Post-pandemic requirements for buying or selling franchise businesses
Editor’s Note: This article first appeared in the June / July issue of Independent Joe, the magazine for independent franchise owners Dunkin ‘Donuts (DDIFO) and is reprinted with permission of the author and magazine. While this was written for Dunkin ‘franchisees, the lessons and advice apply to anyone looking to buy or sell a franchise business during Covid.
The coronavirus pandemic has had a profound impact on the restaurant industry. By the start of the fourth quarter of 2020, more than 1.4 million jobs in franchise businesses had been lost and more than 32,000 franchise businesses had closed. Now, with the opening of states and a gradual return to the status quo, we are cautiously approaching the light at the end of the tunnel. But the return to “normal” is still pushing many operators to consider their future as Dunkin ‘franchisees.
Those considering leaving the system cite the hardships in the job market, the lack of any formal succession plan, the intimidating capital outlays that will be needed to complete the impending renovations, or simply the fatigue from the stress of the pandemic. as reasons to sell. At the same time, less risk averse franchisees keen to expand their existing networks through acquisitions see an abundance of opportunities. Corn Warning: The pandemic has created a number of new pitfalls and hurdles that potential buyers face when committing to purchasing additional restaurants. Let’s look at four of them here.
Franchisees find it difficult to determine the true value of the restaurants they wish to sell because the pandemic has so severely affected their 2020 finances. Some sellers will seek to treat 2020 as an anomaly and implement a mixed average methodology, in which 2019 pre-Covid financial data is taken into account when evaluating their networks. But this strategy carries a risk. There can be no assurance that their store’s performance will return to 2019 levels; thus, the resulting valuation may be artificially inflated, causing the buyer to overpay for restaurants.
Within Dunkin ‘, where 2021’s system-wide performance is comparable to 2020, many sellers find it more beneficial to use the most typical sales of the past 12 months as a benchmark for the evaluation. In such circumstances, buyers should be cautious and recognize that 2021 sales figures are likely to be improved by: 1) an increase in the average product price, and 2) stimulus checks, which were rolled out as part of the CARES law.
The contact-light drive-thru model has become the savior of quick-service restaurants during the pandemic. Within Dunkin ‘, non-drive-thru restaurants have been the hardest hit and make up the vast majority of closed stores across the system. On the contrary, most Dunkins’ drive-thru stores have shown remarkable resilience throughout the pandemic and continue to outperform into 2021. The net effect of this reality is that the Dunkins without the drive-thru are a lot. more difficult to market and sell. In fact, including non-drive-thru restaurants in a Dunkin ‘network can negatively affect the valuation when a buyer is forced to consider the costs of closing and eventual relocation of such sites.
3) Covid deferred rents
At the start of the pandemic, many Dunkin ‘franchisees were able to negotiate rent deferrals with their landlords. In some cases, the deferred rent had to be repaid as “additional rent” for the remainder of the lease term. For a buyer, it is essential to require the seller to repay all such deferred rents on or before the closing date. Otherwise, the buyer could be charged additional rent payments after closing, although they did not receive any of the benefits of the deferral.
4) Funding of the CARES law
The two most common forms of CARES Act funding that Dunkin owners took advantage of during the pandemic were the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL).
PPP funds have taken the form of an unsecured loan which, if used for its intended purpose, can ultimately be canceled by the SBA. On October 2, 2020, the SBA issued a notice, setting out the procedures required for changes in ownership of an entity that had received PPP funds. Among the mandates is the requirement that the seller of any business with unsecured PPP loans obtain transaction consent from their PPP lender. Consent involves a two-step process: 1) the borrower must request cancellation of all outstanding PPP loans; and 2) the borrower must enter into an agreement with its PPP lender to lock in the total amount of all outstanding PPP loans until the forgiveness is granted. Consequently, any potential purchaser of a Dunkin ‘network should make the closing of the transaction conditional on the seller obtaining all necessary consents from third parties, including that of the PPP lender.
EIDL loans have been made directly by the SBA to many Dunkin owners. Unlike PPP funds, EIDL loans over $ 25,000 were secured by general liens on all business assets of the borrower. Thus, prior to any closing of a Dunkin ‘acquisition, the seller should be required to obtain a repayment letter from the SBA, including the full amount of payment required to satisfy the loan, and a commitment to terminate the lien upon receipt. such payment.
Forbes The magazine recently cited IFA data predicting that 2021 will bring the strongest annual franchise growth on record. We’ll have to see if that comes to fruition, but many units are already changing owners. As such, it’s more important than ever that franchisees adhere to the advice of their lawyers.
David S. Paris is a founding partner of Paris Ackerman LLP, a transactional law firm specializing in franchising, licensing and distribution, and commercial real estate. You can reach him at [email protected]