Outside of real estate investment, the restaurant market for business acquisitions has been warming for quite a while now. I say “warming up” modestly because it can be argued it has, in fact, been a fire hot space attracting investors big and small to concept acquisitions big and small. The M&A (Merger & Acquisition) market for restaurants has correlated to how the single-tenant net-leased real estate asset class has responded over the past 24 months; getting hotter than ever, then slowing down, but stabilizing at values that remain higher than most cycles have ever seen. Some of the higher profile news included JAB acquiring Panera Bread, Buffalo Wild Wings being acquired by Roark Capital, and Amazon acquiring Whole Foods in a parallel, but complimentary merging of sectors. In addition to bigger news, there has been some big news in smaller concept growth as well. R&R BBQ was acquired by Four Foods Group, while Beef ‘O’ Brady’s and Brass Tap franchisor FSC Franchising sold a majority of their stake to CapitalSpring. Ponderosa went to FAT Brands. Ruby Tuesdays went to NRD Capital.
Why is all of this happening? Investors have been consistently looking to take advantage of the rising consumer sentiment and there is still a ton of cash out there looking to be invested. The consensus among the restaurant lending arms of the world at the 2017 Restaurant Development and Finance Conference in Las Vegas was that the flow of capital is greater than ever right now. There is a lot of risk in many retail spaces right now and a lot of those investment dollars are being funneled towards the restaurant sector as a hedge against that risk. The newfound success by many smaller more craft concepts has sparked investors to take a more serious look at smaller growing concepts with significantly more upside than their more stable, seasoned, and proven concept competitors. Strong operators or investors with economies of scale in the space are more willing to take the risk on a potentially trendy concept if they can apply some of the basic growth principles to the brand that have worked for their other brands in the past.
Restaurant values are some of the highest we have ever seen with M&A multiples for franchising deals climbing higher and higher. This is making it tougher for smaller operators to grow their unit size as now there are some big money players coming into the mix, willing to throw some cash around at more aggressive prices than smaller investors may be willing to bite off on, but some of these strategic buyers backed by cash heavy big hitters have the scale and size to make the numbers work. Their long-term focus on their investments is driving some prices to 20 times EBITDA or higher. For instance, RBI paid 21 times EBITDA for Popeye’s, but they have the scale, systems, and supply chain to make even the international growth of such a well established concept a successful acquisition. According to the Restaurant Finance Monitor, Wedbush Securities analyst Nick Setyan has identified various restaurant concepts that might be acquired in 2018 based on cash flow yields. He identified BJ’s Restaurants, Fiesta Restaurant Group, and Cheesecake Factory as his top three to keep your eye on in 2018. As we all know, the restaurant industry is cyclical just like everything else, but the hope is that there is still some significant runway left in this cycle for investors, operators, franchisors and franchisees to find some win-wins and continue building concepts that will sustain profits in the long run.