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Credit crunch continues for some operators

DQ refranchising plan hits financing hurdle

Dairy Queen is ready to make a deal to refranchise the majority of its corporate locations, but like many restaurant companies operating in the continued credit crunch, potential buyers have run into trouble securing financing.

Dairy Queen said it is seeking a buyer for 56 corporate units in Kentucky and southern Indiana. The company values the transaction at $32.65 million, including the accompanying real estate, making it the largest such deal for the quick-service brand.

And that might be why its potential buyers are having trouble getting the deal funded, Dairy Queen officials said.

While many industry observers and lenders have said the financing market has improved, that is not the case for Dairy Queen. In a sign of the times, the chain spoke with Nation’s Restaurant News.

“We were surprised that it seems this difficult,” said Eric Lavanger, director of business development for Edina, Minn.-based International Dairy Queen. “Lenders have taken more time in looking at this, and I think it’s because there’s no prior history [of a transaction this large] and nothing to benchmark against.”

Many restaurant companies have worked to cut expenses by significantly reducing their corporate restaurant bases through refranchising, including Applebee's parent company DineEquity Inc., Jamba Inc. and Jack in the Box Inc.

Dairy Queen currently has 5,845 units worldwide, 72 of which are owned by the company. The company has done some smaller-scale refranchising, Lavanger said, but selling 56 locations to one entity would deviate from the brand’s typical franchising practices.

“In our system, most of our franchisees own between one and four restaurants,” Lavanger said. “We do have a handful of larger multiunit franchisees, but there are not as many in our system as perhaps in some other QSR restaurant chains.”

Patrick Silvia, principal of Advanced Restaurant Sales, which is representing Dairy Queen in the deal, said the brand has invested about $12.5 million in the 56 properties since 2008. Several possible buyers have been identified, he said, many of which are private-equity firms, but none has been able to secure the funding as of yet.

The locations specified in the deal are all DQ Grill & Chill locations, and the $1.2 million average unit volumes of those restaurants are higher than Dairy Queen’s systemwide average unit volume, Lavanger said. Currently, franchisees who own Dairy Queens that sell food may convert voluntarily to the Grill & Chill format, but all new corporate and franchised Dairy Queens to be built would be that variant, he said.

Rebecca Watkins, chief executive of National Restaurant Funding LLC, which does not have any Dairy Queen units in its portfolio, agreed that the franchisor’s lack of a prior history of a deal this large may be something giving major lenders pause. But it’s possible that major banks still are acting with an abundance of caution as well, she said.

“Lenders haven’t loved restaurants the last few years anyway,” Watkins said. “A deal has to make perfect sense.”

As of press time, officials at the largest of restaurant lenders — GE Capital, Wells Fargo and Bank of America — had not commented for this story.

Contact Mark Brandau at [email protected].

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