Restaurant Franchise Financing Rebounds to Pre-Pandemic Levels Says New Report

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The pandemic has offered “valuable learning experiences that are helping them improve efficiency, enhance customer service, and economize,” said the report.

As the restaurant industry struggles amid the global pandemic, there is a bit of welcome news today with a report announcing that financing for restaurant franchise operators in the large and middle-tier segments has mostly bounced back to what it had been before the onset of the COVID-19 pandemic.

“We see loan terms and pricing that are as aggressive as they were prior to the full-blown health crisis that came into view in late-March,” said Brian Geraghty, head of Restaurant Finance at Mitsubishi UFJ Financial Group, adding that banks have reverted to accepting a higher leverage profile among borrowers for financing.

“We see franchisees’ rent-adjusted leverage ratios back to 5.75 after tightening by roughly three-quarters of a turn—to 5.0—during the spring of 2020.”

Rent adjusted leveraged (RAL), also known as lease-adjusted leverage, is the ratio of debt to EBITDAR (or earnings before interest, taxes, depreciation, amortization and rent costs). Restaurant lenders evaluate the RAL of their borrowers, many of which do not own their properties but rather lease them.

Rise in M&A and franchise purchases

Geraghty pointed to recent momentum in merger-and-acquisition (M&A) activity in the quick-service and fast-casual market categories of the restaurant industry.

Quick-service and fast-casual are defined as establishments offering quick, inexpensive dining with limited preparation and customization, no seating hosts, and no alcoholic beverages.

“Recent restaurant acquisitions in these market categories highlight the substantial amount of readily available capital for deployment,” said Geraghty.

“Financial buyers, in particular, see investment opportunities in large and mid-sized restaurants that are surviving the pandemic, proving the resilience of their business models, and able to provide portfolio diversification as consumer-facing outfits.”

Geraghty also noted an upswing in the valuations and frequency at which franchise establishments are changing hands.

“In the mid-sized segment, we see a greater number of franchisee purchases at high prices, which indicate to us the desire of owners to enter into this space or expand their foothold.”

Lessons learned from the pandemic

Geraghty added that restaurants have emerged from the pandemic with valuable learning experiences that are helping them improve efficiency, enhance customer service, and economize.

“The changing economics of quick-service and fast-casual restaurants have led many to shift their focus to drive-thru and take-out offerings, and to invest in the technological infrastructure that enables them to field online orders. All the same, casual-dining, family-dining, and fine-dining establishments, which rely more on table service, are facing greater challenges.”

MUFG is one of the world’s largest financial institutions by assets, with approximately $3.3 trillion.

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