| “Great
Opportunities in the Multi-Unit Retail Sector” |
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by Dennis L. Monroe |
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from April 2002 Issue - Indus Business Journal |
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The multi-unit retail sector, particularly franchise retail, has taken a bum rap over the last two or three years. Part of the reason for this perception has been the collapse of the specialty lender community that once provided dollars to fuel growth. The multi-unit retail sector may be defined as retailers who have multiple locations that may or may not be franchised. Examples of the multi-unit retail sector are restaurants, hotels and the auto aftermarket. This sector has always been a volatile sector. For years franchising has brought some certainty to this sector by creating definable concepts and a franchisor-administrated safety net for the operator/franchisee.
A number of specialty finance companies provided financing to this industry during the 1990s. These companies provided financing to the large national brands. They provided financing to the quick service restaurant and casual dining segments dominated by such well known names as McDonalds, Burger King, Wendy's, Applebee's, and Chili's. These lenders were able to package and securitize the loans through private placement bond offerings to institutional investors.
Unfortunately, there have been a number of well-publicized bankruptcies, spin-offs and consolidations, and in general, there has been a slow down in the industry until the last two quarters. But this industry, much like the stock market, seems to be ahead of the overall economic upturn. It appears the major shake-ups, retooling and restructuring of the financial aspects of this industry have all led to the beginning of a significant recovery. Therefore, it is now time for the investor, business operator and lender community to reconsider investment in the multi-unit retail sector.
Below are eight reasons why an investor should consider investing in the multi-unit retail sector:
1. Large Sector. The multi-unit retail sector is very large. Depending on how the sector is segmented in the economy, there are approximately 1,000,000 multi-unit retail locations in the United States. In addition, the multi-unit retail sector represents a disportionally large percentage of the retail sector. Since the retail sector drives our economy and cannot be ignored, it will continue to exist as long as there are consumers.
2. Reasonable Values. The downturn in the multi-unit retail sector has resulted in lower values. Because of this factor, a wonderful opportunity is presented to lenders and investors because the values are now at multiples of two to four times cash flow. Returns shown from these types of multiples are far in excess of what can be obtained from more speculative aspects of the investment community.
3. Down Point. As stated above, the industry seems to be at its low point and is just beginning an up-swing. It is always best to buy low and sell high, and now is the time to look at the current state of the industry.
4. The Bad Apples Are Gone. Most of the bad operators, over leveraged franchisees, and consolidators who have grown too fast have been either restructured or culled out of multi-unit systems. Most systems now are positioned for immediate growth and/or future growth after retooling.
5. Balance Sheet Problems. The problems in this industry have not been a result of bad concepts or operations but are balance sheet related with over-leveraged operators or concept holders not able to withstand downturns in sales. The underlying fundamental concepts have remained strong. Fixing a balance sheet is much easier than developing a viable concept.
6. Return On Investment. The present return on investments afforded investors and lenders in this industry is extremely robust. The multi-unit lender community has always been able to charge higher-than-market rates. Even though current interest rates are historically low, borrowers in this sector have always been willing to pay above-market rates. This above-market rate provides a unique opportunity to lenders and a greater opportunity for their return on investments because of the multiples discussed above. Leverage is still available; prices are down; and thus, the return on investments is up.
7. Cash Flow. The multi-unit retail sector is a definable and predictable cash flow business. Sales may go up or down, but cash continues to come in. The receivables and creditor concerns of other industries do not exist in most retail operations. Cash businesses are very attractive, particularly in a volatile economy.
8. Safety Net. One unique factor about multi-unit retail is that since much of it is dominated by franchising, the franchisee and investor are provided a safety net. Even though franchising is no panacea to success, it is a proven system and usually provides a safety net once the concept has been tested as viable over a number of years. Large franchise systems usually have enough resources (both at the franchisor and franchisee level) to prevent an overall meltdown of the system.
In summary, even though the multi-unit retail sector has seen tough times, it is definitely experiencing a significant upturn. Because of the compelling reasons provided above, business people, operators, investors and lenders are now beginning to return to this sector. The multi-unit retail sector provides a unique opportunity with returns that are historically sound and trustworthy and is not necessarily subject to the ups and downs evidenced by much of the high tech sector. Look around you and invest in a good multi-unit retail opportunity.
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