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After quickly building the Quality Restaurant Group portfolio with 200 Pizza Huts, 27 Arby’s stores, 67 Moe’s Southwest Grill locations, and most recently the purchase of 62 Sonic Drive-In restaurants, Matt Slaine said he is now working on “internal acquisitions” within its four brands. This means buying smaller groups of restaurants in QRG’s existing geographies to continue building scale, which Slaine, CEO of Quality Restaurant Group says, is a primary goal of his partner and Matt Ailey.
“It’s important for us to be relevant franchisees and to scale up,” Slaine said of identifying potential acquisitions. “We want to partner with systems where we can be agents of change,” which in some cases means fixing something in the brand and also applying what they learned in other systems.
Slaine, who, along with Rick Ormsby of Unbridled Capital and Dan Holland of Cadence Bank, joined Franchise Times editor Mary Jo Larson for a Dealmakers Week panel to talk about attracting capital, said the impacts of the COVID-19 pandemic over the restaurant industry has complicated conversations with potential vendors. One of the biggest issues, especially with the smaller transactions QRG looks for, is not being able to match valuation.
“… A seller in a system that has been negatively affected wants to sell 2019 or quote normalized numbers without a quote, and yet a buyer certainly does not want to buy something that is down 20 or 10% from a hypothetical normalized figure. Slaine said. “So this alignment has been really very, very difficult.”
The deal climate, said Ormsby, who works primarily on the sales side of franchise deals, is “quite aggressive,” and in the quick-service restaurant segment, the deals fall into three different buckets. The first includes the most successful brands like Taco Bell or Popeyes.
“People pay current multiples, which are great multiples on really high EBITDA,” or cash flow, Ormsby said. “It translates into ratings that are, like, a time and a half longer than this time last year and you’re like, wow, how the hell is that going. And they are funded.
The second bucket includes brands that have always performed well, with EBITDA multiples rising slightly and buyers willing to pay some but not all of the increases. Lenders, Ormsby said, might not view them as positive.
The latest bucket includes brands that have historically languished or did not perform well during the pandemic or those that are smaller in number of units and, while they may have doubled their EBITDA during the pandemic, have experienced historical difficulties. “The rising tide doesn’t lift this boat that much,” Ormsby said of Group Three.
On the lending side, said Holland, who launched Cadence Bank’s catering group in 2012, the strength and support of the franchisor is a big part of the funding equation. It looks for visible signals such as the franchisor is spending their royalties on areas such as marketing support, site development, and product innovation. Behind the scenes, it’s ‘how franchisors behave in difficult situations’, with the pandemic being Exhibit A.
“I can tell you unequivocally, the franchisors, at least the ones we do a lot of business in, have all stepped up,” said Holland. They “were proactive in calling us, the lenders, to let us know what they were doing to support their franchise community. This included postponing royalties, postponing advertising… rent relief to some of their franchisees. ”
Looking ahead, Slaine said he and Quality Restaurant Group were “very optimistic about the future of franchise restaurants,” especially those in the QSR and fast-casual segments, because even through the pandemic, consumers have proven that the demand was there.
“They wanted to go out and get their favorite brand. They didn’t eat it in the dining room, they did it through the drive-in or the sidewalk – the most famous term that was coined in the restaurant business in 2020, ”said Slaine. “The curbside carryover and what it means for the business, it means that anyone can effectively have a drive-thru if you can perform it well.”
For more information on these and other speakers, watch a replay of Wednesday’s Dealmakers Week sessions. Dealer Week continues Thursday with sessions covering what’s hot and what’s not in franchise mergers and acquisitions, as well as deals with some of this year’s Franchise Times Dealmakers award winners.