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What's hot and what's to come in restaurant dealmaking


It’s no secret we’re spending more of our food dollars at restaurants and carry-out options these days. Whether it’s dining in at our favorite neighborhood spot, grabbing takeout from a popular fast-food chain or phoning for delivery from our go-to pizza joint, we’re eating out more than ever before. In a recent Food Institute's analysis of the United States Department of Agriculture’s food expenditure data, the amount of food dollars spent in restaurants has increased from 34 percent in 1974 to 50 percent in 2014. Given the increase in consumption and sales volume, could this trend also be influencing and affecting transaction deals within the restaurant industry? We asked our RSM restaurant industry insiders to provide some of their thoughts on what’s occurring around restaurant dealmaking. John Nicolopoulos, national practice leader for the retail and restaurant sectors, and David Cho, director for the transaction advisory services practice, share their insights.

What’s happening currently in restaurant industry deal flow?

John Nicolopoulos: Despite the sluggish economy, rising labor and real estate costs, and the restaurant industry having its challenges in a very competitive marketplace, overall the level of investment hasn't seemed to slow in growing restaurant businesses. The industry is constantly evolving because customer preferences are always changing. Whether it’s fast-casual, Mediterranean cuisine or organic and healthy foods, successful restaurants will evolve with the tastes of consumers, and this climate of fast-paced, trend-setting dedication is intriguing to investors and private equity firms.

David Cho: And when transactions have occurred, there’s been a considerable shift where restaurant businesses have had some of the highest multiples we’ve seen in quite some time. In many cases, private equity sponsors are focused on the brand and unique concepts with lots of whitespace for growth. They are looking for concepts which have demonstrated a strong response from the public with the potential to scale, and will pay very high multiples for such businesses. This is something that’s different, compared to what we’ve observed in the past, in that investors are placing much higher value on the concept of a restaurant and growth opportunities.

Are there specific types of restaurants that are seeing more deal activity?

John: The fast-casual concept continues to be appealing to investors because of its commitment to relevance in the marketplace and its responsiveness to the needs of consumers. With that said, there are other types of concepts that are getting investor interest such as breakfast and lunch restaurants, diners and even some established casual concept brands. Investors are seeing the potential of taking these brands to the next level, adding additional concepts to the mix.

David: Brands and concepts that appeal to millennials are also gaining popularity with investors, like those restaurants that might promote social consciousness, for instance, or provide more of a dining experience or entertainment. Appealing to the millennial target is ideal due to the strong buying power of this critical consumer segment. We’ll continue to see investor interest in those brands that court millennials.

What’s the outlook for restaurant industry deal activity in 2017?

John: There will be winners, but there will also be those in the industry who will see challenges in 2017, and there will be a wide swath in between as well. For instance, we’ve heard of multiple restaurant bankruptcies in the last several months and there will likely be more. Even profitable restaurant companies will continue to close units to rationalize their portfolio. On the other end of the spectrum, there are opportunities, because of the constant search and evolving nature in the industry, to find and define the latest experience or concept. Investors in 2017 will be looking for those fresh ideas and models, but there may not be as many as investors would like. That means competition will be high to land the best deals. In addition, there appears to be many private equity firms that have raised funds in 2016 and they’re ready to spend in 2017, but again, pricing will be competitive. We’ll likely see large multiples for hot concept restaurants, but we may see more of a contraction on the multiples of the average or slightly above-average deals.

Is there room for the smaller and midsize private equity firms to compete in this competitive market?

David: It’s a space smaller or midsize private equity firms can pursue, however investors of all sizes will find that a premium will be paid for those elevated concept restaurants. Although the volume of new concepts continue to increase, investors will find it increasingly competitive to close on the concepts that have differentiated themselves as a strong performing and unique business. 

Another interesting occurrence that will continue in 2017 is because there is a shortage of good deals, private equity firms will buy into a deal much earlier than they might have previously. Historically, venture capitalists have provided the early stage funding for businesses, with private equity firms investing later after concepts are more established and the revenue and cash flow of the business are proven. Now, because of deal shortage and heavy competition with strategics and other investors, private equity firms are getting involved in deals sooner. 

What might attract a private equity firm to invest in a restaurant business?

John: As touched on earlier, investors are looking for relevant restaurant concepts that can maximize their investment. In addition, they’re weighing whether the business has the potential to grow by geography or concept, and if enhanced technology solutions will stimulate growth, improve efficiencies and boost profitability. Also, if a restaurant is in early stage development, more often than not, investors look at the management teams in determining whether or not that’s a team they think has the capability to take it to the next level. Most private equity firms do not want to run the business. They want the restaurant management team to run it. They just want to provide some support and guidance in how they get to that next level. Lastly, investors are looking at the horizon and how quickly they think they can grow the business and profit exponentially from the investment.

David: As both John and I talked about, an exciting concept is one of the biggest areas that resonates with investors, and what’s important to them is how consumers are responding and interacting with that concept and brand in the marketplace. Is there social media buzz and high-ranking reviews out there about the restaurant? Is the service topnotch, food on trend and delicious; is the restaurant staff engaged in the brand; is there a dedicated and loyal customer following; do management and employees adhere to common core values and mission? Those restaurants that demonstrate these qualities will be appealing to investors.

What should restaurant businesses do to be appealing to private equity investors?

John: Restaurants that have an easily replicable model have a leg up with investors. Private equity investors are looking to expand and build on the business. Concepts that can be easily replicated and expanded geographically are most appealing to investors. Perfecting the operating model, the training procedures and developing a pipeline of talent and new locations demonstrate the potential of an investment. Sound financials, infrastructure and management team are also very important to potential investors.

David: I couldn’t agree more with John on this. An experienced management team, ability to scale, and solid financial reporting are a must. Having a strong CFO is a plus as well. Anything a business can do to ensure the company reporting is reliable is essential as well when looking to close a deal. To help with this, sell side due diligence can reveal areas which need to be addressed before going to market, and also increase maximum value and certainty of close for sellers.

Want more restaurant industry insights? Check out our key issues content. Questions? Contact us.


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