Readily available, low-cost loans are fueling a healthy market for the buying and selling of restaurant companies, and that trend is expected to continue into 2015, according to experts this week at the Restaurant Finance & Development Conference. However, rising sale prices for restaurant franchisees have some wondering whether the deals are worth it.
“The industry is not having the greatest year, but valuations are having the greatest year,” said Nick Cole, an executive vice president in the corporate banking group at Wells Fargo & Co. “In recent auctions, the valuations have gotten ahead of business performance.”
The number of restaurant industry deals has increased 8 percent to date in 2014, said Jeb Ball, managing director at the investment banking firm Brookwood Associates. That includes large franchisees and restaurant brands. Dollars flowing into the business have helped drive valuations higher, he said.
“It’s a great time to be a seller,” Ball said. “It’s a great time to be a buyer, too, but the market probably benefits the seller more.”
The biggest reason for the active acquisition market is the availability of loans. Interest rates remain low, and several lenders have started restaurant and franchise financing programs in recent years.
The influx of so many lenders has increased competition and in some cases has driven down the terms offered to potential buyers. “There are 10 lenders for every borrower,” said Armando Pedroza, restaurant finance and banking leader at Citizens Commercial Banking. “It’s a hot market.”
When Apex Restaurant Group bought 68-unit KFC and Taco Bell franchisee Morgan’s Foods Inc. earlier this year for $20.6 million, for instance, the company had commitment letters from four different lenders, said Apex’s owner and president, Tabbassum Mumtaz.
More buyers are also looking for deals. Private equity groups in particular have been active in the restaurant space in recent years. They’re buying small, high-growth brands and larger brands, too, but they’ve also snapped up more large-scale franchisees in recent years.
“The flow of private equity into the sector is driving a lot of activity,” said Robert Daniel, group head and managing director at Regions Financial Corporation.
Still, there is some concern that the market has become too hot in some cases. Some experienced franchisees have backed off auctions recently after prices climbed.
“A lot of private equity firms are struggling to make the valuations make sense even if the lending is available,” Daniel said.
Still, with high valuations being placed on restaurant companies and franchisees, some sellers are opting to jump into the market. The Morgan’s Foods deal is a good example.
Ohio-based Morgan’s Foods operates 68 units, most of them KFC locations. It struggled during the recession, but it had closed unprofitable units and refinanced its debt and put the company into a better position. “We put ourselves in a position where we didn’t have to sell,” Kenneth L. Hignett, Morgan’s Foods’ executive vice president and chief financial officer, said at the conference.
The company was also publicly traded, which proved costly for such a small operator and made regular profits difficult. A year ago, Hignett said, the company saw that the market was favorable for a sale and it decided to explore that option. Apex ultimately emerged as a buyer, and the deal closed in May.
That acquisition gave Apex more than 200 locations, and Mumtaz said he saw the purchase in part as an opportunity to make other deals.
“One of the things we liked about the deal is that there were so many franchisees in the region that were also looking to sell,” he said. Mumtaz added that he expects to do three more acquisitions over the next year or year and a half that would add another 100 locations. He added that the deal also gives him Taco Bell locations and the ability to build new units in that concept.
This article has been revised to reflect the following correction:
Correction: Nov. 13, 2014 An earlier version of this article incorrectly referred to Citizens Commercial Banking by its former name.
Contact Jonathan Maze at [email protected].
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