The Restaurant Development and Finance Conference occurs every year in Las Vegas. The conference brings together the finest minds in sales and finance and is well-attended by chain restaurants, franchisees, franchisors and capital sources.
A preconference workshop titled “Health Care Strategies for Restaurant Companies” dealt with challenges that health care reform presented to restaurant companies. The key point is that the law creates access to health care and not health care reform. Individuals will be responsible for purchasing coverage but companies with over 50 full-time employees will have to offer coverage or pay penalties. There will be new duties for employers and the speakers suggested that health care reform may result in a nation of part-time workers, similar to the Wal-Mart model. In an effort to avoid purchasing health care, employers may convert their full-time workers to part-time, and have them work for different paymasters, effectively doing the same work at different locations. Many in attendance thought this was a viable strategy for their chain restaurants, but others disagreed. One said, “I feel fortunate that I was able to amass a chain requiring 5,000 employees and I want to show my gratitude by giving them health care. It is good for them and good for business.”
Professor William Dunkelberg of Temple University spoke about “Inside the Economy: The Banking and Finance Outlook for Restaurants.” He listed the most important problems as rising health care costs, uncertainty about the economy and economic policy, controlling energy costs, cost of regulation and red tape, taxes on business income, finding qualified labor and securing long-term financing. In terms of financing, government borrowing outpaces private loan demand and the uncertainty over the economy makes small business lending more difficult. Currently, we have slow growth in the economy and relatively high unemployment, and small business activity, which constitutes half of the gross national product, is stalled. Because these challenges are local, national and global, it is hard to plan expansion, so the only alternative is to grow opportunistically.
In the session titled “Putting Big Data to Work: Using Analytics to Drive the Top Line and Control Costs,” the premise is that companies are collecting more data than they know how to analyze, and to turn the data into gold, the companies need new skills and management style. Companies will need to employ analytics as a strategic capacity to support business strategies and decision-making. Developing tactical actions based on data analysis can enhance the bottom line and improve market position. The common sources of collecting the large volume of data necessary for the analytics are harvested from the point of sale transactions and the social media sites. The advanced analytics are being used for site selection, driving customer engagement and providing limited-time offers involving price and menu optimization. As opposed to the old-school review of key performance indicators like same store sales, average check value and margins, analytics are looking at more qualitative issues. These issues are how often are the customers dining with us; who are our most valuable diners and what do they typically order; which customers are our biggest influencers; what are people saying about us; which high performers are we in danger of losing; and how will demographic shifts affect our market share.
The Global Opportunities Forum addressed expansion, primarily through franchising, in the key countries for expansion: Brazil, Canada, China, the European Union, India and Mexico. The common denominators in these countries are stable government, rule of law and court system, large and urban populations investment, friendly and stable markets and English as a business language. Brazil is perhaps the highest growth country in anticipation of the 2014 World Cup and the 2016 Summer Olympics. Because of the tax differences in each country, the suggestion is to work through a U.S. lawyer experienced in the country and a correspondent local lawyer in the country known by the U.S. lawyer, in order to utilize the best practices in each country.
Many of the discussions involved analyzing market multiples. Investors use the multiple as a guide to the value of the deal. For franchisees, the consensus is that selling a franchised business should result in a market multiple of 4 to 5 times cash flow, which equates to a 20 to 30 percent return on investment. Larger multiples are earned by franchisees of stable companies like McDonald’s, as opposed to a less stable parent brand. The business appraisers treat the business as if the space is leased, but if the space is owned, then the value of the real estate is added to the value.
When the brand is being sold, the multiples are generally higher, with growing brands valued at 8 to 10 times EBITDA (earnings before interest, taxes, depreciation and amortization), and weaker brands getting 6 to 8 times EBITDA. Last year, 16 restaurant deals analyzed showed multiples of cash flow between 5.3 to 20 times. Franchisors have larger multiples because they have lower capital costs, allowing buyers to put more debt on the books to fund the purchase, rather than preserve the capital for future restaurant expansion.
To be sure, market segment will affect the pricing. Casual dining is still suffering, but quick service still is growing. The only safe bet to maximize valuation is to operate as a franchised business and support the franchisees to maximize their unit economics.
Craig R. Tractenberg is a partner in the Philadelphia and New York offices of Nixon Peabody and an adjunct professor teaching franchise law at Temple University’s Beasley School of Law.