Would You Buy These Struggling Chicken Restaurants?

26:35And you know, there's a brand called seven brew. It's, you know, this newer coffee concept. I spoke to them recently and they're not allowing new franchisees in unless they're going to develop 50 plus locations. And so you've got 50, five, zero. And so like they're only doing it to these kind of big boy and big girl groups that probably have private equity behind them or are large, sophisticated, multi-unit operators already have, you know, 50 Marcos pizzas and 30 Dave's Hot Chickens. And they're just adding this to diversify their existing, you know, portfolio. but there's still a ton of legacy you know ones and twosies the dentist that you mentioned earlier that own two bojangles or three you know jersey mics and there's certainly groups that are going around and rolling these up right now and increasingly private equity is becoming more and more and more active within franchising because it gives so much structure for a roll-up model because you're buying into a system that has guardrails and structures and many targets to go out and try to acquire.

27:32So today's video is actually sponsored by a company I started called Bedrock Quality of Earnings. And Bedrock is a service for business buyers. If you're going out to buy a business, one thing you don't want are surprises. There are tons of stories out there of people who buy businesses, they get into them and three months later, they realize the numbers that the seller told them, well, they weren't true. In a situation where people are often buying businesses and signing personal guarantees, meaning they're really on the hook to return that money to a bank or anybody they borrow it from, that could be a disaster.

28:02So Bedrock is a quality of earnings firm. There are people you hire that go in and look at the seller's books to make sure what you're being told is actually true. And there's lots of quality of earnings firms out there. What makes Bedrock different is it's the only one that has three things. Number one, a CEO, a guy who comes to us from a big four firm and has been doing quality of earnings reports, well, basically for a long time, his whole career, basically. Bedrock is also backed by people you trust and know, including me. You know where to find me if you're unhappy with their service. And number three, Bedrock uses the latest technology, AI and all that different kind of stuff to make sure you get the best results at the best price.

28:38So if you're interested, book a call with the CEO, Will. You can go to bedrockqoe.com or check out the link in the comments below or the one on the screen. Thanks. It's a really interesting choice by a franchisor. Like Burger King got into this trap where they did the same thing that Seven Breed did, where you go sign up with these big multi-unit operators who do 50, 100, 200, or 1 ,000 locations. And that can help you grow really fast. These people are super professional. They're very corporate. But if the stuff hits the fan, you don't have much recourse compared to, say, at McDonald's, where the average one is one, three, four, five, six.

29:13McDonald's or Chick-fil-A at the end of the extreme where it's just one. And you know that if things hit the fan, that owner-operator can go in there and run the cash register and their life is on the line. These corporate guys that happened at Burger King will go bankrupt 150, 250, 1 ,000 units at a time and you as a franchisor are suddenly in big trouble. So it's an interesting choice by 7Brew to do that because it's, one, great for scale very rapidly. And I assume that their multi-unit operators will not agree to cross-collateralize or to basically give you protections as a franchisor. Yeah.

29:48Yeah, that's not happening. and these guys are professionals. And a lot of times, they're at such a big scale. A personal guarantee doesn't matter. Somebody has$10 million in net worth and they're part of one of these corporations doing$1 ,000. I'm like, who's going to personally guarantee it? There's none of that recourse there that would matter. If you're going to close your dual location concept for probably a six-month conversion, I would think, minimum, construction-wise, do you basically just lose all of your employees and you start from scratch and you've got to rehire everybody and new grand opening and all that stuff and retrain everybody?

30:22Or can you keep people on? Like, how does that happen in practice? Effectively, if you have a portfolio like this, I mean, there's some ability to, you know, carry labor over under other stores and other shifts. And the reality is, is the turnover in QSR and, you know, labor models like this is that you're keeping someone eight to 10 months. And so even though you are gonna be closed for six months, you would have probably turned over most of that labor force, not at the management or the GM level, typically, but your frontline, your fry cooks, your cashiers, etc. It's so transient. There's so much turnover.

30:57We dealt with it at the Laundrelab franchise that we built. And it's the same type of thing. You have turnover that's sub-12 months. And I imagine in this case, you're going to turn over most of that frontline base, but keep your managers and have them help support the other locations in the interim because finding them and training good management is very tricky. Okay. So you will lose them, but it kind of just built it. Yeah. Yeah. I was surprised by the total number of employees here being 50 across four locations. Cause I've heard of, you know, Dave's hot chicken or a McDonald's each, each location having 30 to 50 employees because they're 24, you know, McDonald's is 24 seven and you got three shifts to cover.

31:38And a lot of people in that kitchen doing a lot of work. I've heard Chick-fil-A operators say they have 200 employees at one Chick-fil-A. I think the answer is Mills, and maybe you guys talked about it before I showed up late. Thank you, host of the day. But did you guys talk about how low the revenue is per location for these? It's like a million dollars for a fast food restaurant. Even, put that in perspective, McDonald's is at four, four and a half now. Chick-fil-A is up at seven or eight million. There's reasons for that. I don't know. What was the read on why these locations don't do very much sales?

32:13Like a million dollar restaurant is not a lot of money. Is that on the button for these concepts, Alex? Well, it seems like it would be because you said these stores are only 20 % below the average unit volume for these chains. Yeah, so I think it goes back to what I think Mills brought up about the brand. You know, is this a declining brand, a growing brand? And that's where I think there's some insight here of this might be one of the weaker chicken concepts, but the Mexican food restaurant is, you know, top of its peer group and some of the higher revenues per location, but compared to other QSR concepts, still lower.

32:47To Michael's point is Raising Cane's, McDonald's, Chick-fil-A, they're doing four plus million dollars in AUV per location, whereas even the Mexican concept here is two-ish million per location, but much smaller footprint, lower fixed costs than those other comparable restaurants. so i don't think this is a reason to do the deal but as a sweetener you know tell me if i'm off base here alex right like this nation's leading mexican concept right they're probably not taking single unit franchisees you can't just call them up and get in on this thing right but if i buy this business, you know, now I'm in the system and I have one operating Mexican concept.

33:37So I, you know, could I then start bought now I'm pre-qualified if I want to buy more or open more. So could a buyer come in and kind of say, my growth thing is these three chicken ones are lame. I'm not going to open any more chicken ones, but kind of operating these lower margin kind of chicken ones, like I'm not going to lose my butt. You know, they're probably still going to limp along. I get my money back in three or four years if that's the multiple I pay. But now I'm in the taco Mexican chain and rock and roll. There are people that would do that. And a lot of our advice to folks that we work with help find the right brands and think through this decision is a lot of this is you need to get into the game.

34:18Now, that doesn't mean invest like it's the Wild West and don't be thoughtful about it. But a lot of the times if you're in the good old boys or girls club and have access to deals now that are happening on email chains and text chains and you're part of that conversation, you get access to deals that aren't hitting public sites like Biz Buy Sell or, you know, Franzy in many cases as well. There's these deals that and systems that you can get into that are hard. So some people might do that for this. This is a call out that the seller has is that there is no territory availability for the Mexican brand in the Southeast at this point.

34:55And you're just wanting to get in to get those reps in again and get exposure to the brand so that you can start to grow on top of it via acquisition. is it and so if there's no territories available for this brand you have to grow reacquisition right like they're not greenfield the new of these mexican concepts so you get in the game with this one and then you immediately are looking at every portfolio of the mexican concept that comes up and hoping that you're a differentiated bidder against everybody else in that process yeah and you might dump the three chicken concepts because there are some revivals happening like you know to be determined if it works out or not but buffalo wild wings you started out with this massive bar format.

35:35And I think it's a TV for every 10 seats they have. They have to have a TV. Massive, massive locations. But now they're doing this concept called Buffalo Wild Wings Go, where it is just a hole in the wall, essentially, you know, thousand square feet, or it's mostly for DoorDash orders, delivery orders, and it's just their wings and they're pumping it out. But the build-out cost is a fifth of what it would be to build one of the traditional Buffalo Wild Wings. And so, again, to be determined, do they compete with the other chicken concepts? There's so many of them, as Michael mentioned. And I think same thing here with this chicken concept.

36:08Are they going to reinvent themselves? Can they continue to compete? And do you hang on to those three and see what happens there and ride some of that upside if it happens? Or do you buy this, dump those three chicken concepts and say, hey, now I'm in the Mexican concept that I've been wanting to get into in this region and going to start trying to grow inorganically via acquisition. So could I do that? Could I buy this, do the convert, then I've got three in one, and then try to unload the three chicken concepts, and now I just own one Mexican concept, and I'm a small-time single-unit franchisee in this area?

36:42Is the master franchise or we're going to let me do that? Yeah, in most cases, they will. You would have to have a really compelling reason not to. A lot of brands will have a first right of refusal where they can buy it back corporately as well. But typically, they can't prohibit you entirely from selling your locations because it is your business unless there's some absolute glaring reason. Heather mentioned they want other restaurant operators to come in. So they do need to approve them. But if they repeatedly deny someone that has a decent background, honestly, it can get them into a tough situation where they're not allowing their business owners, or franchisees to have liquidity and movement in and out of their business.

37:26Okay. And then there's, you know, courts start to say these are franchisees, these are corporate units, and then there's a whole problem. They really want that to happen. Same with site selection. This was something we learned where we can't tell someone where to build a location, but we can say no, you know, 50 times effectively. I mean, a brand could kind of start to play that game on, you know, we can't tell you who has to buy it, but we can say no a certain amount of times. but after a certain point, it does start to put them into a grayish area. Heather, I don't know if you have comments there, if you've seen anything like that, but I typically see a brand want to be supportive if the person selling is putting a good faith effort in on finding another restaurant operator, someone who will be a good value add to the system.

38:09Yeah, I've definitely seen different things from different concepts. I mean, one thing is the SBA actually has a rule for any concept, any franchise, or that they have to give enough latitude to the franchisees to actually be considered business owners. So there are some franchise concepts that are ineligible for SBA loans. They're not on the franchise registry because the SBA has deemed that they don't do that. They don't give the franchisee enough control. There's that. And then I've seen, depending on the type of franchise, not necessarily always in restaurant, but a lot of them have very rigorous training programs.

38:44And we've had buyers that didn't know for sure if they were going to be approved by the franchisor until close to closing because they had to complete a multi-week on-site training program and sort of pass the test first. So I've seen a wide variety of things and that's one of them. Mm-hmm. So, Alex, I saw something else here on one of the growth levers. It says market menu pricing. And this seemed weird to me because I was on the impression that a Whopper costs the same kind of, you know, the franchisor tells you what a Whopper or a Big Mac costs. Can you just change the price of a Whopper or a Big Mac or any of these menu items?

39:24Do I have that level of pricing flexibility? Yeah, so this is where things get a little interesting because some brands, big, powerful brands, have found loopholes and have enough lawyers and attorneys to navigate these things. But technically, a franchisor is not allowed to dictate the pricing of the franchisee in a local market. They can put kind of guardrails in and bands within reason. And same with labor. There's a lot going on right now in D.C. where there's potential regulation coming where is a franchisor a joint employer? which, as you can imagine, would almost blow the franchise model up entirely because now franchisors have to carry different insurances and have a different level of exposure to liability.

40:05And so from that perspective, as far as how much they pay their teams and how they recruit them, etc., there's a lot of things franchisors cannot get involved in and dictate. So in many cases, a franchisor won't tell a franchisee which payroll provider to use or which software around labor to use because they don't want to cross the line of becoming a joint employer and pricing kind of falls into a similar category of we can't tell you that you have to charge three dollars for a sandwich because you're going to lose money but we as the franchisor might not care as much because we're making six percent of the revenue off the you know off the top um and three dollar sandwiches would move a ton of volume and that would benefit us as a franchisor but not use a franchisee and so there are again guardrails and a lot of kind of regulatory oversight on what a franchisor can dictate in demand of their franchisee.

40:53But there are, again, loopholes in ways that things like the dollar menu and the$5 footlong franchisors have been able to skirt via, they call it a promotion or a marketing thing and not actually pricing. Interesting. So at one point, Burger King's franchisees sued because Burger King was making them sell a burger for below cost. It's pretty crazy. Don't buy a Burger King franchise. or if it's a good deal, go ahead, whatever. All right, sorry, Bill. I was starting to add some random facts about franchises. I assume what this means is that the chicken or the tacos at these restaurants are priced below where comparable chicken or tacos are in the same markets.

41:36And so you should raise price. And the assumption is that the consumer will eat it, right? Would I be, like, let's say these are in the lower income part of town and you know the hey they're performing 20 below the typical unit revenue levels maybe it is in not as good a part of town and maybe they got to be priced a little bit below market you know this is the type of thing you know we look at we've looked at almost 600 deals in the show you know like this is the thing that brokers always say like oh we'll just raise the prices but like you know what a moron the seller's not at market but like you know maybe the seller's not at market because his neighborhood doesn't bear market, right?

42:17And he's got to be like, so it's like chicken or egg a little bit. So, I mean, how do you diligence that? I don't know the answer. So something we did with the laundromats is, I mean, we went in secret shop. We went to, you know, 15 laundromats in a two to three, two to four mile radius and just went and saw what are the prices of 20 pound machines, 40 pound machines, 60 pound machines. And same thing here. I think you'd go to, you know, what are the alternatives for my demographic in this five-minute drive time radius. You don't have to go to every single one, but go get a sample and see, oh, wow, yeah, we are 23 % on average across these 10 places I went to below what they're charging for comparable items or a family meal or an individual meal, et cetera.

42:56And you can get an answer that way. And then I think some of the other things too, when you're thinking about how do we expand the revenue and close that gap, talking to other operators in the system that are maybe doing things differently or knew the previous owner and you might have stories that they could tell, oh, that person always waited to raise price or they ran their locations poorly or they might have some insight that gives you valuable data on diligence before you go to buy it. I think a lot of existing franchisees are willing to share that type of information if you ask thoughtfully and reach out thoughtfully.

43:32And then something we're seeing with a lot of this technology and AI now coming off the shelf is in drive-through especially, having AI take the orders. It eliminates some labor, but it also upsells 100 % of the time. And there's all this data around, as long as you ask the question, do you want this side or this dessert or to supersize it, et cetera, if you ask 100 % of the time, it increases the chance that someone does it 20 to 30%. Things like that might add up enough to close that gap. And I think it's up to the buyer to have to do all sorts of diligence on car count, local competition and pricing, what other technology and systems are not in place that would increase revenue, but also optimize my margin in OpEx.

44:17You mentioned the AI order takers. So here in Charlotte, where Alex and I are, we have a drive-thru chain called Bojangles, which is a Southeastern staple. And that is where I noticed at first, Bojangles has gone hardcore on the AI order taker on the drive-thru. And it's actually quite compelling. it's like it's very natural and like you can tell it's an ai but like it's very good it's not at like phone tree level annoying and they and you're right every time it's like do you want to supersize that do you want to add a biscuit you know if if you are in an area with a bojangles i would strongly recommend driving through a bojangles just because it's one of those like like the first time you ever ride an uber like you're like oh this is coming everywhere this is the future do you know if do you know if these guys do it the the taco guys or the chicken guys so the chicken guys they have a sister restaurant uh that i know does it so i imagine they will be doing it at their other locations soon i haven't seen it at either one of these concepts recently and i've unfortunately go out and do a ton of secret shopping and drive so i've been eating a lot of fast food, unfortunately.

45:26And I haven't seen it at these two locations yet. But it is wildly compelling the impact it has on revenue just by asking. Again, 20 to 30 % lift on orders and ticket size just from asking that question in a$12 hour, employees not asking that question 100 % of the time, if at all. Interesting. So cool. Okay. I think we've been going on for longer than we typically do. So I hope some listeners are still with us. So I do want to kind of wrap this up. I'm not going to ask you, Alex, to kind of speculate on price, but Gurley, I'll start by asking you to speculate on price. This is$675K of EBITDA. What kind of multiple do you think this gets?

46:10And you need some CapEx to flip over the chicken tacos to just tacos. Three times earnings, maybe two and a half. I don't know I wish I was more optimistic about it maybe it's just me talking because I'm not that interested in owning this business seems really hard well I think I hear what you're saying like this is tough right because it's four locations to make 675 before the flip and then you go down to 500 a year 50 like a lot of complexity and that's basically like one Chick-fil-a or four of these right So I think that's just not going to command the multiple that other concepts are going to command.

46:51The way I would think about it is what's the market multiple for these? And then I got to make the seller pay for that conversion. Whatever the franchise owner is not going to pay for, I got to take that out of enterprise value. And the guys we sold our coffee business to, you could do more revenue than this per location selling coffee. And that's no food spoilage, none of that kind of stuff. So that's what I'm kind of basing against. I'm like, well, there's just better businesses to be in than what appears to be an off-brand chicken. It's like with a Mexican Tex-Mex thing thrown in. Seems hard.

47:27Yeah. It seems hard to just own this on its own and just have four locations and you're dealing with the chicken brand that is kind of declining or off-trend or whatever and your one Mexican brand is really good. I think if you're going to buy this, you got to get a good price and you got to view it as a stepping stone into the system, right? You got to view it as, you know, maybe I already am in the system and this is very much more creative because it's, Alex said, it's 675 of kind of post SG &A, all the corporate EBITDA. If you strip out the corporate EBITDA, maybe your 675 goes to 850 or something, you know what I mean?

48:04Like a little higher. So then you've got a lower effective multiple. So you either got to be adding on to something or view this as a nucleus of you're going to do five more, I think. I don't think this makes sense as a standalone to me. So anyway, if that sounds like you, you can reach out to Frenzy and they will help you do it. This or not just chicken and Mexican, but nearly anything on the franchise side. So anything else to add on this one, Alex or Michael? The only thing I would add here is some of the guidance that we're getting is a selling price of you know 2.7 million in that ballpark is a win you know for the seller and so i think there's room to negotiate there that's about a 4x multiple on on ebitda and i'm fully with you bill on how i would approach this personally like food kind of just scares me in general because there's so much competition you have to get the right location you can't move the box once it's built and you know the margins are thinner and so i i really I'm in your guys' camp on.

49:06You have to find the right makeup of things or look at it as a stepping stone into the system and can you buy the whole piece and then sell off some of the other parts and use the part that fit your strategy or if you're a large existing multi-unit operator already and this is additive and you can spread some of the G &A and other learnings you have, etc. into this otherwise somewhat underperforming portfolio of four locations. Yeah, I think 4X for underperforming portfolio of off-trend chicken QSRs is probably pretty rich. So yeah, I think 4X would be a win for this seller. Well, cool. Alex, I learned a ton today, as I always do when you're here.

49:45Thank you for joining us. Great job. Can't wait to see you on the next one. And if you guys listen to this and you liked learning about franchises from a master, this is not the first episode that Alex has guest hosted on. There are quite a few. If you go to our website, acquanon.com, You could probably search Alex's name or definitely click a little franchising checkbox and learn more about other franchising deals we've looked at together with Alex or even without Alex before we met Alex, which those are decidedly less insightful. You can listen to those as well. And Alex will be back for more episodes.

50:25So if you want to know when he is back, you have to get on our newsletter, acqunon.com, and we will email you the new episode so you don't have to be glued to your podcast app. But we would also appreciate it if you subscribe in your podcast app as well. Helps our stats. So Alex, where can people get more of you and Franzi if they want to in between episodes? Yeah, so first and foremost, if you check out Franzi.com, F-R-A-N-Z-Y.com, we've got 4 ,000 brands worth of data just like this that you can go peruse and look at at your leisure. No pushy sales tactics or anything. It's meant for you to educate yourself and learn more about different concepts that are out there.

51:02and then I do a ton of content on different folks that have built empires and franchising, different brands that are coming and going, etc. And that can be found at Alex from Franzy on every social channel, TikTok, Instagram, X, etc. And lastly, we have a podcast called The Exit Plan where we interview folks that have left corporate to go become franchise owners or have built large portfolios and have exited them to private equity. We share both of those tracks and those stories over there as well. So check it out. Cool. So if you're interested in buying a franchisee or several multi-unit franchisee, Franzy is putting out a ton of really good content.

51:40I think you guys will like it. So with that, thanks for listening to this episode of Acquisitions Anonymous, and we will catch you on the next one.