The restaurant industry has been put through a meat grinder the last three years with pandemic lockdowns in 2020 and inflation and labor issues dominating most of 2021 and 2022. This year was the first year that restaurant owners had a chance to breathe and get their business back to baseline after spending the last two years recovering from pandemic losses. The recovery in the restaurant industry means that restaurant owners looking to sell their business in 2020, but couldn’t due to the pandemic economy plummeting restaurant values can finally sell in 2023. However, high-interest rates are pushing some prospective buyers out of the market who can’t pay with cash.
The restaurant industry is back to normal. Your average restaurant owner is going to have two solid years of tax returns showing steady growth and increased revenues which they can show to buyers as proof that their restaurant increased in value. If you are looking to sell your restaurant right now there is going to be interest, especially if the restaurant is a turnkey business. Quality restaurants are selling in this market and restaurant owners dealing with burnout from rebuilding their business are looking to get out of the industry and sell.
Quality restaurants are selling in this market and restaurant owners dealing with burnout from rebuilding their business are looking to get out of the industry and sell.
Quick Service Restaurants under $500,000 were the best value for prospective buyers this year. QSRs are lower rent, with lower labor costs, and most importantly are easier to manage for potential owners new to the industry. The opportunity cost is greater for a QSR since a full dine-in restaurant usually requires significant overhead and an owner with experience to be successful.
The under $500,000 price point is popular because your most willing buyers want to pay with cash. Any deal that requires financing is going to push some buyers out since high-interest rates make borrowing money an expensive and risky endeavor for the buyer and the bank they are getting the loan from. Someone looking to buy a restaurant is going to rethink that purchase if they have to finance a $3.5 million establishment at an interest rate that is prime plus some points. If a buyer needs to do that they are just going to reinvest that money in something else and wait for rates to go down.
High interest rates were a problem in 2023 and the cost of borrowing money did keep people out of the market. Restaurants have always been risky investments and become more risky if rates are high. Uncertainty will always scare people away, and we were never very certain about what the rate market would do in 2023. This uncertainty mixed with good revenue gains for restaurant owners meant increased values for restaurant owners but also meant a smaller pool of potential buyers who could enter the market. Cash buyers helped improve the market in 2023 but we would hope to see more buyers next year due to better access to financing. A lot of people don’t have six figures on hand to buy a restaurant so good financing for prospective restaurant owners is key to improving the market in the future.
The outlook in 2024 is looking good and we expect to see an increase in new and old investors looking to buy restaurants. We expect to see lower interest rates in 2024 which will reduce the debt service for any kind of deal. This means we expect to see buyers who were priced out of the restaurant market in 2023 jump into the market in 2024. We expect to see no shortage of quality buyers in 2024 and the most sought after opportunities will be those quality restaurant opportunities. These opportunities are those restaurants with clean books/records, three years of increasing revenue, and established management in place.