Restaurant Deal Landscape for Mid-Year 2024

Headlines have been filled with a number of restaurant-related transactions this year with well-known names including MOD Pizza, Carrols Restaurant Group, Fogo de Chao, Ruth's Chris and Pollo Tropical. To gain perspective on current deal activity in the restaurant sector, Modern Restaurant Management (MRM) magazine reached out to Nixon Peabody Corporate Transactions associates Robert Pethick and Anthony Bova. 

What factors are fueling deal activity in restaurants right now? Has the thought there was a pent-up demand real and what makes the industry attractive to investors?

RP: Amid heightened inflation, interest rates and food costs, buyers and sellers are looking for signs of stability when it comes to M&A in the second half of 2024.    The best indicator of stability is often a target’s strong financial returns and a track record of consistent cash flow.  Buyers are motivated to enter the industry for the economic returns, but also the scalability and growth many restaurants offer. The restaurant industry also is beginning to experience a push toward consolidation, much like the alcoholic-beverage industry has seen experience over the past decade. Private equity thus is keen on acquisition opportunities that will coalesce well-known brands with newer market entrants, particularly opportunities that are vertically integrated.

How could the growth of the private credit market be beneficial for the F&B landscape?

AB: Private credit has provided a shift for both investors and borrowers in a positive sense.  The broader access to credit offers smaller or medium-sized borrowers the opportunity to facilitate M&A transactions in sectors where larger food and beverage borrowers typically exist. This new access to capital will ease the strain on ambitious buyers looking to acquire restaurant targets that may have been “too small” for traditional lenders in prior years, which in turn should boost M&A activity and heighten competition for less-traditional assets in the food and beverage space.

What are some things you anticipate seeing regarding restaurant industry M&A through the end of this year?

RP: We expect to see increased M&A activity with expected rate cuts and decreases in inflation levels. We also expect to see an increase in distressed targets entering the market as oversaturation looms and customer tastes evolve.

What are some broader issues and trends you believe will impact restaurants moving forward?

AB: The labor market presents a key challenge for the restaurant industry going forward.  As we’ve seen some states have increased minimum wage requirements for fast food workers; wage pressure for restaurants and others in the broader industry could be next. Tipping culture has also dramatically changed over the past few years, which will undoubtedly have an impact on labor retention rates (and on the prices consumers are willing to pay for products and services).  

Although consumers are generally wary of higher prices, eating out has proven to be resilient. To keep up the momentum, restaurants will need to continue entertaining creative solutions, such as by adopting price-conscious menu options, increasing take-out and delivery options, offering flexible menu offerings (vegetarian, vegan, gluten-free, etc.) and otherwise working to deliver value to all manner of consumers.