Rick Ormsby:
Welcome to the Restaurant Boiler Room, season four, episode nine. I'm your host, Rick Ormsby, managing director at Unbridled Capital. Today in the Boiler Room, I'll be doing a walk down memory lane with M&A patterns from the past 20 years, as well as give some reactions from discussions with franchisees at several recent restaurant conventions. I'll talk about recent M&A transactions completed at Unbridled, and I'll discuss the impact of the new Fast Act legislation in California. The restaurant Boiler Room is a one stop shop for multi-million dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk money, deals, valuations, and risk delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on a monthly basis. Feel free to find our content at Unbridled Capital's website at www.unbridledcapital.com. Now, let's enter the Boiler Room.
Rick Ormsby:
Well, okay, glad you were able to join us today. It has been a traveling couple of weeks for me. I just got back from the Burger King Convention and then the Sonic Convention and then Parents Weekend at Baylor University in Waco, Texas, which I might add is just an incredible place. I've never seen such respectful young men and women looking you in the eyes saying, "Yes," or, "No, sir," and dressing appropriately and acting like young men and women. It's an impressive place. I have a feeling that 10 years from now, half the people in America will want to send their kids there. But we had a great time. I tell you, Burger King and Sonic Conventions are both fantastic. I'll talk a little bit more about them later.
Rick Ormsby:
I wanted to first maybe start with this. I was, like many of us, you come out of COVID and you're thinking, "Here I am in the middle of my career and I want to grow." I love to grow. I love to continue to push the limits, that's just kind of my personality. And I would encourage you who are listening to this to do the same. I'm in my late forties now and I'm thinking, "Okay, I've got another 20 years in this M&A business, and I love it. Every day I wake up is a day I love, but I want to grow and continue to challenge myself." So I've been digging into some authors and reading books and things that give me some motivation. I happened upon a guy named Ray Dalio, who's one of the world's largest hedge fund managers. Many of you maybe have heard of him. He's interviewed a lot, and so he's got a book called Principles, and he's got another book too that just came out.
Rick Ormsby:
But I was listening to an interview with him and Tony Robbins. It was interesting that he has taken patterns that he's seen over the last 500 years in history and applied those patterns to what happens to local and world economies in really an interesting study. And it reminded me a minute of the patterns that we see in this world. Tony Robbins had made the comment that people who see patterns and can adapt to patterns, but also who can create patterns are those people who are typically successful. And was thinking back to the tennis world, most people watch a tennis match, especially USTA tennis match, or even really a big tennis match, like one of the professionals playing, and they'll say, "They're just hitting the ball back and forth." I can see they're trying to hit it to the guy's back hand or the girls' back hand, or they're trying to hit a big first serve down the middle. But what people typically don't realize is that most, if not all of these professional tennis athletes and even non-professional tennis players who are very good play a very distinct and very discernible pattern.
Rick Ormsby:
And I kind of have followed this over the years. So I can watch a tennis match and I can tell you about 90% of the time where the ball is going to go before the player hits it. Obviously, each of the opponents knows that as well when they're playing each other, but the pattern of doing things in patterns over and over again, a predictable pattern helps the tennis player discern which shots to make and also gives them a better feeling of what their chance of success is. So I'm going to talk for a minute about going back 20 years in this business. And I'm just going to ramble. For those of you who've listened for a while, I sometimes do that. But the rambling will hopefully give you some tidbits. You're going to have to discern a lot of it yourself, but what I'm trying to do is create a pattern of 20 years in this business, this M&A business, try to talk about some highs and lows and some of the things I've seen. And then you can try to think about how that experience that I have, and I'll think about it too, can maybe translate into the future. Because obviously, the best way of understanding the present and the future is to first understand the past.
Rick Ormsby:
I got into this business in 2001 timeframe and started working for Yum in 2000, 3, 4, and 5 and then left and started doing M&A work on my own in 2005. When I got into the business, I've told this story before I believe, but I left Yum Brands in '05. We had just been through a recession, as you guys might remember, 9/11 happened, and then we had a really, really bad economic downturn in '02 and '03/ When I left Vanderbilt MBA School, I was looking at WorldCom and Enron were coming to campus, and then both of them flop and go bankrupt, really high profile bankruptcies. You had the stock market in a massive turmoil, and then gas prices were really high. And of course, gas prices affect restaurant sales in a really negative way. So when I got into the business, gas prices were really hurting the industry. There had been a bunch of deals in '97, '98, '99, and maybe 2000. They were securitized lending deals, mostly, where lending entities, not lenders would be pulling together a consortium of investors and they would give an extraordinary amount of advance on a restaurant acquisition, often greater than a hundred percent of the proceeds.
Rick Ormsby:
So these franchisees were not having to come forward with much in the way of equity to buy these businesses. They were lending. And the way the securitized loans worked was you promised a return to the investors. And you largely, if you were the borrowing franchisee, you couldn't get out of those loans without massive prepayment penalties. But the upshot of it was, in exchange for high interest rates and inflexibility, you got like a hundred or even 105, 110% of the purchase price advanced to you in many cases. At that time, there were a lot of, in the late '90s, it was kind of a go go time. You remember right before Y2K? And internet stocks were going wild and they were doing these big deals and franchisors were selling large chunks of restaurants at high prices. Now we get into the 2001 and we hit a recession, gas prices jumped pretty significantly, and you see a lot of those franchises who took on heavy acquisitions, mostly from corporate that was selling them, and a lot of them actually from my experience, just my purvey, were from Pizza Hut and Taco Bell. Taco Bell wasn't the darling back then that it is today. And Pizza Hut and Taco Bell were largely selling at similar multiples evaluation then.
Rick Ormsby:
But these big corporate deals were happening. There weren't as many mega franchisees. And then you entered into a workout phase in 2001 and 2002, especially with Starlink on the Taco Bell side, when you had the genetic corn in the tacos. And so it affected restaurant sales. At that time too, there were a couple of really high profile rat cases. There was big red infestation at a Taco Bell and a KFC up in New York, and it dropped Taco Bell sales precipitously for a period of time. So it resulted in some workouts. The franchisees that had taken on these securitized loans were not defaulted on, of course, they were worked out because the investors behind them, they were big enough organizations that they didn't want them to fail.
Rick Ormsby:
We fast forward into '03, '04, '05, '06, '07, and the market really starts to heat up. And valuations over that timeframe start to trend upwards. I get into the business in '05. And at that point in time, GE Capital was really starting to lend, and they were lending very freely. And lending, in many cases, not on the basis of EBITDA. I can remember seeing deals where you would see people putting together proforma numbers and sending them to GE Capital and the loans would be getting approved, and there was really no basis on the current P&Ls. It was just. On what the guy thought he could run. And this wasn't a large organization looking to borrow more. This was someone coming into the business from the outside with no stores under their belt.
Rick Ormsby:
So it became a bit of a frothy time valuation multiples started getting kind of high. It was the advent of the sale lease back world too. I can remember in 2006 and '07, and even I was still doing a valuation of, can you believe this, of a restaurant business, and looking at the real estate as just a component of the value, not separate from the business at a cap rate and an implied rent. So I look back and I kind of giggle at the valuations back in '06, and '07. Even though the multiples were coming up and this idea of a sale lease back was starting to happen, but not many people knew about it. I look back at those valuations, it's crazy, man. W were valuing stores that today would be three times what they are now, largely because of the real estate component was maybe being valued at 10 or 15% of what it is today. It was really interesting.
Rick Ormsby:
2008, we hit the skids with the financial crisis and the great recession in 2008 and 2009, and there was a very pronounced slowdown in M&A activity. I can remember in, I believe it was 2010, I was told, I'll never forget this, by a lender, when we did a 26 million dollar KFC deal, there were like 30 KFCs in Alabama area that we sold, that the lender had told me that to his knowledge, it was the largest restaurant deal that had gotten financed in the entire year in the industry. Can you believe that? Probably just one lender, so it's probably not the end all be all right, but directionally, there was such little credit in 2009 and 2010 that there wasn't really no way to finance a restaurant acquisition. So activity really, really dried. And that one deal at that 25, 26 million dollar price had a huge real estate component, a leaseback component on it, which again, was kind of a newfangled thing.
Rick Ormsby:
During that time, you started seeing the advent of the mega franchisee. It was happening slowly, and it started largely by first or early second generation franchisees that were just trying to go from 10 to 35 stores. And so it wasn't like private equity backed or investor led, it was the franchisee, him or herself trying to finance the deals and buy the stores within their own portfolio. We hit 2010, which is the low point. I was in the bankruptcy court in Delaware on a Pizza Hut deal, and a lot of the painful things were happening and unraveling in 2010. And that's maybe a learning, is that there's a delayed reaction with the bad news. People can't just dig out of a bad situation once it turns, and they usually don't have a terrible outcome initially either. It unfortunately takes time to create a difficult situation and then time to get out of it.
Rick Ormsby:
So it was probably a full 18 months before we started seeing really the difficult, difficult times in the industry, the bankruptcies, the really distressed, sales smaller franchisees were needing to sell. You saw the advent of the larger independently operated franchisee, so that franchisee base probably dropped by 30% and the average franchisee grew by five or six units. So credit was still terrible up into 2011. In 2011, 2012, you started going to conventions and started to see lenders return. I would go to the conventions in 2008, '09, '10 and '11, and you hardly saw any advisors and you didn't see very many lenders. And coincidentally, at the couple of the conventions I've been to this fall, one of them, we were the only M&A advisor, and the other one, there's only one other. And then you see lenders are not really around as much right now either. There's probably half as many lenders, maybe less than there were in the last couple of years. So we're maybe entering that same kind of place.
Rick Ormsby:
2012, you started seeing some lenders early jump on the bandwagon to get back into the space. And actually, one of them to my recollection was Wells Fargo. They made an early bet in KFC and they started lending a little more quickly than others, and I think that was one of maybe their keys to success over those next five or six years. So you had the early adopters come back in to provide some liquidity into the space, and then essentially what happened was as the economy improved, you started seeing corporate selling again, and that a lot of corporations, franchisors still had 20 to 25, 30% franchisor ownership back in those days, and they quickly started selling stores. And quickly, in 2013, you see a lot of the groups that have become really, really successful now are the ones that bought those corporate acquisitions at probably valuation that at the time was fair, but now looking at it looked to be four times or five times less than what it's worth now.
Rick Ormsby:
And they came in and they took an early risk, they consolidated and bought 30 or 40 or 50 of something, they were able to get it financed. They understood the real estate market. A lot of them came in with some investors this time because the deals were a little bigger, and they bought things that ultimately they were able to monetize an enormous gain over time with them. Then we started seeing this progressive growth again in valuations, which happened probably in '14, '15, '16, '17, '18 and '19, a little longer than the last cycle from the early two thousands. And this is when you started seeing these mid-size franchisees that were individuals that owned now maybe 30 stores starting to sell to the private equity and family office community, and they started jumping in and supplying tons of liquidity. Lenders are everywhere, interest rates are crazy low, valuations start to come up.
Rick Ormsby:
And I was talking to a franchisee today who asked me how valuations in one brand had gone over the last 20 years. And I said, "Well, it was like three and a half to four times EBITDA back in 2008." I even started back sooner than that, maybe 2002, and then it goes up to four to five times EBITDA, maybe it hits five and a half, and then it dips back down to four times EBITDA through the latter part of 2009, '10, '11. And then it climbs back up to four and a half times EBITDA, then five, then five and a half, where it's sitting at five and a half times EBIDA in 2016, '17. Then it hits six, the deals get larger, maybe it hits six and a half times EBIDA in 2018, '19. And then we get the COVID craziness, everything locks down. But when the market opens back up with the scare of higher taxes, sellers hit the market. The market conditions are great, lenders are really frosty, and the numbers, again are in the six and a half times. And this time they're six and a half times a big EBITDA, because fast food in many cases has done really well during the pandemic.
Rick Ormsby:
So here we sit in 2022. Credit has tightened, deal flow is most certainly dropped by 70% in the M&A world, I would say, at least, maybe more. Conditions are bad. I don't think people realize that they're worse than maybe what you think they are right now in many cases. And they're probably getting worse, not better, even though we are seeing some sales increases in some brands. I think the story of three to 450 basis points in commodity pressure and then two to 400 basis points in labor pressure, all of this stuff is real and not going away. And even though the headline says inflation is getting less in the stores, it's just on a month over month basis, it's not on a year over year basis. So it continues to be an issue.
Rick Ormsby:
So the learning would be that we're probably only in the third or fourth inning, if even that, in this cycle with rising interest rates, rising commodity costs and labor costs, tightening credit. A lot of M&A activity has happened. A lot of franchisees are stuffed to the brim with deals that they took down over the last 18, 24, 36, 48 months. And we are sitting here with very low volume of M&A activity, and it may stay this way for a while. No one's going to want to sell something that they have built unless they have to, unless there's a death or a divorce or a circumstance forces them to poor performance. They would rather wait and hold on and hope for better times to sell again.
Rick Ormsby:
We've been maybe nine months into this recessionary time that most people don't want to call a recession. What's going to happen? I don't know. But looking back at the last two that I've seen, I would say it's a three year type of problem. Based on the two in the last 20 years I've seen, it's a three year problem, not a nine month or 12 problem. So the only difference we have here is you've got a couple of things balancing the seesaw. The first would be you've got a lot more liquidity in the market than we did back then. There's so many investors in the franchise business, it almost feels like it's a stock market and not a restaurant environment anymore. You used to walk around and it was all about talking about the quality of the food and how to prepare it. And now you go to conventions and there's a bunch of young people talking about EBITDA. So I don't know how that impacts it, but there is a lot more liquidity in the marketplace. That's probably a good thing for any sort of downturn in terms of valuations, if you're listening to this and you might be a seller or a buyer of businesses.
Rick Ormsby:
On the other side, you've got some uncertain times, don't you, with the labor environment? And it's not likely to get better soon. I make mention at this point of the Fast Act in California, which I guess Governor Newsom signed into law at the end of August. Is that right? The last couple days of August. Read up on it yourself, but essentially what it says is if you're a chain of a hundred units or more, they're going to put together this committee comprised of team members, franchisors, franchisees, and they're going to be looking at changing the conditions for the workers in fast food. And I think a lot of people are projecting that minimum wage will go to the 19 and then probably to the $22 minimum wage point fairly soon. I know there's a referendum. Let's not think that California's going to count all those votes in a referendum. That may be a political comment.
Rick Ormsby:
But let's just say for a second that wages go up to $22 from 15. Let's say a store does 1.5 million, and let's say they have 12% operating margins, and let's say they have 22% team wages and their average team wage is $15 an hour and it goes to $22 an hour. That store was doing, call it $180,000 in profit or operating margin, and it'll drop down to like $26,000 if they're unable to raise prices, assuming prices stay flat in the stores. And that means that the operating margin in that example, going from 15 to $22 per hour per employee, that takes 12% margins and drops them down to 1.7% margins. It's almost no profitability. That's something that we have to contend with that I think changes maybe the dynamic of M&A going forward. I'm not sure how much it changes it, but if I'm in a blue state and I'm an operator, I got to at least start asking myself the question, "Is it possible that my state may..." And I know it's out there, I've heard rumors that other states are considering similar California-like legislation to protect fast food workers' hourly wages. So if I'm in a blue state, I've got to be asking myself, "Is this possible that my state could be doing this at some point in time?"
Rick Ormsby:
And if you come to the right conclusion, which it is possible, depending on the state, then you want to be telling yourself, what? What are you going to tell yourself? You should be answering my words for me here. I know I can't hear you as listeners, but you should be saying, "I want to sell my business now, wouldn't I? Because if I hold onto it and then any legislation's enacted in my state, it's going to have a hugely negative valuation drop and hit to my business." And you would be right. I've heard anecdotal comments here in the last couple of weeks from both lenders and buyers of businesses in California who are telling me that valuations are dropping and that it's harder to get money and there are less people wanting to buy assets in those places. It's just an initial look. It's not based on a ton of evidence, but just some conversations over the last two weeks that I've been having in the community, which is not a surprise to any of us. If you're facing those types of wage increases, you wouldn't be all that excited about buying a business in that area.
Rick Ormsby:
So I think that's one thing that may impact this, if you're listening. Revisit your M&A strategy. If you're going to retire in five years, you may want retire in one. Even though the conditions aren't great, if your state's going to be one of the states that possibly could be looking to raise its minimum wage that much, you're looking at a major valuation hit. You don't want to be in the middle of that, it won't end well. I can remember we were working on a deal in Seattle back in 2017 when they were the first place to raise a minimum wage to $15, and I literally watched a two or three million dollar EBITDA go to zero. It went to zero in like three months. It was shocking, it all disappeared.
Rick Ormsby:
Now, after a couple of years, if you can raise your prices a couple percent each month over the course of a couple of years, which is kind of how you have to do it, you could do it in chunks maybe, but you can't go try to take pricing to offset that all immediately or you're going to lose all your customers. So you do it over time and eventually, hopefully, God willing, you get there and you get to the place where your profitability is close to what it used to be, and then the customer has to pay for a $10 Big Mac. That's the way it works. But in the short term, EBITDA is badly constrained, profits are badly constrained, and buyer sentiment from an M&A standpoint is patchy.
Rick Ormsby:
Another thing I think this Fast legislation does is it doesn't help the small guy either. So there is an intentional carve out for the small mom and pop franchisee that doesn't have to adhere by these large minimum wage increases if they happen. But what's going to happen if you're Joe's hamburger shack right next to a Burger King and the Burger King's paying their employees $22 an hour? Are you going to get away paying your employees $15 an hour? Well, heck no, you're not. So indirectly, all of these mom and pop operators are going to feel the pain of the added wage increase too. And a lot of them are going to go out of business. Mark my words, a lot of them are going to go out of business, unfortunately. So I think that's out there as well.
Rick Ormsby:
And so all of those kind of shifting dynamics are going to result in automation. I bet as we speak, people are in warehouses all over this country trying to develop robots to replace most of the labor force. Because when you get that big of a 40% wage increase all of a sudden, that's about the amount... Technology and automation is like 40 to 50 to a hundred percent more expensive than labor in the stores, but with a 40% wage increase, now we're getting closer to parity with better reliability. And so you'll see that going forward. I think because of that, we're going to see, even if this is a two to three year recessionary timeframe where we have higher interest rates and just naturally lower deal flow, I think because of the pressures in the business itself that didn't exist back in 2009, '10, '11, and they didn't exist so much in 2001, 2002, I think those pressures will cause selling to continue at a higher clip, even if the recession is bad, than what happened in the last two recessions.
Rick Ormsby:
So that's my guess. Heck, I don't know. But I do think we'll be in a period for a while where you see less deal flow. And I'm still wondering when we're going to see casual diners come to the marketplace, their P&Ls have still taken a hit. We've been hoping and praying for the turnaround to happen in those stores. Certainly they've been getting sales back and they're open for business and things are doing better, but with the added cost, they've still taken a big hit to the P&L and they're still nowhere near where they were in 2019 in many cases. So we're just hoping that casual dining segment of the business gets healthy again soon. They haven't been able to enjoy much M&A over the last couple years just because there wasn't much EBITDA there and not much of a demand from the lenders to finance the deals. And so there is a huge pent up demand there and aging franchisees who have been unable to sell. And so we're just watching that segment as well.
Rick Ormsby:
When we went through the prior recessions, you did see some brands that faltered more than others, but largely I think it was just spotty across the country based on individual situation. This time around, there are some winners and losers in the marketplace right now. We do see there are a handful of brands that really haven't performed well over the last couple of years, even despite the COVID lift in the business conditions and fast food. And then they're getting hit now as well with the commodity and the labor issues. So I think there'll be an uneven amount of difficulties across brands. Some brands are going to get taller and stronger on the backs of others that are going to shrink.
Rick Ormsby:
And I think because of the labor situation, the geography's going to matter maybe more than the brand, but you'll still have people that made poor decisions or just can't hold it together. I do think a lot of the franchisees who got into the business during or right before the 2009 recession, a lot of them are still in the industry and still doing really, really well. Maybe one of their keys was their first or second or third acquisition was maybe towards the top of the market in 2007 and '08, but they continued to buy. It was one of these, kind of like the dollar cost averaging idea when you're in stocks. If you're going to buy 10 shares of a stock, buy one share every month for 10 months and you'll be sure to be dollar cost averaged in and avoid a lot of the ups and downs of the market and the fear of buying one deal too high or one... You know what I mean? If that makes sense. So I think that was maybe a component that helped with the larger franchisees that bought in right before the last recession. I think they continued to buy and continued to seek opportunities.
Rick Ormsby:
And so if you're a private equity or family office during this time, I know that your deal flow is down, you're not seeing as many acquisition opportunities. But I'd encourage you, if you have a thesis and you liked the thesis and you liked the brand and the characteristics of the brand and your prospects within that brand two years ago and you liked it last year, and you have more of a medium term to longer term viewpoint, well you ought to really like it now, because the value prices have come down because EBITDA come down. So that ought to make you want to get back into the business further if you see the right opportunity.
Rick Ormsby:
Okay. So that's a walk down memory lane. Think about that. I'd love to hear your thoughts. If you're out there and you listen to this, zip me me some thoughts, send me an email or something. Tell me what you think about what you've heard from me and how to apply it to the next three or four or five years in the business. How about that? Let's see, from the Burger King Convention, it's funny, the conventions, the franchisees, and this is a real comment... These franchise brands form their own personalities. And it's really cool because I go to a lot of these conventions, I know a lot of franchisees. But the Burger King franchisees, for example, Burger King was started in Miami. So you're at the Burger King Convention and you're around a swimming pool at night with a bunch of people at an opening party and Pit Bull's pumping in the background. And then you go to the Sonic Convention, which was started in Oklahoma City, they have 3,400 locations and a thousand of them are in Texas, and this convention's in Dallas. And you look around and they're playing country music, and no kidding, a fourth or a third of the people there have cowboy hats and cowboy boots on big belt buckles.
Rick Ormsby:
So these brands develop these really distinct personalities from one another. Those two brands that I just mentioned have very different personalities. They're both really cool personalities, but they just have a footprint that's a little different from one another. The Burger Convention, I don't want to say it's capitulation, franchisees have had a rough go there. They're one of the brands that did not see a whole lot of benefit during COVID. And their financial condition, the franchisees, the franchisor, it's not good. So they had changes in the management structure. Franchisees who are out there seem to be more optimistic and more positive. I think they're just like, "You know what? We got to give this a shot because the conditions have been so bad." I think there's a lot of positivity with Tom Curtis. A lot of people are really happy that he's at the helm there, at least from what I could tell.
Rick Ormsby:
Their FDD, this is public information, Burger King came out and Reclaiming the Flame is the name of their new initiative that they unveiled where they're going to put... Look, this may not be exactly right, but broadly, they're going to put 120 million dollars of new advertising into the system. And then if it produces sales, then they're going to ask the franchisees to contribute through higher royalties when they remodel and through other initiatives to the tune of what could be another 250 million. Who knows how big that number will be. And it is conditioned a little bit, I think upon the success of the added advertising spend. But overall, it's being heralded as a 400 million investment in the system. It probably won't be anywhere near that big, but I think there's a lot of positivity coming from it from a low place.
Rick Ormsby:
Usually, many of these brands work in pretty forceful cycles, and if you were to look at a low point, Burger King would be near a low point. So if you were acquiring businesses, that might be something for certain types of investors that you might look at, trying to buy something while it's at its low point. Franchisor also seems to be much more reasonable now and much more conciliatory towards the franchisees. And that's typically what happens in any of these past recessions There's usually an element of the franchisor and franchisee either coming closer together or getting farther apart. The ones that do well and recover, the franchisee and franchisor, they get closer together. You usually do see some infighting between the franchisor and the lenders if you have any lender who has a huge portion of the debt in a brand. And so let's hope we don't see that like we did in 2010 a lot of times at the bankruptcy court.
Rick Ormsby:
At the Sonic Convention, boy, that was a lot of fun. Got to listen to Big & Rich, country music singers there in the final night. Claudia San Pedro, boy, she's got a great infectious personality, doesn't she? If you've ever heard her speak or met her. In that convention, because there's so many... That brand has a lot of small percentage owners. So you might have a franchisee who owns 50 locations or 10 locations or 20 locations. But unlike a lot of other brands, each manager, not in every case, but each manager might own three to five to 10% of the store where they operate. And so you have a bigger team environment at these conventions for Sonic because a lot of the general managers are actually owners. And so it's just a bigger convention, lot of energy there. They're coming off of a really bang up job in 2021. I think 2020, their same store sales were probably up around the 20% range. Unbelievable. They're one of the biggest explosions of same store sales in 2020. They lapped it in 2021 with increases in same store sales, I believe.
Rick Ormsby:
And then here we are in 2022 and they're down year to date pretty substantially, not double digits in sales, but they're down single digits in sales. And I think it's no surprise they had so much of an upswing. So they have some sales deceleration, and like every restaurant concept, some margin pressures. So they're going through, I think what'll probably be a time of just kind of dialing back on the restaurant P&Ls, focusing on value, focusing on messaging, focusing on marketing promotions and things. So I expect Sonic M&A to be kind of low for the next six to nine months. On the Burger King side though, I think it's probably going to pick up a little bit. So that's just two observations. I got three more conventions to go to later this fall, so stay tuned in other brands. I'll tell you what I see there too.
Rick Ormsby:
A couple of other things I'd like to talk about. I have a little note here, restaurant profitability. I chatted a little bit about restaurant profitability. Generally, the general gist across the industry is sales, depending on the concept are flattish right now, but some are up a little bit to moderately right now, now that we've gotten past the June/July time period of 2021 rollovers. So on a month over month basis, some franchisees and some brands are starting to see some increases. So if you're seeing sales up, it's usually with higher check average and traffic is down a little bit. And in that case, profitability's down a little bit. That's kind of the way I'd characterize it in general, every situation's unique.
Rick Ormsby:
If your sales are down then your EBITDA is way down, but we're seeing sales getting better and it's largely because people have finally, they've been slowly... Franchisees don't like to change price and a lot of the older franchisees from experience are very hesitant to change price, and they've started to do so and get more comfortable doing so. And I think that's had a good impact on same store sales. But traffic is a problem, traffic is a problem. Even though we'll watch, gas prices have come down, at least in our area, it's now just slightly below $3 a gallon and it was like 4.25 in Florida here. So we'll see if that impacts things a little bit. But I get a sense that we're going to have a squeeze on consumer spending and I might just be totally wrong about that.
Rick Ormsby:
I hear just anecdotally that pizza sales are soft right now. I've heard a couple of analysts talk about they expect that the big pizza concepts are not doing well from a top line perspective right now. And I don't know why that is exactly. Maybe it's promotion related, maybe it's value related, maybe it's competition from third party delivery for other fast food chains. I don't know, maybe it's just that they're rolling over stronger numbers coming out of COVID. But that's something I've been hearing. If you are franchisee and you haven't taken advantage of the ERC credits, I'm starting to get a lot of people call me and talk with me about ERC credits. So employee retention credits, I don't know much about it other than it was put in place like PPP for the government by the government so that people who were employing workers during shutdowns or partial shutdowns, and of course that depended by state, you're able to take advantage if you're of a certain size, of employee retention credits. And they're pretty big numbers. They can be really large. We're talking $10,000 or more per employee in some cases.
Rick Ormsby:
So there are third party firms that are out there doing it. Your CPA's probably talking about it. Your CPA probably, unless they're really a large CPA and really experienced, it's such a niche area, that your CPA may not know all of the rules, regulations, and ability to fight for the credits in a way that maybe someone who's a specialist could. Couple of specialists have called me, so we've got some names, and if you know want to reach out to me, I'm happy to give those to you. But that's something that I would not ignore. It could be substantial money. I think it taps out a little bit based on size of the franchisee. I don't know how it works relative to whether you're incorporating in multiple concepts or multiple brands, but I think it really works the best, from what I understand, with the franchisees who have between five and 50 units. It's kind of for the small to mid-size franchisee, they see the biggest benefit, all things considered, from what I understand.
Rick Ormsby:
But if you're a franchisee of that size or even larger and you haven't fully investigated the ERC credits, it should be part of an investigation. I'm happy to link you up with somebody if you're interested, to at least explore what it could mean for your business and what the process would be, which is substantial, it involves revised filings. But it is a credit, it's not a deduction, it's a credit, which is a one for one reduction in your tax bill, which is a big deal. Okay, so that's ERC credits. What else?
Rick Ormsby:
We've had a couple of deal closings that I'll just announce to you because they're interesting. They go with the theme here. The first of which was we closed Steve Helm's stores, he had 16 Taco Bells in Shreveport and Bossier City areas of Louisiana. And ADT Pizza, led by Adam Diamond, bought the business. He's back to buy a private equity group out in New York and they're doing great things. They've bought a couple hundred Pizza Huts through several acquisitions, and now they're a Taco Bell franchisee as a second brand for them. We worked to get them approved, we represented the seller, but we worked to get them approved with Taco Bell corporate. And Taco Bell corporate's very difficult. Very, very difficult to become approved as a new franchisee. And so Adam's franchise was able to get that approval. It wasn't easy, but we're thankful that it happened and now he's in the system. And so that's kind of a landmark deal. It was 16 units, but the circumstance was one that you don't see very often in Taco Bell. So happy to see the Helms exit gracefully as well. They'd been in the system almost 50 years, 48 years. And what a blessing Steve and Justin and their family are. They are awesome, awesome folks. So we wish them super amounts of success and we'll miss them at the convention.
Rick Ormsby:
There's a second deal we did recently and it was we sold 24 Burger Kings and Popeyes. 16 Burger Kings, eight Popeyes in Kentucky mostly. And they were sold to Kevin Newell. The seller was Andrew Shorey. And I'd met Andrew maybe 10 years ago through a mutual friend at church up in Kentucky and we became buddies. He's a second generation franchisee and he was ready to exit the system and had a great Burger King business. His Popeyes business was new. He had built it out over maybe a three or four year period and had just decided to sell and move on. And so Kevin took to the business and closed it successfully across two brands. That was also a really unique deal. I think Burger King and Popeyes are probably trying to be separate more than they're trying to be together. And that's okay, that's the way the Yum Brand system is too. The brands are separate, they're friendly, but they make separate decisions.
Rick Ormsby:
So closing an acquisition at one time with two different brands like that is akin to closing two different deals at the same time. So it was a complicated deal, but it happened successfully. And I think it positions Kevin quite nicely as he has now a decent size business in this middle Tennessee and Kentucky area. And man, I think I mentioned earlier in the podcast, I went to Vanderbilt for MBA school, which is in Nashville. And for those of you who have been to Nashville anytime recently, that place, other than the crazy traffic, is just an incredible growth story. You count the cranes going through Nashville, there's dozens of them. It's the craziest thing I've ever seen. Expect that city to continue to thrive and grow. No state income tax and just great pro-business policies there. So expect that place to grow.
Rick Ormsby:
The third deal that we recently closed was 17 Taco Bells in San Diego. SD Bell sold to the Capriotti Organization, [Kati 00:41:44] Foods. First deal done with Kati Foods, and really impressed with them as an organization. Very professional, sharp, adaptable, flexible, easy to work with. SD Bell's owned by Paul Hoover, he's a friend of mine and we've done, gosh, half a dozen deals with him over the years. He's a great guy. And he was a part of the first deal that I did when I came out of corporate in 2005. He didn't actually get it, he came in second place, but it was a small franchisee who had been a door to door vacuum cleaner salesman, but was looking through the newspaper and responded to a newspaper article to become a Taco Bell franchisee in Salina in Junction City, Kansas. Can you believe that? And he and his wife built and operated four stores. I called him up and they said they were ready to retire. That all happened in 2005.
Rick Ormsby:
And oh, by the way, when that deal closed, I didn't have enough money to make the next month's mortgage. I guess that's what happens as an entrepreneur. You have to have a crazy story like that, don't you? But this deal was a good one in the San Diego area, good Taco Bells, right in the brand's wheelhouse where it started in southern California. Glen Bell started the concept right there in San Diego. And so cool deal, it's the third deal in the last month that we've closed. And I've gotten a couple of emails, because I sent some of these closing announcements out on the wire, couple emails coming back saying, "Yo, we're glad to see deals closing again. We're glad to see you're busy again. We're glad to see you're doing great." Thank you to everyone who recognizes that. It's a real blessing to know all of you.
Rick Ormsby:
Again, to end where I started, I get up every day and I love this business. And I wish that for all of you, if you're listening to this podcast. I don't know what else I do. And I think I'm blessed to know so many good, hardworking people in the franchise community who've become, in many cases they're like father figures to me. And now, heck, I'm like a younger brother to them as I get older. But I just love what franchising represents in every small community in large town in America, this solidarity towards creating a craveable experience for the American populace. And to do it across all types of people with all types of food, it's really an awesome business. I love it. Wouldn't ever find myself doing anything else. Encourage you to recharge. That was the Sonic Convention theme, it was recharge. So I encourage you to recharge this fall. We've all been going hard and now we're back at it full time and facing challenges. And it seems like the amount of variability and unpredictability in the world we live in is really high right now. But I encourage you to consider your life as an adventure. Go get it and find ways to continue to grow to keep that positive attitude. Don't wilt away or waste away. Let's go get this. Let's go grow. And I'm here cheering for you and here to help.
Rick Ormsby:
Okay, thanks so much for listening. Got a great podcast coming next time, so make sure... I got two big franchisees. One owns about 450 locations and the other owns a couple hundred locations. And I'm hoping that both of them will be able to join us. And we're just going to rap for about an hour. It's going to be a webinar that'll be a podcast. We're just going to rap for an hour about how they got into the business, their prospects for the future, how they set up their companies. I think it'll be a really insightful conversation. They're two of the top 20 names that you're hearing in the franchise space these days, so it'll be fun. So have a great one. Stay in touch. Bye now.
Rick Ormsby:
Thanks so much for entering the Boiler Room today. You can find our podcast on iTunes, Google Play, Stitcher, TuneIn and Spotify. If you like these podcasts, please listen, rate and review. I also encourage you to visit our website at www.unbridledcapital.com for the best franchise, M&A and financial resources in the industry. Our website includes webinars, podcasts, videos, white papers, and a list of our past M&A transactions. Please note that neither Rick Ormsby nor Unbridled Capital Advisors, LLC give legal, financial, or tax advice. These podcasts represent opinions that have been prepared for informational purposes only. We expressly disclaim any and all liabilities that may be based on such information, errors therein or emissions therefrom.