 Last year was a tough one for mergers and acquisitions, with deals down more than 50 percent from the prior three-year average. While analysts expect M&A to level out this year, activity in the first half of 2023 has been slow amid continued inflation and other ongoing operating challenges. As a result, restaurants looking to enter the market, whether as buyers or sellers, will have to be prepared to ask and answer detailed questions in a stringent lending environment.
In a recent webcast from Franchise Times, strategic buyers from Ampex Brands, Dine Brands and Savory Restaurant Fund weighed in on how restaurant businesses can prepare to make a deal – and also shared the warning signs that indicate it may not be the best partnership. Eric Easton of Ampex Brands looks for “puffery” in the numbers when considering an acquisition. In other words, he says, “when everything in a CIM is a pro forma, run.” Potential sellers can present a more compelling case by compiling complete financial metrics for the business. The restaurant’s growth plan should be built upon actual results as opposed to rosy projections or ideas that still need to be fleshed out. Be ready to share information. Understand what rights you and your investors have to proceed with a deal. Is there anything standing in the way of your planned growth strategy? Have a team in place to back up your claims and ensure you’re presenting information accurately and in the proper format. Your brain trust should include an investment banker, an accountant who can validate your results, and a lawyer with M&A experience who can support your compliance and manage legal paperwork. Go into a meeting with a clear understanding of the other party’s core appetite and how you can help each other. If you waste the other party’s time now, you may limit your opportunities to partner down the line, once your brand has developed into what might be a better fit for this business. Finally, avoid surprises. Taylor DeHart of Savory Restaurant Fund said it’s a bad sign when unfortunate issues surface late in the process. Material financial differences, for example, should be discussed at the outset, and HR issues such as failed disciplinary actions coming to light can damage the trust that all parties need for a smooth transition. Talking through potential problems early will give you time to work things through as partners.
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 Bank of America’s recent State of the Restaurant Industry report pinpointed a major shift in how restaurants are operating – and where challenges exist in light of both the Covid-19 pandemic and inflation. “We have a new cost structure and paradigm where 85 percent of sales go through a window,” says Ted Lynch, senior relationship manager for the bank. “In the past, the dining room was the bottleneck,” added Roger Matthews, vice chairman of investment banking for Bank of America Securities. “Now it’s the kitchen, and that usually has higher capacity. Restaurants can do more sales than ever before, and that’s a good thing.”
The potential of the restaurant kitchen as a growth engine makes it an area especially ripe for investment this year. That could mean using restaurant kitchen space in new ways, such as by sharing real estate – and expenses – with other operators. Or maybe you’re investing in a new technology to make your kitchen operations more efficient, such as a kitchen display system that brings greater efficiency to your management of growing sales streams and new staff. Such changes may give restaurants more room to absorb ongoing food inflation (not to mention labor inflation, which isn’t levelling off anytime soon). As of this writing, overall inflation appeared to be on a downward pitch, if still much higher in absolute terms than it had been in 2020. But food inflation still faces some obstacles to easing. In addition to the crop disruptions caused by extreme weather, the war in Ukraine continues to impact current crop distribution, future planting and the supply of animal feeds and fertilizers to support a range of livestock and crops. As for labor, Matthews feels the current cost structure is permanent as other major employers competing for restaurant staff move to a $15 wage. But here, too, greater efficiency in the kitchen may at least partially offset needed wage increases by minimizing the need for paying overtime. |
More Financial MattersWhat’s the best financing option for my restaurant?Build revenue through the kitchenLegal claims: Are you leaving money on the table?
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