Mar 15, 2021 | Insights

Highlights from Franchise Finance Report

Q&A with Doug McKenzie, Managing Director Midcap Financial 

What lessons as a lender did you learn from 2020?

  • Lenders have learned that the quick delivery of government stimulus and liquidity – in the form of PPP checks or other – can make the difference.
  • Inelastic demand for QSR translates into a very resilient asset class.
  • The more diversified your sales channel mix, the better.

How should lenders & operators prepare for a “black swan” event?

  • You cannot predict a black swan, but you can prepare. The common denominator to survive for those industries adversely impacted will be ample liquidity and a nimble response. Rigid physical, IT, advertising, supply chain, labor, financing, and/or sales channel infrastructure won’t work.
  • Black swans are severe and have lengthy duration. Either lower leverage or conversely higher cash balances are key. Perhaps a rule of thumb would be to keep 2.5x payroll in cash which is the formula that PPP was based upon.

How do we normalize for valuations?

  • QSR M&A deals are benefitting from not just record high EBITDA but also from record high multiples. Private equity and family offices are able to capitalize on this trend.
  • At this point it is too early to normalize for FSR valuations. In some cases, buyers are offering low-ball bids but many owners are choosing to wait it out if they can. The post-vaccine universe will be a better indicator.

How have the collateral values for larger footprint QSR stores been affected given a diminished appeal for dine-in currently?

  • QSR enterprise values are at an all-time high and lenders are mostly focused on cash flow as opposed to hard collateral values. With sales increases comes a relatively-speaking reduced fixed cost base which improves metrics to lenders’ benefit. Therefore lenders are unlikely to be concerned about a lower QSR dine-in mix especially as dine-in sales are likely to return.
  • In any case, while there won’t be a franchisee exodus from existing locations for multiple reasons, new build prototypes are likely to reflect smaller footprints going forward.

RR’s Franchise Finance Report Highlights

Franchise Finance & 2H20 Valuation Report Outline

  • RR’s Finance & Valuation report is based on survey responses (equally weighted) from 50 finance companies including traditional cash flow lenders, sale leaseback companies, SBA lenders and equipment finance companies.
  • Report highlights: (1) 2020 traditional restaurant financing volume of $7.9 billion represented a -24% y/y decrease, reflecting diminished financing demand driven by government COVID-19 restrictions; (2) 61% of financiers expect to increase 2021 originations resulting in an expected $1.5 billion (+18% y/y) increase to $9.3 billion; (3) 2020 loan portfolio balance decreased by -5.0% to $55.7 billion as lower net new originations were not enough to off-set principal repayments; (4) loan portfolio default rates depend on FSR exposure which fortunately is limited; (5) leverage underwriting ratios have tightened considerably – especially for FSR; (6) 2H:20 valuation survey results indicate a broad-based improvement in franchisee EBITDA multiples; (7) the 2H:20 public restaurant company valuation multiple doubled on a strong rebound in stock prices in anticipation of normalizing EBITDA levels; (8) cap rates for single-tenant net-leased restaurant properties increased slightly for QSR and held steady for FSR on limited transaction volume.

SBA $1B+ Chain Restaurant Loan Database

  • The SBA remains a very important source of funding for new franchisees, some of whom will become the multi-unit operators of tomorrow.
  • RR’s SBA Lending Database provides 11 years of data (2010 – YTD Sep. 2020) covering 7,200 loans for 41 $1B+ Restaurant Chains.
  • Data includes total annual originations, estimated portfolio balances, average loan size, interest rates (7a only), and charge offs for both the 7(a) and 504 programs.


Panera – RR’s Executive Summary

Panera is the 2nd largest fast casual player with a well-established cafe-bakery positioning around a menu featuring fresh/healthful ingredients, “foodie offers” and seasonal options/flavors. The brand seeks to reposition the conversation from around diets (and what you can’t have) to discussions about wellness food you should have (getting to “yes”) with “food that tastes good & is good for you”. Its ongoing menu evolution includes the addition of: improved breakfast offerings; “hearty” dinner options; non-carbonated and moderately sweetened beverage choices; and an upgraded coffee/espresso platform consistent with its parent company (JAB holdings) portfolio of specialty coffee chains. The goal is to expand beyond its core lunch daypart with menu items better suited for breakfast & dinner. To this end, its new flatbread pizza rollout helps address dinner and is well suited to a post-lockdown world. An improved value equation includes its: $5.99 Panera Duets on the You Pick 2 platform; new menu offerings priced under $10; and a $8.99/month unlimited coffee & tea subscription program. Notably, the industry’s largest loyalty program (MyPanera) drives 50%+ of transactions, generating double the frequency of non-member customers. Even though Panera is well known as a sit-down chain providing a 3rd place oasis, its substantial E-commerce sales mix is driven by Rapid Pick-Up orders and delivery which includes an in-house program to a limited extent. Access could further benefit from a new prototype (possible 3Q:21 intro) featuring smaller cafes and seating areas, double drive-thru lanes, external rapid pickup access counters and designated curbside pickup areas. All-the-same, post-lockdown sales initially declined by -50%, reflecting Panera’s predominant sit-down model and it is notable that the chain is challenged in a post-lockdown world by a system in which only 39% of its locations offer a drive-thru. Further, historical comps already had been trending down as Panera was challenged by a healthy, quality upscale positioning which may appeal to its core customers but not so much to value seeking consumers at the margin. A near system low EBITDAR margin reflects: post-lockdown sales challenges; high labor costs; relatively high ad costs; and elevated “other” operating expenses associated with its forays into digital, off-premise and delivery. In conclusion, Panera is well positioned for the long-term given: its solid execution around a healthy halo; returning consumer demand for dine-in; and steady improvements in value, digital and access.

Remodel Report

Report Highlights

Remodel data and analysis on 50+ national chains, including: (1) remodel progress/system condition; (2) investment costs; (3) post remodel sales increases; (4) franchisor remodel incentives; and (5) program scope.


Remodel programs have been largely deferred for a year or more and many are in the process of being redesigned to better accommodate the dramatic changes that have occurred in the restaurant industry over the last year. The focus of remodels has shifted from improving the dine-in experience to bolstering off-premise business with increased investments in separate pick-up areas, second make lines dedicated to online & delivery orders, outdoor patios, double drive-thrus to alleviate capacity constraints as well as technology including digital menu boards (to facilitate app integration & suggestive selling) and contactless payment options. To this end, 14 of the 55 chains recently introduced or are testing new programs and more expected to follow suit. We expect remodel progress to resume during 2021 for concepts with normalized sales.

Click here for Remodel Report Outline


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