Multi-Unit Franchisee Magazine Issue II, 2012 | Page 80
ExitStrategies By Dean Zuccarello
Red, Yellow, or Green?
What signals are affecting your business?
W
e have made progress digging our way out of
the pit of economic meltdown we tumbled into
in 2007, but we certainly have a long way to go
before we experience the vibrant economy we
enjoyed in much of the 1990s and the early to mid-2000s. For
many, it seems like we are in a state of purgatory—not knowing
if we are heading to heaven or hell. So where does that leave
business owners today as many face critical decisions regarding exit strategies? We are finally seeing positive signs that the
window of opportunity to sell businesses is open. Will it last?
Many owners seem to be at this intersection, but also seem to
be having difficulty determining if the signal is red, yellow, or
green. Let’s take a look at our view of the signals as they relate
to various elements affecting the transaction world.
Worldwide economy
Yellow light, at least for the time being. This could turn
to red at any point. There are well-documented troubles
around the globe, and no doubt other problems that are
less visible. Turmoil in the Middle East and North Africa,
coupled with European financial stress in Portugal, Italy,
Greece, and Spain is having a significant impact on worldwide
markets. China and Brazil are still growing, but at a slower pace.
Japan’s economy faces major challenges. The list goes on.
Domestic economy
Yellow light. U.S. government spending is out of control. Deficit problems continue to accelerate with no
solution in sight. Political gridlock has created an environment where virtually no progress has been or can
be made on this issue. Consumer confidence has improved somewhat as the general population is no longer focused on an economic meltdown, but overall conditions are
far from rosy. There seems to be more acceptance of today’s
economy as the new reality. Housing seems to be reaching a
bottom and consumers have reduced their overall levels of
personal debt, although debt levels ticked up during the holiday season. Technology continues to be stable with some segments doing very well. Retail and restaurants have improved,
but consumers are cautious.
Political environment
Red light. The U.S. has become politically dysfunctional. There is strong right-versus-left sentiment, resulting in neither party being able to effectuate the
critical decisions necessary to “right the ship.” This
polarization will play a huge role in the upcoming election. The implications for business owners, such as the cost of
doing business, government regulations, personal and business
taxes, and incentives to invest, are huge. But because of the
political uncertainty, the direction of the impact on business
owners is not determinable.
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Multi-Unit Franchisee Is s ue II, 2012
Capital environment
Green light. Capital providers are actively deploying
capital. Credit parameters are more conservative (the
result of tighter underwriting criteria), but lending is
occurring and debt availability is improving. Equity
markets are liquid and have relaxed return requirements,
resulting in more favorably priced equity alternatives than we
have seen in quite some time.
Deal environment
Green light. While the M&A markets have not completely forgotten the recent bottom of the economy,
investors have largely moved on and are focused on the
future. The marketplace is supporting new deal activity, especially non-distressed, quality companies, which
have weathered the recession with positive trends. Singletenant real estate values are also improving. And cap rates are
declining because of the lack of available interest rate investment alternatives providing a reasonable return.
Brand environment
Mixed. Different brands, even in the same space, are
flashing different signals. Some top-tier, national franchised brands thrived through the recession on new
product offerings, value price points, and trade-down
traffic. Others revamped menus with solid price-point
menu items and revamped their signature products, along with
their image, as the recession drew to a close. Yet others continue to struggle and lose ground. At the same time, many upand-coming regional brands, mainly fast casual, performed very
well throughout the recession, and are showing very strong
results at present. And certain second- and third-tier concepts
continue to demonstrate excellent resiliency as they chug
through thick and thin. How the market views your business
is certainly affected by the overall performance of the brand(s)
you are associated with.
Personal situation
Mixed. Where you are personally in your business
lifecycle is also an important consideration. Some
owner/operators have thought about retirement, only
to have those thoughts dashed on the rocks of recession. But after surviving the downturn, those thoughts
are stronger than ever as they vow “never again” to experience
that. Some owners have family or longtime partners who
would like to take over the business. Other owners may see
that the performance of their business, even if improving, is
probably as strong as it’s going to be for the foreseeable future. Based on a review of your personal situation, the timing
could be ideal to monetize the equity in the business or to
diversify your risk with a partial liquidity event, sale of a market, or real estate holdings. Yet others may be new to the