Multi-Unit Franchisee Magazine Issue II, 2013 | Page 80

ExitStrategies
By Dean Zuccarello

Unique Opportunity—Act Today!
2013 is the ideal time to refinance, remodel, buy, or sell

W

e 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.”
Macroeconomic framework
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 q uarrels 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.
Capital market observations
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 dra-

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Multi-Unit Franchisee Is s ue II, 2013

matically, 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.

Opportunities
So just what kinds of opportunities does
this environment create for the franchise
operator? Let’s address three:
1) Mergers, acquisitions, divestitures. The environment has created a
perfect storm for transactions. We’ve
mentioned the abundance of credit in
the markets, and the new lenders creating
competition. In addition, there are many
motivated sellers, desirous to move on
for any number of reasons: retirement,
not wanting to weather another recession, concern over rising healthcare and
commodity costs. And there are many
motivated buyers: private equity, consolidation into mega-operator formats,
and growth-focused operators looking

to take advantage of low rates.
2) Refinancing. Similarly, there is an
abundance of credit available today for
refinancing. The same new lenders are
building their businesses, and the established lenders are fighting back. Credit
terms have eased, including rates, equity
requirements, leverage ratios, prepayment penalties, and elimination of certain
covenants. Financing is also more readily available for remodel and reimaging
projects, new unit construction, and rebranding of closed units.
3) Dividend recapitalizations. Finally, there is more credit available for
dividend recapitalizations. Performing
companies with debt capacity are able to
refinance and monetize equity. By making a payment
to shareholders, companies
can allow shareholders to
realize value without selling any of their stake.
Action plan
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:
• Growth strategy. If you are focused
on growth, put yourself in a position to
acquire bolt-on acquisitions, such as re-