An expert panel at Restaurant Finance Monitor’s Restaurant, Finance & Development Conference in Las Vegas advised that structural shifts in the restaurant industry mean that many multi-unit restaurant franchisees need to shore up their balance sheets and revisit their business models.

“Most operators are encouraged by the continuing strength of the economy and consumer spending, as well as cost-stabilization in areas like labor and commodities,” Joe McKeska, a Chicago-based principal at A&G Real Estate Partners and leader of the firm’s restaurant industry practice, said. “However, operating cash flow continues to be impacted by the hangover effects from certain post-pandemic challenges, and tighter financial conditions have made it harder to invest capital and drive growth.”

During the panel discussion and Q&A (“Strengthening Real Estate Portfolios and Balance Sheets in a Challenging Business Environment”), experts in real estate, banking, restructuring, M&A and corporate strategy offered tips on how to thrive in today’s environment, with an emphasis on collaborating with lenders, franchisors and landlords.

In addition to McKeska, who served as the moderator, the panelists were:

• Josh Acheatel, managing principal at Monarch Alternative Capital
• Dan Dooley, principal and CEO of Chicago-based turnaround and restructuring firm MorrisAnderson
• Robert Hersch, senior managing director with Austin, TX-based Mastodon Ventures

In kicking off the discussion, Dooley described today’s changed calculus, including trends like demographic changes, the work-from-home model, the labor/skilled manager shortage, surging delivery and takeout orders, and declining traffic around malls and central business districts.

“The whole landscape in the restaurant industry has been permanently changed,” Dooley said. “What that means is, a restaurant that might have been successful yesterday may not be successful today.”

Panelists cited the high cost of capital and pointed to its undercutting effects on profitability, especially now that benefits from the Paycheck Protection Program and the post-COVID demand surge have run their course.

Construction costs also have surged, the panelists noted, and yet many operators need to spend money to reinvent themselves and remodel their stores.

Restructuring real estate — everything from selling assets to renegotiating leases and shuttering money-losing stores — can strengthen franchisees’ balance sheet and advance their adaptive strategies, the panelists said.

A veteran M&A advisor, Hersch noted that today’s higher interest rates are, predictably, translating into lower levered returns on acquisitions and fewer transactions. In this environment, sellers need to be smart and realistic.

“Often, what you have is a disconnect between buyers and sellers,” Hersch said. “The sellers might be remembering those 2022 peak sales resulting from pent-up demand, while buyers are looking at a new reset.”

With restaurant engagements over the past few years that have included NPC International, Sunrise Restaurants, TOMs King and Summit Restaurants, McKeska pointed to the benefits of right-sizing portfolios. He added, however, that franchisors often strongly resist their franchisees’ plans to close money-losing stores for fear of losing out on royalties and other financial incentives.

Bringing in third-party real estate, financial and restructuring advisors can help franchisees advance these delicate negotiations, the panelists said. “It is almost impossible for the franchisee to go in solo and do that,” Dooley said. In addition, the panelists said third-party advisors can give borrowers an array of advantages in their interactions with landlords and lenders.

“That could include lower interest rates from lenders, who prefer to see clean, detailed, professionally produced presentations and also tend to favor the credibility and objectivity that are associated with third-party advisors who have long track records and a reputation in the marketplace to uphold,” McKeska said.