We are experiencing a rare alignment of stars in the franchise finance world right now, and it's essential that operators act quickly to take advantage of this situation, before the party's over. To understand the current financing environment, let's take a look at the economic "big picture."
Signals for overall economic recovery continue to be mixed. Households are deleveraging: the ratio of household debt service to income has reached a 30-year low. The housing market is on the rebound: inventory is down, prices are rising, and financing is cheap. Yet the latest figures show a negative GDP for the U.S. in the fourth quarter of 2012, and consumer confidence has begun to wane. Jobs reports seem to swing up and down. And as the Fed injects liquidity into the monetary system, the capital markets improve, creating a more favorable lending environment.
Budget quarrels in Washington, D.C., reached a short-term reprieve, but are looming once again. We expect battles over budget cuts and debt ceilings, taxes, sequestration, and Affordable Care Act implementation to continue over the next few years.
The Fed continues to drive down interest rates by buying mortgage, asset, and Treasury securities. Lenders are expanding their underwriting criteria as improved balance sheets and competition spur lending activity. Interest rates are at 20-year lows. Junior capital is now widely available again. The number of senior lenders in the franchise space has increased dramatically, with at least seven new national lenders vying for business. Private equity and family offices have a strong appetite for franchised operations, and have a lot of pent-up equity capital to deploy.
One result created by this is an all-time high of new debt issued by companies. Rates are so low that every company is jumping on the debt-issuance bandwagon. In fact, at the beginning of 2013, the average yield for U.S. high-yield (aka "junk") bonds was below 6 percent for the first time ever. Prices for bonds themselves, which move inversely with interest rates, are at historically high levels. It's a great time to be a borrower, but not so much to be the ultimate bondholder.
So just what kinds of opportunities does this environment create for the franchise operator? Let's address three:
So, what's the takeaway? Simple: it's time to act. We are currently in one of the most favorable debt financing environments in recent history. For sellers, valuation multiples are strong, pent-up equity is waiting to be deployed, buyers are looking to grow and build empires, and there is an abundance of financing. For buyers, there are many sellers on the market, franchisors are selling company stores, equity partners are available for the right operators, and there is abundant financing.
But this won't last forever! While we expect this favorable environment to be in place most of 2013, it will not last. Now is the time to create and execute on your action plan. Depending on your strategy, consider the following:
The franchise finance environment created by this perfect storm of events is as common as a snowstorm in Miami. We won't see this again for a long time, and this window will not be open for long. Take advantage of this to improve your financial position by acting now. You'll look back on this time and be pleased that you did.
Dean Zuccarello, CEO and founder of The Cypress Group, has more than 30 years of financial and transactional experience in mergers, acquisitions, divestitures, strategic planning, and financing in the restaurant industry. The Cypress Group is a privately owned investment bank and advisory services firm focused exclusively on the multi-unit and franchise business for more than 22 years. Contact him at 303-680-4141 or email@example.com.
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