How the Pandemic is Affecting M&As for EMUs

Just as franchisors, operators, investors and lenders have adapted to continuously changing conditions since March 2020, labor, raw materials and supply chain issues remain at the fore. concerns of all. This affects operators and stakeholders not only in evaluating their existing operations in conjunction with budgeting and planning for 2022, but also in evaluating new opportunities for generic growth and acquisitions.

Operators, investors, and lenders pay attention to brands that are doing well, operators that are outperforming their peers, and the availability of capital. Now, with heightened concerns and a new infection risk from the omicron variant, the industry realizes that Covid and the surrounding virus-related uncertainty will continue to factor into business and acquisition planning. for a certain time. Nonetheless, M&A activity over the past year has been robust, with bigger and stronger brands and operators continuing to buy out competitors and/or other franchisees.

Like other changes, such as the explosion in food delivery, which apparently evolved from the pandemic, mergers and acquisitions, and broader industry consolidation trends within the unit space multiples were already in motion before the onset of Covid. And while the pandemic may not have been the direct cause of these changes, it has certainly accelerated much of the M&A and consolidation activity the industry has seen over the past year and that the industry will continue to see in the future. The main consolidation factors include:

Aging franchise systems. These are long-established legacy brands with aging franchise bases looking to transition their businesses.

Increased business complexity. The franchise and multi-unit space has grown increasingly complex and challenging with no signs of slowing down. Big brands and operators with resources in accounting, HR, operations, training, marketing and development are better able to handle a complex operational environment.

Increased capital requirements/availability. Capital is more readily available and on better terms for major brands and operators. Banks and other providers of capital believe that the larger an operator, the lower the risk, and will generally support big brands and franchisees with remodeling and expansion requirements, as well as acquisitions.

Involvement of the franchisor. Franchisors are increasingly involved in driving and steering franchisee-to-franchisee transactions, favoring larger, well-capitalized operators who wish to develop markets and expand stores, and influencing buyer pools.

High-Level Perspectives

While the main drivers of consolidation were already in motion before Covid, there is no doubt that the pandemic has influenced and accelerated consolidation trends at the macro level. The multi-unit franchise space has actually gone through three economic cycles over the past year. During this period, there have been winners and losers in different segments, geographies, brands and operators. Some brands and operators weathered the early waves of Covid, buoyed in part by PPP loans and other relief that provided the cash needed to stay in business. Others have thrived, especially those with strong digital platforms, multiple revenue channels, and a cost-effective offsite service model (e.g., drive-thru window, curbside delivery, or drop-off delivery). a third).

The first waves of the pandemic were followed by what was one of the most critical labor shortages in recent memory, forcing operators to modify operations, reduce store hours or even to close completely on certain days. In response, the industry as a whole was forced to raise wages and provide additional incentives to attract and retain employees.

And, just as operators try to manage labor shortages, the restaurant industry has been hit by unprecedented increases in product and product prices caused by inflation and supply chain issues. ‘supply. To counter rising food and labor costs and maintain profitability, the industry was forced to respond with significant price increases to limit the deterioration of margins.

These macroeconomic challenges have tested the resolve of many operators and franchisees. For some, their employees and their teams are tired. The rapidly changing operating environment over the past year and related pressures and demands have caused some owners to rethink their release schedule. Additionally, as brands increasingly push for new developments, they are pressuring franchisees to increase the number of units and aggressively push for image and facility upgrades.

While many improvements are needed as brands seek to adapt to a new competitive environment where convenience and experience are paramount, for franchisees considering a sale, these increased capital needs may ultimately cause them to remove. On the other hand, the groups which have the capital and which have the capacity and the will to develop gain the favors of the franchisors, who in turn accompany their growth and their consolidation.

In addition to brands and operators, many investors in multi-unit businesses are reassessing their timelines, growth goals, and liquidity alternatives. Many franchises and multi-unit businesses have multiple owners with different ages, risk tolerance, and future prospects. In most cases, the pandemic has multiplied conversations — and often divisions — about growth, timing of cash, and more.

While no one can say for sure what the future holds, it is safe to assume that the consolidation trends that everyone has seen accelerating over the past year will continue across the board.

Carty Davis is a partner of C Squared Advisors, a boutique investment bank that has completed hundreds of multi-unit franchise and restaurant transactions. Since 2004, he has been an area developer for Sport Clips in North Carolina with over 70 units. Contact him at 910-528-1931 or [email protected]

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