Ready To Sell? A dose of realism for the current environment
Given the uncertainties of the current environment, there are several factors sellers must consider as they evaluate the potential sale of their business. Transactions are picking up and deals are getting done. However, given the varying levels of impact the pandemic has had on different segments of the economy and different brands within each segment, to complete transactions right now sellers must be realistic about the value of their business. The segment and brand of your business are critical factors in determining whether the value of your business has maintained, increased, or decreased over the past year, and whether there will be capital providers able and willing to support a transaction.
It is imperative for sellers to evaluate how their business has performed throughout the pandemic. Start with the industry and segment of your business. As an example, the QSR segment has outperformed its counterparts in the casual, family, or fine dining segments. One key advantage QSRs have over their competitors is their flexibility and convenience for consumers through drive-thru capabilities, contactless pickup, third-party delivery, and mobile order and pay applications. Restaurants in the casual and family dining segments that saw success during the pandemic have been resilient in adopting a more contactless model by offering off-premise alternatives to counteract dining restrictions. The brands and concepts that especially prospered were those with a well-defined and user-friendly digital platform.
The region of the country matters, too. While every state has been affected by Covid, the level of economic pain and ultimate recovery has varied, and it is important to understand how your business has been affected compared with other regions. For example, if you have a dozen quick-service restaurants in a top-tier brand with drive-thru operations in the Southeast, chances are your business and profits were up in 2020 over 2019. The likelihood of a successful sales process and realized valuation is high, as interest in those assets continues to grow.
Conversely, if you own five fine dining restaurants in New York City, the ramifications of Covid have been significant. Owners in these situations should focus more on surviving than looking to sell their business, as valuations have most likely declined. There is a limited market for challenged assets currently, and the debt and capital markets continue to be difficult to navigate for brands and situations that have operating uncertainty. Valuations on challenged businesses will be on the low end as buyers are forced to allocate more capital toward equity contributions and cash reserves as performance is uncertain and difficult to project.
If your business is part of a franchise system and you want to explore a potential sale, it is paramount that you understand the overall performance of your units the overall performance of the brand/concept. The brand’s performance is important in assessing value. Franchisees of national brands with the financial support of franchisors and suppliers have been better equipped to sustain the downturn of the economy over the past year. Brands that embraced technology before the pandemic have performed better than their peers, irrespective of segment, and are now trading at more-robust multiples. Contactless pickup, third-party delivery platforms, mobile ordering and pay, and scheduling applications have expanded off-premise sales and streamlined services, which has offset Covid challenges. Results have varied significantly across brands—even brands in similar segments—so an evaluation of your system is critical. Buyers will pay for results and positive, sustained performance, which should be captured as a valuation premium.
Because of the current business environment, potential sellers must understand and assess how capital providers view their segment and their brand. Capital providers have tightened their credit standards and, in some cases, may charge above-market interest rates to compensate for perceived risk and uncertainty. Limited support from capital providers also puts pressure on valuations in challenged segments. Sellers should require that any bona fide purchase offer include the details of the buyer’s capital structure. Cash offers with no contingencies are ideal, but the exception. In most transactions, buyers will look to third-party capital sources to fund transactions.
Sellers should review a buyer’s financing commitments carefully and place a premium on that buyer’s certainty of closing. Many buyers are taking advantage of Covid uncertainties to re-trade deals because of financing issues, or using quality of earnings reports to justify price adjustments. Financing is fluid as lenders and capital sources hesitate to commit if uncertainties persist. Given their knowledge of lenders and the franchise and multi-unit lending landscape, industry advisory firms can help access and determine deal financing certainty.
When assessing the current state of your business and what the future may hold for a buyer, it is essential to have realistic expectations on valuation. Time spent assessing valuation before marketing your business will narrow differences between sellers and buyers and should ultimately lead toward a successful outcome in the sale of your business. However, multi-unit owners coming out of Covid with continuing operational and EBITDA challenges would be advised to wait and instead focus on an operational turnaround that will yield higher cash flow and an enhanced valuation as some sense of normalcy returns. Here’s to better days ahead.
Carty Davis is a partner with C Squared Advisors, a boutique investment bank that has completed hundreds of transactions in the multi-unit franchise and restaurant space. Since 2004 he’s been an area developer for Sport Clips in North Carolina with more than 70 units. Contact him at 910-528-1931 or firstname.lastname@example.org.
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