Buying 6 Fazoli’s Franchises in Rural Texas: Would You Do It?
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There could be a lot of hidden and escalating costs in restaurant leases. That right there scares me. That's a lot of people, a lot of turnover in the restaurant business. So you're spending a lot of time just on that alone. It's a tough business. Everyone knows that, I think. If they're the top performing stores or even in the top decile of performing stores in the concept, there's got to be somebody in the existing system who wants them. And if not, then why?

In 20 years, has the population doubled and your EBITDA has doubled and you have a tailwind here? Or is this a stagnant area where this thing's 1.1 and EBITDA, it's going to be 1.1 forever? Hello, another episode of Actors Anonymous. We don't have 100% beers anymore. And thumbs down on just the plus inventory alone.

Welcome back, everybody, to another episode of Acquisitions Anonymous. I'm Mills Snell, one of your co-hosts. We have all four of us today, Mills, Bill, Michael, and Heather. And we talk about a chain of six fazoles, the fast, casual Italian concept in Texas. And kind of we're

rural and West Texas. It's a really interesting episode because we talk about the dynamics of an established franchisee versus maybe a new franchisee. We talk about a market like this, where you've got six locations in multiple different cities, uh,

The business has been around for a while. We talk about the role of real estate and capex in something like this. How does this business fare over time? The dynamics of buying and selling a franchise versus a run of the mill business. There's a lot in this episode that we cover. It is a great size business. It's doing over, I think it's around 1.1 million in EBITDA. And so it's in a competitive size range.

but it's in kind of a non-competitive category being food service. And we talk about all those different dynamics. I think it's a great episode. Hope you enjoy it. Stick around for a quick word from one of our sponsors.

Hey everyone, it's Bill. And I want to tell you about maybe the most exciting sponsor we've had in a long time on the pod. It's called Capital Pad. And it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So Capital Pad is a marketplace for acquisition entrepreneurs. That is people who want to buy a business and need capital to list their deals and solicit capital from other people who want to invest in

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So if this sounds like something that's appealing to you, if you want to buy a small business and need capital, or if you want to invest in small businesses, go check out CapitalPad.com and tell them that Acquisitions Anonymous sent you. All right. Michael started this episode right before he hit record by swearing he was going to stay quiet and not talk the whole time. So we'll see how this goes. He's even covering his mouth for extra. Yeah.

So, okay. Actually, since you're making me talk, I'll do it. The reality is I got a little paranoid that I was doing too much talking in our episodes, and I started to listen to the last five or six I was in to make sure I wasn't talking and talking over everybody too much, and I think I'm okay. That's my read. You guys let me know if I get out of control. I think you're okay. This is a safe space, Michael. You're okay. This is a safe space.

Yeah, right. Well, we know how passionate you are about franchised places to have dinner. So I expect you actually will be fired up about today's deal. Yes. Yeah, I ran across this. It's super fascinating. So it had a lot of stuff that I think is interesting for us to talk about. So let me read you this one.

So it is six. It is off BizQuest. It is six Fazoli's franchises located in Texas, located in Abilene, Texas. So I will pause there. Do you guys know where Abilene is? I've heard in a lot of country songs, but that's about it. Do you know where Fort Worth is? Yes. Do you know where Midland is? Yes, I do.

Okay. So it's about 35% of the way from Fort Worth to Midland on the interstate out in the middle of nowhere. Okay. Why is it in all the country songs? Great question. I mean, look, when you live out in West Texas, there's not much out there. You can talk about Amarillo.

you could talk about Abilene and you can talk about Lubbock. Other than that, there's, it drops off pretty quick. Okay. So Abilene and Amarillo is making it in the country songs. I've never heard a country song about Lubbock, Texas. It doesn't roll off. It doesn't roll off the tongue. Have you guys been to Lubbock? No. Okay. I highly recommend it. Uh, it is the home of Texas tech and it's also kind of the center for all the West Texas, like, uh, like, um,

wind boom. So like there's just tons of stuff supporting all of the turbines out there. If you drive out to West Texas, it's just turbine field after turbine field for wind energy. But turbine field after turbine field with fazoles scattered in there. Six of them. Exactly. But so the other thing that Lubbock does a lot of is cattle processing because West Texas is all about cattle. So Lubbock can either be like a totally delightful place in the Texas high plains in the West or

Or you could be there in the moment where the wind shifts and the cattle feedlots start to, the wind goes through the cattle feedlot before it reaches where you are. So I took my son once to go visit Texas Tech with the idea he could potentially go there. And then he's like, dad, what's that smell? I'm like, son,

Those are cows about to be slaughtered. That's Texas. Michael, there's a place where I lived in Denver. There's a place north of Denver that is the name of it is escaping me. That is a huge cattle processing place also.

That smell is not the feed. That smell is the blood of the slaughtered cows. I know exactly the smell that you were talking about. It is not the feed. Goodbye now. I'm leaving. It's hard. And there's like signing off for today. So speaking of... Now let's talk about food. Yeah. So Abilene, I think, is like a hundred and thousand person city, right?

Out there, it's enough to where they have banks, and Chase Bank has stuff there, and there's a country club, I'm sure. So it's big enough to be a real town, but it's not one of the big four towns or cities in Texas, which are Houston, San Antonio, Austin, and Dallas. Okay. Yeah.

enough to tell us about these though i'm thinking can it can it possibly sustain six fazoles read more for us michael um yeah yeah let me tell you more so yeah it's in taylor county abilene texas they're asking five million dollars for six of these restaurants

They don't disclose their cash flow, but the EBITDA is 1.1 million. So asking price is 5 million, 1.1 million EBITDA. It looks like they run typical restaurant gross margins with gross revenue at 13.3 million. So they're doing a little over 2 million in revenue per Fazoli's. And they have some pictures here of what a Fazoli's looks like. It looks like just like, I don't know, how would you describe this, Bill?

It looks like a strip mall Italian place. Yeah. It's Italian fast food. It looks like a TGI Fridays or Chili's, but if it were Italian, it's not as nice as a Chili's. Okay. Um, so it's an established cashflow opportunity here in Taylor, Texas, six as Taylor County, Texas, six facilities, Italian fast, casual franchise businesses. So it's like a down market, Olive Garden, best way I could describe it. Um,

They do here, even though they didn't say cash flow, they said the adjusted seller's discretionary earnings is $1.3 million on $13 million. So there's about 10% theoretically going into the owner's pocket. Heather, when you see adjusted SDE, what does that typically mean? I only care about adjusted EBITDA. And it's exactly what you said. The difference between adjusted EBITDA and SDE is just this seller's salary.

And or maybe some benefits, you know, sometimes they throw in the car or whatever else. So the so the owner is presumably making two hundred thousand dollars a year for himself as a salary of some kind. But the business cash flow is one point one. And I don't like the S.T.E. as a as a as a.

In anything that we do, because if you're going to raise equity, if you're going to run the company, you're going to be paying a salary. So that's just an expense. It's a business expense. I don't know why brokers love SDE so much, but lenders go by adjusted EBITDA. Yeah. Well, it does appear this person is paying themselves $200,000 a year in salary.

located in Central Western Texas. All stores feature drive-thrus, no deferred maintenance, stores up to brand standards, and all CapEx was completed in 2021. The real estate is not included. Looking at the photos, it looks like these are mostly rented spaces in typical strip malls and probably Abilene's type place probably still has a mall. A lot of like out parcels too, you know, out in front of like the Home Depot or the Lowe's or the Walmart or something like that. Mm-hmm.

So, yeah, so how the real estate is locked up in the future of it, I think, is a big question here because a lot of there could be a lot of hidden and escalating costs in restaurant leases.

But that's something we can put a pin in and come back to. Four of the six tours are in the top five for performance in the entire Fazoli system. A long-time operator is retiring and willing to stay on for a transition period. District managers to transfer with the sale and the franchisor approval is required. Transfer fee is not included. It is lender-reviewed and bankable. Oh, Heather, they did your job for you. Yeah.

It's bankable. Easy. It's already done. Wow. That's great. I like that better than pre-approved, though. I mean, that basically says, like, we've had a lender look at it and it's not egregious, which I appreciate. I do, too. That is much better. Yes. A bit more here. 28 years in operation. 135 employees. It's currently a franchisee. No CapEx is required. They have the listing here. They've all been remodeled since 2018. That's kind of important because...

They probably did that in conjunction with lease renewal. Yep. That's true. Okay, so that's good. Market Overview, West Texas, known for its oil industry and small towns, has a growing appetite for diverse culinary options, including Italian cuisine. The region's restaurant scene is evolving with a mix of longstanding local favorites and newer establishments catering to changing tastes. There are some local Italian favorites, such as Luigi's Restaurant in Midland, which I think is three hours away. Like, I don't know how that's a competitor for...

for something in Abilene. Orlando's Restaurant in Lubbock, an Italian village in Midland. There's also a fast, casual Marco's Pizza. Like, I don't know why they list these competitors like in Midland. Like, you have to fly there. It's like a two and a half, three hour drive at 70 miles an hour from Abilene to get to Midland. It's a little nowhere. Well, it seems like they're saying, right, when you go back up, Michael, I don't think all six of these are in, they say six of, I don't know.

I thought it was located in central slash Western Texas. So I think, I think they've, they, I don't think the market would sustain six was always, they've got to be spread out. So your suspicion is there's, there's one in Midland, one in Lubbock, one in, in these different places. So, yeah, but I love that they throw out Marco's pizza. It's like competition. There is also a Chinese restaurant down the street, you know?

All right, let me finish this up. Franchisor has identified a five to six store growth market potential with a niche and fast casual Italian. And they want to have a bridge between traditional sit down restaurants, a piece of change. They're offering customizable pasta dishes or build your own Italian sandwiches that could appeal to younger demographics. And there are people wanting lighter Italian options as well as adopting some technology. So this is actually the

This is one of the best broker kind of, here's the things you could do to improve this business if you want to do that I've ever seen. It's not just like go buy Facebook ads, which appears to be what every other broker recommends. Start marketing. Consider marketing. All right. The real estate is all leased. They pay $86,000 a month in rent. And then lease expiration is 1-7-2031. So that's about six years from now. Is that right, Bill GPT? Yeah.

More or less, yes, which is good. It's not 10 years, but it's going to need to be 10 years if you want an SBA loan. That's right. Bill has trained well. Yep, I've done this a few times. All right, so that's what we know. So Mills, you're going to fly out to Abilene and check this one out. They do have air service, but you can only fly to Dallas. There's direct from Columbia to Dallas, so this could work. Okay.

I see it coming together. I have flown to Midland before. I've been to Midland in a plane. Yeah. Saw a lot of pipeline under the plane. Yeah. So here's what I like about it. It seems like it's been around for a while. These locations seem established.

They have recently renewed their lease. They're going to have to renew it again as part of this sale process if you use an SBA loan. But, you know, it's not a big ask to ask a landlord to extend from six years to 10 years. It's not nearly as big ask as extend from two years to 10 years. Right.

So that'll be easier. It says that these are high performing stores. It's a little weird to me that they said four of their six stores are in the top five performers in the whole Fazoli system, which would indicate that, you know, of the top five, four of them are these, which is pretty wild. If that is true, I think I like that. I mean, how many Fazolis are there? There's got to be over 100 Fazolis.

Yeah. So that seems a little strange. Maybe they meant like top 5%. But even still, if that is true, these are well-run restaurants. I also like that he dropped that the district managers will transfer with the sale, which means that he has a decent level of middle management in place. There's 195 Fazolis. Okay. So that means...

the top, even the top 5% here would be, you know, 10 stores, 10 stores. Yeah. Yeah. So that's impressive. Um, so it's possible this is actually a really well run restaurant group, which I like. Um, I like that, but it also, so I think it scares me a little bit because restaurants in particular, but like any business, the, uh,

Operator is so key. And if this person is already like this is not a material growth, material margin improvement kind of play. This is I buy it and I just hope that I can hold on and not erode margins. And restaurants are really, really hard to do that in.

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E-D-L-E-R-Z-A-I-N.com. That's Edler Zane. And tell them we sent you. That's true. The way you would describe this, I just pulled up their pictures. This is like Panera, but for Italian. Have you never been to a Fazoli's, Michael? No. You don't cheat on Chili's?

Not a big Italian guy. I don't know. Is this about to get us canceled again? I'm not a huge fan of it. And then cheap Italian. I think I went to a Fazzoli's one time in Kentucky, which they do have 33 locations in Kentucky. I think more than any other state. That's interesting. And I think I was in high school. It's been a while. I mean, inexpensive place to get Italian for the whole family is basically what this is. Yeah.

The one in San Antonio, this is why I've never been here, Mills. The one in San Antonio, I just pulled up the picture of it. It's attached to a truck stop. I don't think I'm not like, hey, honey, it's date night. Let's go to the truck stop. I mean, don't knock it till you try it, Michael. Come on. Right. So what what don't we like about this?

That it's a restaurant. I'm a lender. I have to say that. Thanks, Heather. Everybody was trying to figure out how to say that, but you just nailed it. I mean, I agree. Like the hours are terrible. The margins are thin. Restaurants is tough business. And it's a fickle, you know, the customer is fickle. They change their mind. They go for something new. I will say if I have to do restaurants, I'm

uh you know i like a relatively national brand something like this like the new hot tapas place that's fickle right because you're not gonna be the new hot tapas place forever you know fazoli's savoy's is never going out of style because it's never been in style you know it's just this is what it is there's kind of always a market for low-end italian it's gonna be there

Right. So I do like that when it comes, but it's still a restaurant. I mean, it's still. And it's six stores. So the more stores, the more complicated, the more people, I think it said what, 135, that right there scares me. That's a lot of people and in the restaurant business. Yeah. A lot of turnover in the restaurant business. So you're, you're spending a lot of time just on that alone. Uh, it's a tough business. Everyone knows that I think.

So here's another thing that makes this somewhat hard mode. So this is the guys, our gals, six locations. So there's one in Abilene. Oh, they're far apart. Two in Midland, Odessa, and three in Lubbock. But if you do the math here, you're like, oh, those aren't that far apart. West Texas is so big.

That is basically each one of those, like between Abilene and Lubbock is like 130 miles. So you're like, you got to drive two hours to go from restaurant to restaurant. And I think that's why this, the listing says they have district managers. So my guess is the owner runs this one and is the district manager for the one in Abilene because that's where he or she is located. Then there's somebody overseeing the three in Lubbock and the two in Midland Odessa. Yeah.

The thing we talk about that just comes up to me for every single franchise is why is an existing franchisee not buying this? And if they're the top performing stores or even in the top decile of performing stores in the concept, there's got to be somebody in the existing system who wants them.

And if not, then why? Nobody is that acquisitive. And I mean, that's what happens in these multi-unit is you end up with a person who is willing to acquire, willing to roll up and get a lot of them. And then you get to a critical mass, probably five times the size, and you got $5 million in EBITDA and you exit. Nobody's doing that in Fazoli's, it doesn't seem like. Or if they are, they just don't want these locations. Right.

I mean, to me, that's also why there's potentially an opportunity here. And this is not going to trade for much money. Like between these three towns here, there's 350,000 people, let's say. So then you got to find somebody like out of that pool, you got to find somebody who wants to live in one of these three towns, which is tough to do. Like Midland, Odessa, like San Antonio is filled with people that lived in Midland, Odessa, made a lot of money and moved to San Antonio. Like I have a lot of friends that are that way.

And that says something because this is San Antonio. Like, let's be real. But so you got this tiny pool of folks. You have massive competition for labor in these markets. Like Midland Odessa, like that's the center of the oil field. So there's tons of high paying jobs there. You're competing for that. And then you've got this thing in hard mode, which is you're out in West Texas and your locations are 120 miles from each other. So you got all that put together. Like, I wouldn't be surprised, Mills, if a lot of franchisees

Farah Fazoli's looked at this and they're like, whoa, why do I want to spend every single week driving around in a car when my general manager doesn't show up? Because you've got to wake up at 3 a.m. if you want to drive from Abilene to your Lubbock location to bail out that location and have it open on time. And you look at the density in Kentucky where there's 33 locations or Indiana, there's 29 locations. Ohio, there's 16. It's just, I think, a tough sell in that way.

Is it – I mean, how much of it though are you betting on the demographic trajectory of the area, right? Like –

If you're if you're OK living in this area or, you know, in or around this area. And if this is and Michael would know better than any of us, like in 20 years is has the population doubled and your EBITDA has doubled and, you know, you have a tailwind here. Or is this a stagnant area where like this thing's one point one and EBITDA, it's going to be one point one forever. And whatever you put into it, you'll be lucky to get out of it in 10 or 20 years because it's not going to be any bigger.

I think it is that way. It's probably more stagnant, which is not bad, right? It also means it's probably predictable. Stable. But you just can't underwrite growth. So what's going on in Texas demographically, or at least whatever, geographically with population is these, Dallas and Houston are the biggest cities and they're winning by far. They gain more people all the time. Everybody moves there and Dallas is like a multi-state attractive and then Houston is international.

And then you have Austin and San Antonio that are growing 8% and 12% annually, like respectively. All the rest of the cities, with the exception of Midland Odessa, are pretty much shrinking or dying slowly. The best they're hoping for is staying the same. Because just if the option is for a young person to try to get a future in Abilene, like there's a massive brain suck. They end up in Dallas, Fort Worth for college, and they just stay there.

The only one that is really kind of has a bunch of tailwinds is Midland Odessa. And that's because of the oil market. The shale revolution is still running there. And there's just tons of growth because people are chasing the money. So I would actually look at these three markets, Mills, to answer your question about it and say Abilene, I'm not. I think it's we look at the numbers probably shrinking as a city. Lubbock is staying flat mostly because the university and the wind stuff and then Midland Odessa is doing well and has tailwinds there. So it's a mixed bag here.

You know, they made this. Go ahead, Heather. Oh, I was going to say, switching back to the cash flow, I believe they said no CapEx required. And we're talking about 1.1 million EBITDA. I don't think that you can do that in a restaurant. I don't think you want to add back depreciation and not deduct.

maintenance capex because there is a cycle of refreshing the brand that every franchise you know brand has to go through but especially restaurants I mean there's a lot of wear and tear on the stores and I think the cash flow the actual cash flow that you want to set your valuation to is a little lower it's got a you've got to subtract out some maintenance capex for six stores

That's where I was going with it. You beat me there. They say, you know, 2018, they renovated the stores and they're up to brand standards. That's seven years old now.

As the franchisee, you get told by the franchisor, hey, it's time to renovate stores and you have a certain amount of time to do it. And you're paying for that. It could be logo changes. It could be new upholstery on the booths. It could be full, you know, gut the whole dining room. And those are not cheap and they're not quick. And in restaurants, whenever you're doing that, you're shut down. You're not generating revenue. It's not like just putting, you know, a facelift on the outside of the building. Yeah.

Yeah, it does say separately all CapEx completed by 2021 also. So there's a little bit of conflicting information in this listing about the 2018 versus 2021. I mean, as far as listings go, I mean, this could be, I've seen way worse. I mean, this is relatively recently remodeled, which is nice. You see a lot of times sellers get the notification from corporate that they got to do the remodel and they go, I'm selling the business. Yeah. Right. So who's the right buyer for this?

I think there's only one buyer for this. Another Fazoli's franchisee?

I actually, I don't think so, Michael, because they clearly already don't want it because they don't want to be in this geography. It's somebody that owns a different franchise in the same geography. Like you already own, you know, six chilies in the area and you want to add a fazoles, right? Michael, we know you secretly do. Yeah. If there were somebody from Texas who really liked chilies and Italian food,

That would be a good buyer. Maybe you've got seven Jiffy Loops in the area and you want to try your hand at restaurants. Or Zaxby's or something. Yeah, exactly. Somebody who's got five to ten stores already of something else franchised in these markets. That's the only buyer for this. I don't know that I've ever run into it, but will franchisors...

squash like if you're if you're thinking about buying this and you own seven zaxby's is fazoli's gonna let you is zaxby's gonna let you diversify into different chains i think it depends upon the chain i mean some of them at the extreme level you have like the chick-fil-a stuff where they just totally restrict you you can't even own it you could barely own a second store as a chick-fil-a person um but then there's other brands like taco bell and folks like that they're totally chill like

all the i found out a couple months ago like like all of like the applebees and stuff like that and then like several of the other kind of similar brands are all owned by like one one family office out of south carolina here in san antonio you were doing opposition research on the chilies people yeah you know you gotta look out for the home team uh since we're running up on time uh do we want to uh do we want to thumbs up thumbs down this one how do we feel about it

If you live in West Texas and own a bunch of Zaxby's, this could be great. I mean, there's probably synergies. I think it could be great. But if that's not you, I think this is tough. I'm thumbs down on this. For the same reason Heather said, I know that there are people who make money in restaurants. I know that it would not be me, and I don't want to go find that out the hard way. Yeah.

As a lender, I'm obligated to thumbs down restaurants. So that was predetermined. I think this should trade to somebody who is potentially going to come work their way into owning these things. I think that feels precisely like that. I think that's a better option here because there's just like...

Finding somebody who's going to be willing to pay up for what these people are asking for, which is four times EBITDA for a very tenuous business, it's rich. So I don't know. I think this is going to end up trading to somebody who's not a conventional cash buyer for this. So we shall see. But I'm thumbs up if that person can make it happen. I think there could be a win-win there with the seller. There is this interesting phenomenon in franchises, just really quick, where this, I mean, Fazoli's has been around for a long time.

You look at the number of new entrants to the market, you've got like every, you know, better burger, you know, place. You've got all the like Tex-Mex, you know, like the cycle has just really wound up quickly. And somehow Fazoli's has stayed around. They've made it. So there is some value to me in, you know, if you're looking at restaurant and you're looking at multi-unit and,

and it is kind of sleepy, that might actually be better than like trying the new, you know, smash burger. Like, I don't know that those even have really made it, you know, or like the new Mexican concept or the new whatever. I think there's some value in the fact that it's been around for a while. And we don't have time on this, this episode, but one of the things that's fascinating to me about this is,

is how, despite this being a very down-market concept, like it's Panera for Italian, basically, like their strategy in Texas is to have one or maybe two of these locations per a few hundred thousand people. Like they intentionally don't have much density. There's only one of these in San Antonio. There's one in College Station. There's two in the Austin area. Like there's one in Abilene. Like it's just such a bizarre thing. Like,

Like when could you imagine a Chili's going into a market and only having one Chili's? Like you would never do that because like lots of people like it. So I don't know if there's something fascinating about this Fazoli's concept as to why they've expanded this way with like in a not dense manner at all. So I don't get it. That was a good one, Michael. Hey, Bill, I have a question for you on this one. Were we too serious on this episode? Were we too serious? I mean, I had my coffee before this. I got to say, Michael is trying not to talk.

uh heather just woke up mills i think really good heather hated the deal the whole time right and she was just like a restaurant i'm out i'm gonna go get some coffee no i don't think we were too serious i mean you guys were too serious i thought i was fine you were perfect all right is it anybody want to do the outro before i click stop

All right. Here's the outro. If you thought we were too serious, there are other episodes on which we are way less serious on our website, acquanon.com. We have other restaurant deals. We have manufacturing deals. We have other franchising deals. We have e-commerce deals, almost 400 deals on acquanon.com. You can also follow us on X at the same handle as the domain name.

We tweet all the episodes and you can also tweet all the hosts as well. I say tweet, but I call it X. I don't know what to do. Post. But you know where to find us on the internet. We hope you do. And we'll see you on the next episode.