From gold rush to reality check: The new restaurant M&A playbook
Restaurant M&A dynamics shift as market realities set in post-COVID.
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The article highlights the evolving landscape of restaurant mergers and acquisitions, noting a decline in valuation multiples compared to the pre-pandemic period. Expectations from investors have shifted significantly, requiring a deeper understanding of restaurant operations to secure deals.
Why It Matters
This may affect franchisee valuations and deal-making strategies, prompting operators to reassess their approaches to growth and investment in the current market environment.
The current landscape of mergers and acquisitions (M&A) within the restaurant sector has shifted significantly post-pandemic, as discussed by Ashish Seth, founder and managing director of Harrington Park Advisors, during the opening keynote at the CREATE event in Rancho Palos Verdes, California. Maintaining a practical approach, he noted that the gold rush mentality of past years has diminished, stating, "It's no longer a gold rush." Unlike the previous decade, when operators with only two units could achieve valuations between $60 million and $100 million, today’s investors have a higher threshold for evaluating business viability.
Seth elaborated on transforming market dynamics, attributing some of the seismic shifts to disruptions caused by significant entities like Amazon in retail and Chipotle in the food sector. He emphasized how Chipotle changed the restaurant landscape by delivering quality and connection to customers, setting a new standard and leading to a rush of investment seeking the next similarly transformative brand. However, the excessive investment led to overbuilding in the segment, and subsequent challenges like rising food costs and consumer price thresholds exacerbated the situation.
The restaurant valuation environment has notably decreased, with casual dining now fetching 5 to 10 times EBITDA, fast casual 8 to 13 times, and QSR from 10 to 20 times—far less than valuations seen a decade ago. Seth voiced concerns about these averages, highlighting that many might overlook the underlying reasons why they represent the median market performance.
