Archived postings from May, 2008...

Two Singles And No Cheese.

Posted: Thu, May 29, 2008 at 1:57pm (CDT)

It all comes back to the basics. Serve customers the best-tasting food at a good value in a clean, comfortable restaurant, and they'll keep coming back. –Dave Thomas, deceased founder of Wendy's

An autographed picture of Dave Thomas hangs in a hallway of the Restaurant Finance Monitor's global headquarters in Minneapolis, Minnesota. Attached to Dave's picture is a letter from Dave penned to your friendly, restaurant finance newsletter provocateur.

Dave's picture and note came to mind recently when I was asked to comment on the pending Arby's takeover of Wendy's. One wag said that Dave Thomas must be "turning in his grave" over the recent deal whereby corporate activist Nelson's Peltz's smaller Triarc/Arby's Restaurant Group will acquire the larger Wendy's International for Triarc stock.  Thomas's daughter, Pam Farber, herself a franchisee, was quoted as saying it was a "very sad day for Wendy's" and that if her father was alive, "he wouldn't be amused." ...continue reading.

R&R Capital Completes Sale/Leasebacks for Applebee's and Coco's and Carrow's Franchisees

Posted: Wed, May 21, 2008 at 10:54am (CDT)

Colby Haugness of R&R Capital represented Apple American Group in its completion of a sale/leaseback of 11 of its restaurants to a California investor for an undisclosed amount. The transaction had a 38-day escrow. 

The Catalina Restaurant Group, operating under Coco's and Carrow's, completed a four-store sale/leaseback to R&R Capital & Investor for $7.55 million. All stores were located in the Southern California region. Randy Rivera of R&R Capital was able to identify and provide the seller with competitive pricing for the well-located California real estate. 

Based in San Diego, California, R&R Capital is a private equity firm that specializes in restaurant and retail sale/leaseback financing. For more information, contact Colby Haugness, partner at 858-200-9410 or by e-mail Colby@RR-Capital.com, or Randy Rivera, partner at 858-200-9410 or by e-mail RRivera@RR-Capital.com. ...continue reading.

Finance Exec Turns Restaurant Operator

Posted: Wed, May 21, 2008 at 10:53am (CDT)

As Vipul Patel worked with entrepreneurs for the last 20 years, he couldn't help but aspire to owning his own business one day. And that day has come.

"Part of the driving force behind this was that I've worked with entrepreneurs my whole career, and saw the reward of working for yourself," he said. "I decided it was time; life is too short."

And so the former finance company executive bought a 20-year-old restaurant concept, US Cafe, through his acquisition entity, US Cafe Investments, Inc., six months ago, with plans on growing the business through company-owned, and someday franchised, locations.

Patel understands the financial side of the business–his resume includes working at some of the heavy hitters in the sector: SunTrust Bank, CNL (later Trustreet), and GE Capital Solutions, Franchise Finance. 

Now he's taken what he's learned from all those customers he served over the years and is working on fine-tuning the two US Cafe locations in Smyrna, Georgia. The concept is a fast casual hamburger restaurant, with a large menu and a reputation for quality–"fresh cut fries and hamburgers hand rolled every morning," says Patel. "It has a great following in the marketplace, and it connects with the consumer."

First steps after purchasing the company six months ago were to update the financial controls. 

"We needed to manage our labor and our products better," he said. "We know what's selling and what isn't selling. That wasn't tracked before." And despite warnings from industry pundits, Patel raised prices three to five percent in April. He was worried, but because commodity prices are making front-page news, his customers seem to understand. Average ticket price for lunch is $9.00; about $11.00 for dinner.

Next he'll refresh the restaurants: The flagship is the larger of the two with about 3,500 square feet. The second one is an "express" location and is inline with 1,200 square feet. Once he has the larger store updated, it will be the prototype of stores to come–in fact, he will have one to two more up and running by the end of the year, says Patel, and two or three more open next year. He financed the acquisition through bank financing and has recapitalized the debt. Patel says the company has sufficient capital in the near term to grow, for at least the next 2-1/2 years.

Growth will be in the Atlanta area primarily. Once that is filled out, "and we have a track record, we can look at it as a franchise vehicle," he says. "I want to make sure it makes financial sense for the franchisee; that the economics work."

The managing partner with the previous ownership, Howard Garnel, has stayed on as director of operations. "He has a good track record," says Patel. "He'll help us get to the next level, and then help build the leadership team from there."

Each day presents challenges, but "this is fun," he says, "because people love the food–and that's an enjoyable thing for me right now."

While Patel misses restaurant finance–"I loved the customer contact," he says–his former customers had the opportunity to "build their legacy." Now it's his turn. 

You can reach Vipul Patel, CEO, US Cafe Investments, at (678) 761-2328, or go to www.uscafe.us.com to learn more about US Cafe. ...continue reading.

GE Capital Solutions to Purchase CitiCapital

Posted: Wed, May 21, 2008 at 10:51am (CDT)

GE Capital Solutions, Franchise Finance made the announcement in April, amid an ever-tightening credit market that they will purchase competitor CitiCapital. Through the transaction, GE will acquire seven CitiCapital divisions, including their franchise finance group. The deal adds about $13.4 billion in assets to GE Capital's Commercial Finance business.

GE folded into its business Merrill Lynch's franchise group earlier this year. Some in the industry are more interested in how the Citi purchase will affect the restaurant borrower and the competitive landscape, given that this means one more capital source, in a very tight market already, will be eliminated.

Bill McPherson, managing director of McPherson Commercial Capital, who packages transactions and has worked with GE often in the past, says that fewer choices in the marketplace is never good because it can affect availability and pricing. At the same time, he says, "GE has been pretty good about not going out of their way to charge higher prices. If the deal meets their criteria, they seem to price pretty fairly."

Years ago when he originated restaurant loans for Captec Financial, a competitor, McPherson said, "I can remember being in competitive situations with GE and we'd look at the deal and say it should be priced at a certain level, and they would be underneath that."

One large, multi-unit operator lamented the purchase because Citi had "the cheapest capital out there," he said.

McPherson doesn't know if GE will continue Citi's pricing, but "the reality is that the impact of (losing) Citi is very localized. They served some pretty distinct systems. The Citi group tended to focus on some very select, top-tier chains."

And while GE seems to continue to buy up competitors, at the rate of at least one a year, some speculate that eventually even GE could reach their concentration limit with franchise loans–a big part of lending IS risk management, after all, said one broker–and that could give way to opportunity for other lenders.

But for now, things will remain tight for borrowers overall, says Rob Hunziker, principal with Advance Restaurant Sales, a company that focuses on multi-unit restaurant company mergers and acquisitions.

"I think that GE and other lenders are attempting to only write loans that they are extremely confident will be repaid in a timely manner," he says.  "Because of the serious concerns about higher food and labor costs compounded by lower customer counts, even sophisticated lenders are scared to death about writing any restaurant company loans, let alone conservative ones. The few loans that are being written (in the sector) have huge risk premiums over the comparable bond rates." 

This will subside when non-performing loan percentages "abate," says Hunziker. At that time, "lenders will begin to step up and aggressively lend again. At that point, new lenders will likely emerge as they see the improving returns in the industry. The risk premiums will drop as the market conditions heat up again."

Said one M&A specialist, "Right now, its all about relationships, and the operators who have relationships with local banks will be better off than those who are just coming in. A lot of lenders are working with people they are already comfortable with."

Financing chicken fingers

That being said, as far as the Monitor can see, GE's pipeline looks active. The company has provided a financing package to Louisiana-based Raising Cane's Chicken Fingers of $29.5 million. The deal includes a $26 million term loan and a $3.5 million revolving line of credit. The financing will free up growth and working capital, allowing the business to grow. 

GE Capital Solutions, Franchise Finance offers financing for restaurants, such as equipment financing, funds to purchase real estate, capital for new construction or remodels, acquisition financing and refinancing packages. For more information, call 1-866-438-4333. ...continue reading.