“Opportunities to Buy Troubled Quick Serve Restaurants”		«BACK
	by Dennis L. Monroe
	from Franchise Times, February 2003 Issue

In addition, the bond rating agencies that have been actively involved in rating securitized debt (which was used extensively by QSR operators), have downgraded many of the bonds originated by securitized lenders. The confluence of workouts, downgrading of bonds (secured by QSR assets) and the lack of senior debt financing have created a significant opportunity for those buyers who have suitable funding to acquire QSR assets.

The following are six reasons why it makes sense to acquire QSR assets:

1. Many of the troubled concepts are the major national and regional hamburger QSR concepts. These concepts, though troubled, have a large, critical mass and will, in some way, continue to have a significant market share. These systems may go through a number of store closures and continued troubled situations and workouts, but survival in some form is assured, and the systems will probably emerge more efficient and profitable. The troubled scenarios set up the opportunities. For example, taking into account the real estate component of the recent Texas Pacific buyout of the Burger King system, it is apparent the buyer obtained favorable pricing. Texas Pacific bet that regardless of Burger King's present troubles, Burger King will survive as a system. We have seen the same scenario with the Hardee's system. In general, systems in decline with an indication of future stabilization provide a unique opportunity to buy low and sell at a reasonable price.

2. There are certain QSR concepts (such as Taco Bell) that have bottomed out and are on an upswing. The selling prices for these units have not necessarily recognized a full-blown upturn and therefore, can represent valuable opportunities.

3. Implicit with all the comments above, the selling multiples for the QSR segment (outside of potentially Wendy's) are historically depressed. Thus, any time you can acquire assets in the range of 2.5 to 4 times cash flow, this represents a return on investment on a non-leveraged basis of 2.5 to 4 years. I believe these multiples will stay depressed for at least the first half of 2003. We should see an upturn in prices beginning in the middle of 2003 as more private equity funds pour into this marketplace and competition increases for suitable transactions. We are already seeing some indication of upward pressure on pricing for good quality franchisee groups.

4. The regional chains have done a good job of invading what were previously national brand QSR territories. A good example of this is Culvers, an upper Midwest concept that has tackled the high-end hamburger QSR segment. Because of customer loyalty, we continue to see other regional QSR concepts like Whattaburger in the Southwest continue to attract franchisees to their systems. In most of these regional concepts I do not believe there is a tremendous upside, but there is a certain customer following that creates stability that is not dependent upon new products and glitzy advertising.

5. The overall ability to finance real estate still creates an opportunity in the QSR segment. The sale/leaseback marketplace and the attractiveness of the cap rates (lease rates on investment) charged by sale/leaseback acquirers are such that the underlying real estate of a QSR property is still a highly sought after investment. Given this fact and the lack of financing for the business asset, real estate creates opportunities for people willing to put in significant equity for the business assets and leverage or execute sale/leasebacks for the real estate. Real estate is still at a premium. Good, quality QSR sites are still in demand. As systems stabilize and bad locations close, prime sites will become more valuable.

6. There is a huge opportunity in the QSR segment for lower volume QSR chains that have niche followings. Examples of this segment are some of the sub sandwich concepts and regional Mexican concepts. These concepts can go into Class B sites and succeed with annual sales levels of $300,000 to $600,000. There are many closed QSR sites with sales volumes too low to sustain major concepts but are highly profitable for regional and lower volume concepts. We saw this type of Class B site initially in the bagel and sandwich sector, where they had breakevens in the low $300,000. As these concepts grew and opened in premier locations, in many cases such concepts were not able to increase their volumes to sustain profitability with the higher occupancy cost. Therefore, lower volume QSR concepts that can go into recycled sites previously occupied by tier one QSR concepts present a huge opportunity and should be pursued.

There are a number of significant growth opportunities within the QSR segment. Good franchisee units are underpriced because of negative system performance, and franchisors with good cash flow have low selling price multiples, thus representing a potential for strong future returns.