Welcome to the Restaurant Boiler Room, Season 7, Episode 8. I'm your host, Rick Ormsby, Managing Director at Unbridled Capital. Today in the Boiler Room, I'll be sharing a panel discussion from the 2025 Restaurant Finance and Development Conference. The panel was entitled, How Leading Investors Assess the Market Opportunity in Franchise Restaurants. Speakers include Nick Cole from MUFG Bank, Eric Herman from investment firm Capital Spring, and franchisees Andrew Krumholtz and Tommy P representing the Taco Bell, Wendy's, Wingstop, and Jersey Mike's brands. I was supposed to be the moderator of this panel, but had to cancel my plans. So make sure to check back into episode 7, season 7, for my personal thoughts on these questions and answers discussed here. The restaurant boiler room is a one-stop shop for multi-million dollar merger and acquisition activity and financial complexities affecting the franchise industry. We talk money, deals, valuations, and risk delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on a monthly basis. Feel free to find our content at Unbridled Capital's website at www..unbridledcapital.com. Now, let's enter the boiler room.

My name is Nick Cole, and I'm with MUFG Bank. You probably expected to see me sitting over there and Rick Ormsby standing here, but my good friend Rick couldn't be here today unexpectedly, so I've been drafted to take over. You're stuck with me for the next hour. So let me just start out. The name of this panel, how leading investors assess the market opportunity in franchise restaurants. My friend John Hamburger cleverly rewrites the titles of these panels every year, even if a lot of times the subject matter is meant to be the same. And this has always been nicknamed the deal panel. This is the, what are we buying? What are we selling? What are the opportunities out there in the market? How are valuations? What's the trend? What's the outlook? It's our job here with a panel of experts to make you a little bit smarter when you go out there to build your company through acquisitions and doing deals. And being smarter really is the goal. As Warren Buffett once said, if people weren't so often wrong, I wouldn't be so rich. So we're going to try to be a little less wrong by accessing the expertise of folks who've done it a few times and can help us navigate what is a tricky business. So first of all, let me introduce my panel. At the far end, Tommy Pipa-Jarasjit. Where's JT? Did I get that right? Tommy is with Magic Concepts. He's a franchisee and owner of several concepts, growth concepts, including Wingstop and Jersey Mike's. Next to him in the middle is Eric Herman from Capital Spring. Capital Spring is a diverse investor group that goes up and down the balance sheet from private credit to equity investments, primarily focused on consumer retail businesses with a particular concentration in the restaurant world. I won't go through the entire list of investments because some of them I don't even know. You keep it a little bit secret, but Broad-based investor, both owners of franchisors and franchisee businesses. And then finally, closest to me, Andrew Krummeltz, who's the owner of Delight Restaurant Group, which is a franchisee of Taco Bell, Wendy's, and the newest venture, Seven Brews, which seems to be the buzz of the conference. So we'll be eager to hear a little bit about that. So what have you guys been buying in the last few years? Walk me through what you're buying, what you like, what you see out there, and what's been interesting. Why don't we start with you, Tommy?

Well, my path is a little different from, I'm more of a restaurant operator. I grew up working in the restaurant business that my parents started. You know, as a family, we were very hands-on in the restaurants, cooking, serving guests, scrubbing floors. So in terms of getting into franchising after our family business, my wife and I decided to get into franchising because it was really difficult for us to scale our family concept beyond our local market. So we got into Wingstop 10 years ago and we scaled organically to about 40 locations. And this was in Ohio and Michigan. We had an opportunity to purchase some locations in the east, in Long Island and Connecticut. And that was a big jump for us. First acquisition, this was last year. And then the second acquisition we did less than a year later was adjacent to our Long Island location. So we had synergies of economies of scale. We didn't have to increase GNA and shared resources. So really, you know, this is from a restaurant operator lens and just learning about investing. And I wouldn't call myself like a lead investor, but having to surround myself with leaders that know how to scale. So we hired a CEO, a CFO, and we're going to continue to look at opportunities in both Wingstop and Jersey Mike's. On the Jersey Mike's side, we purchased locations in Indiana. This was last year. This was our entry point into Jersey Mike's, and then we were able to grow organically. We have six locations in Ohio and Indiana.

So what's the action for you these days, Eric? What are you guys into?

Yeah, our business, a little bit different than Tommy's. He's obviously focused on his two brands and kind of growing his portfolio there. we always take a much broader view. we've been busy over the last few years, really across a lot of different brands and categories and situations, as you mentioned, up and down the capital structure, both on the private equity side as well as on the structured credit end. And that's been both kind of new platform opportunities as well as add-ons and growth kind of within existing portfolio companies, both within brands we operate and new brands. and I think, one theme that I've seen and kind of where as we evolve is, whereas 5, 10 years ago, I'd say most of our investing was around, the traditional kind of tier one QSRs and some of the more mature fast casual brands out there, we've definitely shifted to kind of more growers within, kind of brands that are growing rapidly or even emerging brands. we see a shift in the consumer, especially as Gen. Z becomes kind of a louder voice on purchase decisions in the restaurant landscape. And so we're, we've kind of deliberately shifted to brands that are kind of growing more rapidly. Still looking at opportunities across the board, but that's notable, I think, as we look at where we've spent more time in the last couple of years. And so some examples there, you know, on the kind of portfolio side, you know, like Tommy, we're big fans of Wingstop and Jersey Mike's. You know, we were In those systems, we owned a business called Sizzling Platter that we sold earlier this year, and that was a kind of a very large multi-brand limited service platform franchisee. But we kind of made the decision a few years ago that we wanted to really lean into those brands. Those are brands that are growing rapidly. They're relevant with Gen. Z. They're taking share. There's opportunity to grow both through De Novo as well as consolidation. So we kind of love that. Love that story. we also think from a leadership standpoint, both brands kind of know where they're going. They've got a good kind of North Star, so we like that. And then, just another example on the company-owned side, about a year ago, we bought a business out in Southern California called Prime Pizza, which is a 10 or so unit company-owned chain doing New York-style pizza in LA. And, you know, they're kind of going to market with slightly more premium positioning. Again, going after that, younger, slightly more affluent demo, great unit economics. We're kind of growing that out of, you know, rapidly in Southern California now. And that's, you know, five years ago, probably wouldn't have been a brand kind of on our radar. We would have, you know, stuck to the usual suspects. And so I think that's been a notable shift just as we look at the consumer landscape and trying to find brands that are approaching traditional categories in new ways and ones that I think especially are appealing to a younger demo.

Awesome. I bumped into a friend from college walking around the halls here earlier today and I was catching up with them and I told him I was doing a panel later today and he should stop by. And his response was dead serious. It's like, how much do you have to pay to be on a panel? I was like, what do you mean? He's like, how much do you pay? He says, be on the panel. I was like, we don't pay. So I just want to clear the air here and hopefully get a little more value out of this than my good friend would have thought you would. so we're a multi-unit franchisee operator. So we've got a little over 200 Wendy's, 30 Taco Bells, and then our seven brew franchisee now with development rights for a couple 100 locations. In terms of what we've bought in, call it the past year and change, on the Wendy's side, we bought 65 restaurants in the Pittsburgh area and the surrounding markets about a year ago. And the way we thought about that is we want to be doing this business for a long time. It was a high quality Wendy's market, above average, AUVs for it. And I think if you're going to be doing any type of investing over long periods of time, it's really important to have quality and buy high performing assets. I've seen it from like prior lives in private equity. Being in Las Vegas reminds me of 1 where a private equity firm had bought Caesars. It was Harrah's back then. And I showed up at the private equity firm five years later, and they still have this investment. They're still trying to figure out what to do with it. And so I think it speaks to like when you make these acquisitions, and especially if you want to own these assets for decades, just picking high quality portfolios. And then on the Seven Brews side, look, we got into this business thinking about, hey, what are large, mature, established brands? And then here we are signing up to build a ton of coffee chains. And so how we got there was We thought coffee's an amazing category. The unit economics were great. And the franchisor is looking for franchisees that could execute. They're not trying to make money selling development pens. They're trying to make money by building units, having a royalty stream. And so them having confidence in our organization to be able to develop sites and operate those sites well is how we got them. And I think like the commonality between the two and I think what we were trying to do when we started at this nine years ago was try to be a buyer of choice. And so both those examples, look, you have to pay a fair market prices for these assets, but I think in both of those examples, It's, you're not winning just on price. You're winning on somebody operates existing locations and they care about what happens to their team. They care about what happens to their reputation of the restaurants and their communities. Or in a seven brewer example, they care about getting these stands open and want to have a trusted partner for it.

Let's walk through a little bit of the mechanics of valuation. And it can really range how you think about that. I mean, Tommy, you've done some of the smaller tuck-in type of acquisitions, single stores where you're already building off a platform. Eric, you've bought whole companies and how you think about the valuation of something like that. And then Andrew, like adding a brand or building off of the platform that you have with larger scale acquisitions that you've done. Just help us understand a little bit just the math, the mechanics, the methodologies for valuation. And maybe we'll take it in reverse order. We'll start with you, Andrew, and then finish up with Tommy.

Yeah.

So it's part qualitative, part quantitative. Sometimes the quantitative is easier to talk about, but the qualitative is more important. People talk about EBITDA multiples. I do it too. Really, that's just a shorthanded way to talk about unlevered free cash flow yields, where someone's like, okay, this is 10 times EBITDA. So we'll be like, okay, maybe it's close to a 10% unlevered free cash flow yield. Or this is a five times EBITDA business. And so, hey, it's a 20% unlevered free cash flow yield. But that's obviously, it's not taking into account CapEx. It's not taking into account how you're thinking about using debt financing. And so when we really get into the weeds of analyzing these opportunities, We're really focused on the qualitative part, like what do we think of this brand, the sustainability of it, the durability of these cash flows, and we'll do a lot of work around that. And then we're focused on, hey, what are the returns associated with this, both on an unlevered basis and a levered basis?

You know, I think it's definitely more of an art than a science, but the nice thing about, I'd say, especially about franchise restaurants is there's just so many comps out there, right? All these brands have hundreds, thousands of locations, so many trades. over the years. And so if you think about, restaurants versus a lot of other industries, there's just a lot more data to work with. And so, that doesn't mean that it's easy to get to the right answer from a valuation standpoint, but it gives you a great kind of reference frame on what the market might expect from a valuation standpoint. You know, I think for us, though, because we're really looking to invest in growth, and I think if you Kind of depends where you are on the maturity curve, but I'd say, generally speaking, deals in our sector, especially on the franchise side, you're probably in that 6 1/2 to 8 times EBITDA, depending on what brand you're in, kind of asset quality, trends, CapEx profile. Obviously, Taco Bell's the outlier there, trading a couple turns higher, but but that's kind of the world that we live in as a baseline, and that's really more, kind of buying pretty mature assets that have incremental growth. And it's just, it's kind of the math of the unlevered free cash flow that Andrew was talking about. But, you know, if you want to kind of get beyond that, and really, if you're looking at it from a growth standpoint, which is kind of our typical orientation, you know, it's really how quickly can you grow the business once you have it. And in our world, there's really two ways to grow. And first is de novo's. in a new store development and then the other is M&A, right? And we like deals ideally that have kind of both those attributes because it kind of gives you multiple ways to win. And so for each of those categories, we're looking at, you know, how big is that opportunity? And so if you're buying a platform that has 50 locations and you have an opportunity to build 5 infill sites, that business is going to be worth less than a similar 50 store business that has the opportunity to build 25, right? And so, you know, the bigger your TAM, bigger your addressable market for growth, the more valuable you're going to be. And then another dimension there is kind of how easy, okay, so you have this TAM, how easy is it to execute against it? And so what we look for there is, do you have an exclusive development? Do you have a hunting license to go out and build or are you co-mingled with other franchisees and you're going to be fighting through pin studies to kind of get stores open and it's just going to be high calorie and just take a long time? So that ease of execution question Then lastly, what are the rates of return? And so for us, we get excited, and we really look for concepts that have kind of a 30% cash on cash return or better. Not always easy to find. And obviously it depends on your site model in terms of the real estate and whatnot. But the reason we like that is that corresponds to kind of a low threes multiple. And so if it's working, you can effectively debt finance your growth kind of into perpetuity. And so it becomes a flywheel. So we kind of like that, dynamic. And so we look for those types of situations. And then, you know, on the M&A end, kind of similar thought process. It's how big is that opportunity set? So on the M&A side, it means how fragmented or consolidated is the brand? You know, how many potential tuck-in targets do you have out there? And then, you know, again, the question is, okay, what are the constraints? So is the brand supportive of consolidation? Is the franchisee that we're investing in growth approved in the brand? Are there, you know, unit count caps that we need to worry about? Are there, you know, restrictions on non-contiguous M&A, right? There's all sorts of questions that come into play, but it's that same idea of how easy is it to execute against that growth opportunity. And then lastly, I'd say just on kind of multiples in the brand, you know, you have brands like Taco Bell where, you know, it's almost doesn't matter how many stores you're buying, if they're good stores, they trade at a really high price. And so there's not a whole lot of arbitrage there versus, you know, other brands where you see kind of big valuation gaps between platforms and tuck-ins. And so, you know, stepping back, For us, looking to invest in kind of growth situations, it's really trying to assess how big is that opportunity, how easy is it to execute, and what's the rate of return that we can expect from deploying capital against those opportunities.

You know, Tommy, this was...

I have no idea what these guys are saying.

We have the professors of financial analysis and strategy here, but you're, as you put it, an operator at heart. You have a different perspective on how to dig in and what what you look for when you're thinking about an acquisition?

Well, yeah, when we were approached with these acquisitions, I was like, hey, let's get into the stores. Let's see what, how they're doing, how they're operating, how they're greeting the guests. What are the opportunities for us to improve operationally? And then let's put it into numbers. You know, I learned a lot from these guys. I've been here, first year here, 2022. didn't know anything about like acquisitions and the numbers that you're talking about, multiples and things like that. And so I got to credit this conference to that. But definitely getting into the restaurants and digging deep on opportunities to improve the P&L and the return. But on paper, you know, normalizing the EBITDA to ensure that, you know, we're going to hit the returns that we need to hit as well. And just looking at, free cash flow and again, just making sure that the returns are what we want.

Yeah, so when we look at these things from a bank perspective with companies coming together, franchisees buying, other franchisors, we run a regression analysis to look at like how much of the operating metrics of the buyer might bleed into the better operating metrics of the seller and have an uptick in valuation. That really is our main methodology for sort of proving out whether there's a payback on those types of investments, because they usually come with a leveraging component. Maybe you guys, anyone want to take that topic a little bit and run with it? I know that you guys probably do some of the same.

Absolutely. We have created this library over time around these brands that we operate in. There's A correlation between sales volumes and what your EBITDA margins are. And then it starts to vary by geography because wages may be different. But it proves out pretty strongly over time. And then the best thing that we can have is our own data. So we know how we operate. restaurants for a certain brand in different parts of the country. And so we can look at somebody else's P&Ls and say, hey, is there opportunity here? And the reality is that it works both ways. There are opportunities we come across where we say, Look, we think we can run categories X, Y, and Z better. And we think there's opportunities there. The opposite happens as well. And there'll be portfolios we see and somebody else may operate their EBITDA margins higher than ours. And we'll look at it and be like, look, we know how we operate. We know what our standards are. And like, I don't think we're going to be able to replicate that repair and maintenance because it's lower than what we run. And the standard we want to operate our restaurants to is up here. And so we'll step away from those types of situations where we know we're going to come in and the EBITDA we think we can sustainably run at is lower than maybe where the other franchisee was. But yeah, definitely spend a lot of time around, we call it benchmarking within our organization, but yeah, a lot of time around that.

Let's talk a little bit about growth. I mean, it came up and as all you guys were talking about these investment strategies, but growth is really the big opportunity when you can kind of duplicate and multiply by adding on new stores. How do you guys analyze that piece of the puzzle specifically? Capital returns, looking at development agreements. Eric, you touched on it a bit with just making sure that when you're executing on a strategy, there are fewer obstacles to that development opportunity to execute. Maybe you can speak to that a little bit more.

Yeah, you know, again, it comes back to obviously starting with a kind of an operating model that works, right? There, the unit economics are strong, where the paybacks on development make sense, right? There's a whole range there and you can approach real estate from a build-a-suit standpoint or ground lease or fee simple, right? There's a lot of kind of permutations. And the reality is that I think when you're, and especially as you're looking to amp up growth and you go into a new market and you want to go grow, you might find that the good sites are already taken, right? And so you have to think creatively about your real estate strategy. And we kind of try to take a portfolio approach, which is, you know, it begins with having obviously the right brand, the right platform, the right management team, and having that kind of the art of site selection. as well. But, you have to be nimble and be willing to get into projects that, I mean, oftentimes they say the best locations are ground leases and those have the worst rates of return, right? And so you kind of have to balance that with, more efficient builds on a build-to-suit basis. Or, we actually like to buy the real estate where we can do it and then sell lease back it. We find that's a really efficient way to kind of drive returns. But again, it comes back to if you're in the right brand, you have the right operator, and if your brand is working really well in the market, I think one thing that Andrew said earlier that resonated with me is, we try to find... some of the best operators within the brands we get into. And we try to really look for unit economics that are kind of punching above both the categories and the brands they're in. We don't want to go work with, ideally, a franchisee whose AUV is 15% below the system because brand's not working as well in that market or whatever. You want that cushion. You want to really look for those kind of premium platforms that have that growth opportunity. And then from there, it's just Okay, again, how big is the TAM that we want to go after? How do we make the math work? But being flexible as well in terms of the site model that you use.

Yeah. And Tommy, your brands are inline brands. So you're not thinking about a piece of real estate and a drive-through and the complexity and the investment size. Do you gravitate towards those brands because they're in line? Because it's a much...

Yeah, I mean, that's the model we like, where the real estate's a little bit easier to find than, you know, you have to find an end cap with drive-through. It's typically more expensive. But when looking at acquisitions, just like what Eric said, I mean, we look at the base first, how is it, how are the stores performing and can we improve performance? But then I think typically you can't, you don't buy development territory, right? When you're buying, doing an acquisition, that will come later, but you kind of have to assess what is the potential, right? And then the potential for further bolt-ons and acquisitions in the markets that you're in?

Let's move on to a little different topic because I think it'll be interesting for folks to kind of think about a conversation leading to our outlook. But let's touch on some of the macro factors for a minute. And let me read you something. I don't know if you caught McDonald's third quarter earnings, but the CEO made a very interesting comment, which was echoing a comment from the prior quarter. He said, we continue to see a bifurcated consumer base with traffic from lower income declining double digits in the quarter while traffic growth among higher income consumers increased double digits. This is a real phenomenon in our recent economy. We're now starting on a hopefully downward trend in interest rates. How does the economic outlook, those factors, how you're thinking about the consumer, How does that sort of drive your investment thesis today? Or do you try to look more long-term beyond these maybe smaller economic cycle blips? Maybe Andrew, want to start with that one?

Sure. I don't think anybody's good at predicting macro. So that's usually my going in. starting point. And so the way we'll think about it is a part of why we like this space generally is it's generally a resilient space in good and bad macro environments. Will the industry be hit and will the consumer be hit if there's a recession? Absolutely. But you typically aren't seeing same-store sales down 10% in those types of environments for the brands that we're in. And so we just try to spend time making sure that one, obviously the deal makes sense today. And then we think about sensitizing outcomes. And so what does it mean? It seems if I think 10% down is an extreme scenario, what does it look like if comps go down 10% for a period of time? What does that do to the EBITDA of the business? What will that do to the financial covenants of the business? And can it make it through to the other side? And so we think about it more not so much that we're smarter than anybody on what six months or what two years from now looks like. But we assume recessions will happen. And we want to make sure our businesses are capitalized in a way that if it shows up tomorrow, we'll be okay. We'll be able to get to the other side of it. And then Every other time in the past, things have gotten better. And so the most important thing is setting yourself up so that you can sustainably get to the other side of that. And so that's how we approach trying to be smart about the macro. It's just, it's setting ourselves up so that we have a capital structure that gives us flexibility so that you can continue to be there on the other side, because the next high is probably higher than the last high, even if there's a dip in the meantime.

Yeah, we try to kind of take a balanced approach. I think if you're looking at the world and saying, hey, I'm getting into a brand and I think this brand is well-positioned long-term. With the consumer, they're differentiated. You know, they're, again, ideally attracting some of those younger demos in so that they're kind of replenishing their customer base over time and you're getting in with the right operator and the management team and you have the right capitalization. You know, we don't sweat the bumps in the road because they're kind of inevitable. But, you know, I actually think the biggest mitigant to the bumps in the road is having that high ROI growth, because if you can go open stores at 30% cash on cash returns, right, even if your comps and your base are down, you're producing EBITDA, you're producing equity value, and so that, again, having that flywheel. I think it's more important today than ever because it's a great mitigant. It's not just about building and growing your business, but it can serve as a powerful kind of mitigant on what's going on with the base. But, and on the base, you know, I think we really focus primarily on kind of the three drivers, which are, okay, what's going on with traffic? And then what's going on with kind of the two components of prime costs. And, you know, I think sitting here today, you know, one surprise we had actually recently was, and I'm sure other people have seen this, but with the government shutdown, how big of an impact that had, on our QSR businesses and some of the fast casuals with the SNAP benefits. And I think just this kind of uncertainty that hung out there as well as consumers that, while we don't take EBT, they were using it elsewhere and that created dollars that they could, spend at our Restaurants. So, I think we're hopeful that snaps back here quickly, but with the government coming back online, but it's just, it's trying to make sense of it. But I think we try to take long-term kind of directional bets on brands as opposed to, worrying too much about it now. It's all relative, right? If your comps are down 10%, it's going to be hard to get a deal done.

There's a very stable and studied answer to a question on macroeconomic factors that a lot of people get pretty exercised about. But what I'm hearing is, Screw the economic forecast. We're here to do some more deals, right? Am I getting that right? Oh, come on.

We're always here to do deals.

All right, let's move on. We're running short on time. We do want to leave some time for questions. Can we talk a little bit about franchisors and the brands that you work in and how you think about going into particular brand and what you factor in about how the franchisor themselves, like their management team, how they operate, their track record, your connectivity directly to the brand as an investor, is that something that you guys study a lot? I know that we do as bankers and how we interact with some of the franchisors and the systems that we have the most exposure, but I mean, Tom, you're nodding. Why don't you, why don't we start at your end?

Look, so we've been fortunate to be in Wingstop for 10 years, and the management team has been very, has a lot of longevity and been pretty stable at the C-suite. So just having that consistency, and I think that's the reason why there's a strong growth trajectory. The other thing is the support infrastructure that they're building, and as the brand scales really fast. I mean, there's a lot of changes that happen in the support infrastructure and that communication of how that changes is important to the franchise community. And then if it doesn't work, if things work, are they able to pivot and make the changes to get it right to support the franchisees? So those are important. I mean, transparency and accessibility, being able to pick up the phone and just call the CEO or the COO and him answering and just being open and honest about what the tailwinds are, what the expectations are from the brand, and what the expectation that he or she has on the franchisees as well.

A lot of these brands have gone through major upheaval. Companies have been sold, management teams downsized. They've fiddled with marketing strategies. They've fiddled with how many sort of support people they have in the field to help franchisees. For a lot of brands, it's a constantly changing environment. And not to throw any particular brand under the bus, you guys have broad experience. You don't have to talk specifically about the brands you're in, but how do you think about those things?

So one, I think the franchisor and how they view the franchisees is hugely important. They have a tremendous amount of control. The much harder question, and I'm not sure it's answerable, so I'm open, is, but that management team isn't static. And so if that's changing and you have new people in the building and five years from now, is your view of how the franchisor treats franchisees change? And look, I think a lot of these brands, there's something in their DNA around the way they were built, how they view the types of franchisees they want, the way they treat franchisees. And so I think there is something structural about that. Look, I think the franchisors... that get it right, realize that the best thing they can do is have the system do well and focus on franchisee's business and view it that like we are 97% aligned. And there may be a couple things that we have disagreements on. So maybe there's disagreements, the hot button issues will typically be around discounting. they'll be around new builds and maybe they're around discretionary CapEx. And so the franchisors that do a great job say, let's focus on this 97% that we both agree on and make a lot of progress there. I think over time, you've seen in a lot of brands where the franchisor gets really caught up on those 3% and like trying to really push new build growth where it may not make sense, or trying to push discounting where it's just too much. And almost every single time, it's just a matter of how long it is until that catches up. And then you'll see these brands unwind it, and then they'll go back to, okay, when are these franchisors at their best? And it's when the entire community is doing really well. But look, people are human. People start to feel pressure, say the business isn't doing well. And they're like, what can I go after? And they see some short-term opportunities, maybe on something like discounting. But I think inevitably it's just a matter of time till they get to the right place, which is you want to have a healthy franchise system and focus on the 97% that everybody does better with.

Yeah, I mean, it's somewhat structural to franchising, right? There's A codependency there. And so, if you don't like that, you can go buy a company-owned chain, which we do also, right? And then we don't need to worry about that issue. But that comes with its own list of headaches. But, you know, the advantage of franchising is obviously the scale, the resources that you have, you know, that's marketing, product development, a system that's proven, right? So there's so many benefits. And so I think you just have to kind of take it all in stride, but I think really getting aligned, right? And understand, even if the management team, I mean, any management team is subject to change and you can't control that, but what you can't control is the decision you make to get into a brand based on what at the time. And so, for us, and I think when we come in as a private equity investor and effectively become the franchisee, you have the opportunity to sit down with the leadership team of the brand, really understand their vision and kind of get a sense around some of these hot button points that Andrew's mentioning that they tend to come up, whether it's the CapEx or the discounting or the, cannibalization through infill or, whatever the issue may be.

I got to admit, it sounds like a little more than 3%.

Yeah, I was going to say 97%, 97% is way above my batting, but, and I would say 90 is optimistic, but, inevitably, right? And we've just been through kind of the gauntlet with so many brands and I think healthy and respectful. disagreement, I think. Also investing in the right franchisees that have a voice at the table, or management teams that have a voice at the table, you're on the committees for whether it's marketing or supply chain or whatnot, and each brand's a little bit different in terms of how they approach that, but... you want to feel like you're being heard and every now and then you got to, you have to go get your pitchfork out and, talk to them about pricing or whatever. But I think it's symbiotic and just making sure that you have that alignment going in because it's, what you don't want to do is close into a deal and then find out 30 days later that there's some massive strategic shift that's going to, hit your business hard and you could have done the diligence on that.

Do you pay as close attention as I do when you see a franchisee and a brand filing chapter 11 and wonder how the franchisor handed? Or is that just a bank person obsession?

Yeah, I think that's more of a creditor's freak whenever anybody goes down. But you know, I think you obviously want to understand what happened there, right? Was it an operational issue? Was it a capital structure issue? Was it a brand issue? if there's broader implications, then I think it's certainly important as a risk factor. But the fact that some people fail, I don't think in and of itself is concerning to us.

Yeah. Let's maybe take a quick hitter question while we're running low on time here. But the topic of real estate, I know a lot of folks in the audience think about that quite a bit. Tommy, not really part of your toolbox at this point, given the types of brands that you're in and the inline locations. It's really only a lease opportunity. Eric, it sounds like you like the idea of owning real estate as part of that development tool, leveraging and maximizing the development aspect, but maybe not a long-term real estate holder. And then, Andrew, you're a little bit maybe the outlier here, wanting to own some real estate on occasion. How do you think about it?

So I'll say a couple of things on this. One, We prefer to own the real estate if we can. There's just a certain amount of effort that goes into running a restaurant well. And so if you can have close to double the earnings that are coming out of it, seems like a good use of time. So if we can, we will. That said, if we're coming in and they were buying the OPCO or buying restaurants, we're not the right buyer. of triple net lease real estate at a 5% cap rate, especially with like where interest rates are now, you're owning that and like maybe you're getting a 5% return. We think we can do much better than that. We have done much better than that. And so we won't invest incremental dollars into buying just stabilized triple net. So how do we end up owning real estate? It ends up being opportunistic over time. So new builds an obvious way to do it, where we can come in, we can buy an acre, put up the restaurant, and then sign a lease with PropCo. And so we'll own that and we'll have created that in an attractive basis. The nice thing about those situations are once you have the lease signed, you can go get debt financing, get a mortgage on the real estate. And so you're able to take almost all, probably more than all of the capital out that you had invested in that real estate. And so that's a capital efficient way to do it. Sometimes we'll have portfolios where it is a triple net lease, but we think that lease is below market. And so we can pay the 5% cap rate, knowing that we have the ability to mark it up. And there's some value arbitrage from doing that. And slowly but surely, you pick off ones and twos along the way. And you have, like for us, we'll have a couple dozen properties that we own. And When we get to the end of this, I think we'll be happy that we have this real estate portfolio that we've built up and we've been able to do it in a capital efficient way and get financing along the way. So it's not some large drag on returns or capital.

Hey Nick, I like real estate too. So actually when our real estate team goes out and looks for sites and the first question I'll ask is, can we buy that? But a lot of times it's a big center, obviously, very capital intensive for inline. But there's been opportunities where actually one that I'm pretty proud of, we bought a piece of property, it was a hot now. We took it down and we built a center, a little center with Wingstop and Jersey Mike's that does really well. And like being the landlord for, you know, those proven brands.

All right, I'm sorry I underestimated your real estate mogul prowess over there, Tommy. Very good. Thanks for that. Maybe we'll do a little bit of a forecast question here as we get toward the end. Where do you guys think we are in the valuation cycle? Is it peak, trough, middle, moving in the right direction, interest rates going to help? How do you kind of think about if you want to give folks that prognostication about where values are headed?

Yeah, look, I think it's a nuanced answer. I think it depends kind of what's going on with your brand. I think for a lot of companies right now, we're still living in this kind of post-COVID hangover environment where traffic's down, costs keep creeping up, you're fighting to maintain margin. I think for those people that, and that's a lot of the mature brands out there, I think you are probably kind of in the bottom half of what your valuation is over the course of a cycle. So not necessarily the best time to monetize. on the flip side, if you're in a growth concept, you're seeing record multiples being paid there, when things are working. And I think there's just, there's a ton of capital that's been raised that's sitting on the sidelines looking for a home. And so, and just a lot of investors that are kind of been around the space. And so I think, you need to see it with some of, Seven Brews or some of the Wingstop trades, right? Things that are really, really hot right now. And so, I think it's kind of a little bit of a world of haves and have-nots at the moment. as far as outlook, unfortunately, I don't know that, save for the kind of the reversal of the blip on the government shutdown, you know, what's going to be the catalyst that kind of encourages consumer spending at this point? Like, I don't see it over the next few quarters at least. And so I think we're kind of living in the world we've been living in, which probably doesn't bode incredibly well for M&A activity and valuation generally, but there's going to be certainly exceptions there. I think rates on the margin help us as they come down, but it's not going to compensate for what's going on with earnings. So I think we're, I would just say we're kind of in the same muddle case for a little bit.

All right. Are there any questions from the audience before we finish up?

Thank you all for speaking at the panel. I had a question. How do you value emerging brands? So you said that there's a prevalence of multiples for established brands, of course, but how do you think about valuing emerging brands? That's something I'm thinking about. I.

Think it's a really good question. In general, it's just, it's really, it's like, how do you think about valuing the development pipeline? And is that an opportunity? You can buy down your multiple because you're building it at three times EBITDA, or is it an obligation? We're like, hey, I can buy an existing restaurant at six times, but this new one is going to be at a higher multiple. And in some ways, it's pushing up my EBITDA multiple for it. So I think it's a function of what the unit economics are for that brand. And I think it's also a function of the structure. So there'll be sometimes you'll have development agreements that are set up where it says, hey, you're going to build this number of units. And if you don't, you have substantial penalties for not building it. You'll have other development agreements set up where you're paying some notional, smaller notional amount for the opportunity to build it. But if you don't build it because it doesn't make sense, then you just step away from it and you paid some small premium, but there's not large penalties associated with it. As you're, I think as you're just building anything de novo, there's more risk around it. And so we think that the returns have to be better than buying existing. I think the way people look at it is like, hey, Does it make sense on the base business? Sometimes there's not a base business, but does it make sense on the base business? And then can we buy down our multiple and get to attractive returns? And then different people will look at what their investment return hurdles are and back into what do they have to pay for it? Or do they have to pay up for those development rights?

It's always good to catch brands when they're on the upswing, when they're a lot of greenfield, but getting customer recognition, you don't always get the best bank terms when a brand is not yet fully proven. Maybe that's asking myself a question, but do you sort of factor in when you look at some of those things, particularly with high growth situations, there are more controls maybe in the loan agreement, maybe there's a little bit more cautious leverage multiple, maybe the pricing is a little higher. Have you experienced that factor?

Yeah, I mean, when we looked at, when we started on the Seven Brew journey, we weren't sure there was going to be lender debt financing available. And so we looked at it on what does this look like on an unlevered basis? And how much equity capital do we need if a lender doesn't decide to lend to this brand for the next three years? And we thought it made sense on that basis. And we've been lucky and fortunate and the brand's absolutely earned it. But now there's real lender interest because people see, hey, I'm lending to this business and they're building these at four times EBITDA or three times EBITDA. And I'm giving some percentage of that. So I'm really just lending it two times EBITDA to a really high quality brand with high margins. So we want to make sure that it works on an unlevered basis. And then if there's debt financing available and that helps the returns, excellent, but we don't want to be totally dependent on it.

There is debt financing available. All right, I think we'll have to wrap it there, but thank you to my panel. Appreciate it. And thanks everyone for coming.

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