I’ve been mostly absent from RNS for the last several months as I worked on a multistate* deal for my employers to purchase a decent-sized package of national-brand fast-food restaurant franchises, a deal that fell through this week because the numbers got so bad so fast. So yes, I’ll be blogging more, but my eyes have been opened, big time.
Get this: these deals are usually priced in multiples of EBITDA, that is, the earnings before interest, taxes, amortization and depreciation. For non-accountants like me, all that matters is that annual EBITDA for this package at the time the sale contract was signed four months ago was roughly $X, so a sale price of 3 times EBITDA (a steal, BTW) would be $3X. Following?
So what happened while we were doing all the due diligence, licensing, and other legal crap to actually complete the sale? Well, in the last three months of 2011, yes food costs rose, but more importantly sales plummeted. I am not going to quote numbers because I can’t, but I can say the combination dropped annual EBITDA to roughly $.6X. That means that sale price of $3X was transformed to more than 5 times EBITDA, taking this from a really good deal to being some of the most overpriced restaurants in the country.
That also means much more than just “oh one year was 40% worse than the other.” It means that just this past quarter alone was SO bad that it caused that kind of drop to the annual figure for this package of stores.
Anybody afraid that Obama’s going to skate to reelection on “improving” economic numbers is deluding themselves. Wake up, folks.
* Not one of these restaurants was in California, either. For one thing, the vast majority of national class-action suits against these chains are always based in Cali, and I wouldn’t allow my employers to ever buy a restaurant in this state because of that alone.