OPES/BURGERFI – SHAREHOLDER MEETING TO APPROVE DEAL – MORE INFORMATON FROM FRANCHISE DISCLOSURE DOCUMENT!!
OPES announced this morning that the virtual shareholder meeting to approve this deal will take place on December 15th. Final proxy material will be filed with the SEC on December 2nd.
We have recently written two articles discussing the potential acquisition of BurgerFi by SPAC, Opes Acquisition Corp. (OPES). Our most recent article can be accessed here:
OPES/BURGERFI – WILL THIS DEAL HAPPEN ? – SHOULD THIS DEAL HAPPEN?
Our previous information was gleaned from the Investor Presentation as well as the preliminary proxy material. One of our readers was kind enough to forward to us the Franchise Disclosure Document, which provides some additional information.
We had estimated that the royalty structure includes 5.4% of “Sales Based Royalty”, a Brand Development Fee of 1.4%, and the Company was receiving Vendor Rebates of 0.45% (which was increasing the cost of goods to franchisees). That total was therefore about 7.25% to be deducted from company store level EBITDA from franchised locations. We didn’t deal with advertising requirements (below the store level expense line) because the Investor Presentation didn’t discuss it. The FDD pinpointed a Royalty Fee of 5.5%, a Brand Develpment Fee of 1.5%, plus a Local Advertising requirement of 2%, and POS System Maintenance and Support of $6,000 Annually or about 0.4%. There are lots of other charges to franchisees such as “On-Site Training” of $450 per trainer per day, 1.5% interest per month on overdue royalties, On-Line Ordering of $129/month per store, Gift Cards/Loyalty Program of $1500 annually. Setting aside the “nickel and dime” charges: The Royalties (5.5%), Brand Development (1.5%), Vendor Rebate (0.45% cost to franchisees), Local Advertising (2%) and POS Support (0.4%) add up to 9.65% (below the company store level EBITDA line). That reduces the franchised store level EBITDA line from our previous 6.9% of sales to about 4.25% of sales (before depreciation and local G&A). The new store level cash return of $57k (based on the $1.345M franchise AUV) is lowered from 12.3% of the $750k buildout to only a 7.6% cash on cash return at the store level. Even if the franchise store does the 2019 company store average of $1.87M, the cash return would only be $79k or a 10.5% cash on cash return.
The FDD provided a chart (below) apparently showing how the oldest stores in the system are doing the best, as of the Y/E 12/31/19.
This chart seems to show that stores are maturing consistently with higher volumes as they age. However, here’s a bit of further illumination, as provided within the FDD. The table below will summarize the next five paragraphs.
There were 43 franchised and affiliate (company) owned restaurants open for at least 60 months, of which 9 were affiliate owned. The annual average of those 43 restaurants was $1.591M, including the affiliate average of $1.756M, so we calculate that the non-affiliate (franchised) average was $1.548M.
There were 58 franchise and affiliate (company) owned restaurants open for at least 48 months, of which 11 were affiliate owned. The annual average of those 58 restaurants was $1.499M, including the affiliate average of $1.785M, so we calculate that the non-affiliate (franchised) average was $1.432M.
There were 70 franchise and affiliate (company) owned restaurants open for at least 36 months, of which 14 were affiliate-owned. The annual average of those 70 restaurants was $1.478M, including the affiliate average of $1.775M, so we calculate that the non-affiliate (franchised) average was $1.403M.
There were 82 franchise and affiliate (company) owned restaurants open for at least 24 months of which 14 were affiliate owned. The annual average of those 82 restaurants was $1.447M, including the affiliate average of $1.775M, so we calculate that the non-affiliate (franchised) average was $1.379.
There were 92 franchise and affiliate (company) owned restaurants open for at least 12 months of which 15 were affiliate owned. The annual average of those 92 restaurants was $1.413M, including the affiliate average of $1.716M, so we calculate that the non-affiliate (franchised) average was $1.354.
So here’s another way to look at the first chart, which seemed to show pretty good progress:
You can see from this tabulation that the first chart is very heavily influenced by the oldest company stores, which have done consistent volumes north of $1.7M. It’s interesting to note that the newest company stores are doing a little worse than the five year old locations, the oldest stores very little changed for “time in grade”. Relative to the franchised locations, the volumes between the one year old and the four year old stores are very little different, only about 5% “progress” in total from the one year old class to the four year old class. Only the franchised class opened six years ago(now open for a full five years) is doing materially better than the stores opened most recently. In short: the franchised locations opened over the last five years are consistently doing about $1.35M, far below the company average, so store level margins for franchisees, burdened by royalties, etc., will be hard pressed to generate an attractive return on investment, even if they achieve the higher company volumes.
CONCLUSION:
Once again we say that the BurgerFi franchise stores scheduled to open need to do materially better than franchised stores opened over the last four years. Store level margins for franchisees are too modest unless sales volumes turn out to be materially higher than even the existing company locations. Since the historical operations don’t support what we consider aggressive projections in the Investor Presentation, we view the post-merger valuation as unattractive. SPACs are hot investment vehicles at the moment, so OPES/Burger Fi stock might do well for a while. That will not necessarily be related to the fundamentals of the situation, which will assert themselves at some point, for better or worse.
From the standpoint of potential franchisees (of any concept) that this website serves, we suggest you read every page of the FDD, as well as talk to existing franchisees, going so far as to examine their operating results (including royalties and other fees) if possible. We can’t help but note how one-sided franchising “agreements” are, predictably in favor of the franchisor. Hardly any potential franchisee, enamored as they are during the “courtship”, will hire a qualified attorney to negotiate the franchise contract, but it would be money well spent. At the least, the negotiation, if there is any, will give the prospect time to think through the next twenty years of a new “partnership”.
Roger Lipton