Tired or Opportunistic, Big ‘Zees Sell Out
It’s hard to find new ways to say just how hot the restaurant M&A market is. We’re past scorching, and blew by white hot in 2016, so maybe 2017 finally reached molten hot.
And the restaurants are flowing every which way.
Franchise operating companies rise and fall regularly, selling off a market here, buying another there. But in 2017, there were a notable number of companies selling out completely. In all, 10 companies on the Restaurant 200, our annual ranking of the largest U.S. restaurant franchisees, left the list completely, selling off a total of 857 restaurants accounting for $1.3 billion in annual restaurant sales.
The Wendy’s system was especially busy. Across the system represented in the rankings, 700 restaurants changed hands. Three Wendy’s operators got out completely. The No. 23 company in last year’s rankings, Cedar Enterprises, unloaded 215 restaurants, No. 45 DavCo sold off 145, Valenti Management (No. 53) sold 119 and Pennant Foods sold 87.
Yum operators were active, too. OCAT—No. 120 in last year’s rankings—sold 56 Taco Bell restaurants, the entirety of its operations in a complex deal that ensured all back-office employees kept their jobs. And No. 126, Treadwell Enterprises, sold its two Taco Bells and 84 KFC restaurants.
Imagine now that these sellers are on a beach, at the golf course or just hanging out with family. Whatever blissful pastures these former operators have moved on to, they’re not talking. But two advisers behind some of these deals did.
Rick Ornsby, managing director at investment banking firm Unbridled Capital, said he’s seeing a lot of interesting trends in M&A, but sellers are especially busy.
“Sellers in this business are typically threefold: A 65- to 70-year-old operator, they’re looking at valuations and they’re thinking, ‘Am I going to be in this business until I’m 80?’ They still represent the largest number of sellers,” said Ornsby. “Then there’s the owners who have had it for 10 years, but didn’t want to spend their whole life in the business, and they’re hoping to sell for a big price.”
And then there’s the mid- to late-career franchisee that either sees big dollar signs or can unload a distressed business.
Amy Forrestal, managing director at middle-market investment banking firm Brookwood Associates, similarly said it’s a natural alignment of three things: aging operators, great prices and franchise agreements ending.
“I think that’s partly what is driving these deals, a lot of franchising started in the ‘70s and ‘80s,” said Forrestal. As those agreements end, franchisors are looking to extend development, get franchisees to remodel their restaurants or invest in technology. Doing the math on paying that off just might not make sense.
“I think there’s some folks that have been in it a long time or retirement time that may say it’s time to sell versus spending all that money. But it’s going to impact price to some degree. You don’t get top dollar and have no obligations to capital expenditures. But some people are just tired,” continued Forrestal.
Buyers are racing to get deals done, too, and pushing sellers along and enticing them with premium prices. Popular systems are getting the highest prices, but everything has a bit of a low-interest rate bonus as buyers look to complete deals before interest rates tick up.
“We’ve had a prolonging of a low interest rate environment. We’ve had this wave of people who probably realized that we’re on a slow normalization and a slow downward slope,” said Ornsby. “They’re looking to buy the car right before the financing ends.”
There are also fears that downward slope will get steep. This era of economic expansion may not show any cracks when looking at the stock market, but the economy is far overdue for a correction or recession, at least by historical measures. But some major investors think there’s plenty of growth left.
"Right now, there's no question; it's feeling strong. I mean, if we're in the sixth inning, we have our sluggers coming to bat right now," said Warren Buffett on CNBC’s "Squawk Box." Whether the game stretches to extra innings remains to be seen, but the smart bet is on a recession sometime in the next several years.
“Unemployment is a record low, things seem to be going pretty well,” said Forrestal. “If you just look at the economic history there’s likely to be a recession in the next couple years, it might not be that bad but this can’t last forever. If you’re looking to sell in the next five or so years, this is a great time to do it.”