If you are in the market to buy a restaurant this year, you may need some advice and understanding about how the industry has been affected and how that in turn, is affecting transactions, valuations and multiples for lending.
The acquisition market to buy a restaurant has never been stronger signaling strong interest in the industry. We Sell Restaurants is reporting the highest velocity of sales in our 20-year history. Why?
Resiliency is the keyword
The restaurants that performed well during the crisis have demonstrated their resiliency, proof of concept and ability to maximize return in a down trending environment. What is not to love about that? They have taken market share from other players, streamlined their menus, increased their efficiency and raised their profit margins.
Profitability is proven.
Overall, on the financial metrics, those that survived the crisis have stronger profit and loss statements than before the crisis because of their demonstrated resiliency noted above. They are keeping these improvements demonstrated on their financial statements including lower labor costs, reduced food cost and overall operating efficiencies created based on need. That is wetting the appetite of those in the market to buy a restaurant as the heavy lifting has already occurred and they are buying a well-oiled machine.
Time heals all wounds and sales are back
The industry’s sales during the month of April were double last year’s dismal results during the COVID shutdowns but more importantly, beat April of 2019. The $64.9 billion in sales for April of 2021 were 2% higher than April of 2019. That is even though many states (California, Michigan, Oregon, etc.) still have extremely limited dining situations.
Nothing substitutes for the dining experience.
Customers are taking their stimulus and demonstrating pent up demand to dine. The National Restaurant Associated forecast this demand months ago in their national survey of dining habits. As a nation, we want and enjoy the dining experience. There is truly no substitute.
Lending is readily available.
While there was a short pause or momentary pullback in the market during the crisis, underwriters are back to the table to fund deals with no issues. Their valuation approach is now less risky as they are heavily weighing 2019 and in many cases, throwing out 2020 altogether. The other approach we are seeing on valuations is the trailing twelve months approach to the financials. Overall, however, valuations pushed down in a kneejerk reaction to the crisis are now being based on 2019 for strong performing stores and the return of sales volume.
Availability in listing inventory returns as aid runs out.
Now that all aid to the industry has either been distributed through the EIDL (Economic Injury Development Loans), PPP (Paycheck Protection Program) and the latest, RRF (Restaurant Revitalization Fund), restaurant owners are moving off the fence about selling and into listing agreements. Most business brokers specializing in restaurants saw a pause in listing activity while sellers absorbed the programs available. Now they are exhausted with the struggle, the staffing crisis and more so We Sell Restaurants predicts the largest transfer of restaurants in the next twelve months in history.
Government aid does not last forever, and people need jobs
Many in the market to buy a restaurant are now moving off the couch and into the active marketplace as they see the end of enhanced unemployment benefits looming (September of 2021). They may have been previously employed in the industry or moving from another, but we will see strong activity for those in the market to buy a job in the next twelve months as well.
Overall, the market to buy a restaurant is 2021 has changed. The pandemic affected the industry in unprecedented ways. On the flip side, however, it has created both supply and demand for those in the market to buy a restaurant.