's the ideal time to sell.
Rick Ormsby
I think that's an important question because a lot of the legacy brands and friends that we keep I've had businesses that have been struggling a little bit over the last two years. So when I get the phone calls of, hey, sales have flattened or we're up a little bit over the last three to six months, you think the interest is out there. And our answer is generally, we need more time. You know what I mean? If you're wanting a higher multiple, stronger price, it would be better if you had this timeframe that Derek just described. But the one thing I would say is the best time to sell a business is not when you're feeling tired, okay? You need to be more planful than that. Too many calls I get or I'm tired, Rick. Well, when I hear that, I know it's time to sell. But get in front of it six to nine months, 12 months before you're feeling tired. Okay.
Derek Ball
Oftentimes if you're feeling tired, your P&O might show it. So that won't necessarily be the best time to do it.
Rick Ormsby
Yeah, thank you so much. Derek, Peter, Raymond, it's a joy to have you guys on here with me. Thank you for everyone who's listened. Make sure to check out our website if you want historical content. This will be played on the Restaurant Boiler Room podcast as well. You can actually get it on YouTube too, so find it anywhere you want to find it. If you have any questions about selling franchise businesses or buying, financing, doesn't have to be restaurants either, any type of franchise business, please feel free to call us. We're available anytime. and we wish you the best this summer. God bless you and thank you for watching and listening. Take care, guys.
Derek Ball
Thanks, everyone.