The Shifting Restaurant M&A Landscape

Despite economic volatility and slower traffic, restaurant merger and acquisition (M&A) volume increased 42.9 percent year over year, according to data from Capstone Partners. Modern Restaurant Management (MRM) magazine spoke with experts from Bennett Thrasher, an accounting and advisory firm serving national brands including Zaxby's and Waffle House. Spencer Rees, Partner in Transaction Advisory Services, and Matt Taylor, Partner in Tax Transaction Advisory Services, share their perspectives on the evolving M&A landscape and financial management.

Why is restaurant M&A active now? What factors are influencing it, and what are investors looking for?

SR: The restaurant industry has always been an active area for M&A, attracting both private equity and strategic buyers. Restaurant concepts that combine an intriguing and unique brand while providing high-quality food and beverage offerings, coupled with a solid financial foundation, provide a strong platform for investment. 

Consumer demand remains high, and the industry has continued to grow despite rising ticket prices driven by inflation in food and supply costs, coupled with increased labor rates for quality staff. 

M&A activity remains strong because restaurant businesses have continued to perform well across fiscal years and geographies since the world has normalized following the COVID-19 pandemic. At the same time, the market’s vast size creates a broad pipeline of investment opportunities. Consumer demand remains high, and the industry has continued to grow despite rising ticket prices driven by inflation in food and supply costs, coupled with increased labor rates for quality staff. 

Investors are looking for businesses with solid fundamentals that they can grow and scale. Restaurant concepts should differentiate themselves through a compelling brand story, a unique market position, and the ability to build lasting connections with guests while consistently delivering high-quality service. Equally important is a strong, experienced management team with a proven track record of generating consistent, repeatable earnings and margins while controlling fixed costs. Diversifying a restaurant’s sales reach through a digital platform, or keeping customers engaged through membership or discount programs, can also provide intriguing growth potential. Together, these factors position a restaurant brand as an attractive platform for investors for future growth and expansion. 

Is there a valuation gap between what sellers think their restaurants are worth and what buyers are willing to pay?

SR: Investment bankers and other sell-side advisors will advise their clients on what buyers are paying for similar businesses in current market conditions. Naturally, many sellers believe their business deserves to command the upper end of those valuation ranges, especially after years of sweat equity building the company and seeing comparable businesses or the competition achieve strong outcomes. However, a seller’s expectations and a buyer’s valuation are not always aligned.  

That isn’t to say sellers shouldn’t expect to receive a high valuation. Rather, a buyer’s view of a business’s value is influenced by a broad range of factors; businesses must demonstrate strong earnings and margins as well as present the ability to grow and scale post-transaction. Demonstrating the ability to maintain a strong and loyal customer base with increasing ticket sales is desirable. 

To help narrow any valuation gap, sellers should be well prepared before going to market. That includes maintaining a robust financial reporting function, preparing a quality-of-earnings analysis with documented EBITDA adjustments, and presenting a credible growth strategy while pointing to historical performance and projected possibilities. 

What are ways operators can improve their profitability via strategic tax strategies and/or incentives?

MT: Restaurant operators can improve after-tax profitability by properly classifying capital expenditures and maximizing available tax incentives. Key opportunities include accelerated cost recovery through MACRS depreciation, Section 179 expensing, bonus depreciation, and favorable treatment of qualified improvement property. For restaurants undertaking renovations, correctly distinguishing building costs from interior improvements and shorter-life assets can significantly accelerate deductions. Recent law changes are particularly favorable, including the restoration of permanent 100 percent bonus depreciation for qualified property acquired after January 19, 2025, and higher Section 179 expensing limits. 

Restaurants with tipped employees should also review eligibility for the Section 45B FICA tip credit, which provides a credit for certain employer Social Security taxes paid on employee tips. Because the credit is part of the general business credit regime, its benefit may be limited by overall credit utilization rules, with unused credits generally carried back one year and forward up to 20 years. In addition, many states offer tax credits and other tax incentives that may be applicable to the restaurant industry and, in many cases, depend on the size of the business.  

When considering tax strategies and incentives, it is critical to consult with your tax advisor to evaluate eligibility and the ultimate benefit of any tax strategy being considered.  

What is an M&A timeline and how should operators prepare?

SR: The M&A timeline itself is a three- to six-month process from start to finish on average. However, a well-prepared seller should start planning many months to even a year or more prior to going to market. Early preparation can streamline the process and shorten the timeline, improving the likelihood of achieving a successful outcome and obtaining a maximum valuation. 

Preparation starts with ensuring the business is financially and operationally ready. This includes maintaining accurate, consistently applied financial records (with conversion to accrual accounting preferable over cash), tracking key metrics and financial data, ensuring accounting and operations teams are stable and lean, and identifying and remedying any legal or tax issues. Focus should also be placed on managing the business to improve operational performance over the coming months leading up to going to market, including increasing revenues, where possible, and lowering costs. 

Hiring experienced advisors early is also important. Investment bankers prepare financial models and craft marketing materials outlining the reasons why a business is an attractive investment that should command top dollar. Transaction advisory service providers can prepare a sell-side quality-of-earnings analysis that works hand-in-hand, supporting the investment bankers' thesis by cleansing historical financials, unlocking additional value through EBITDA addbacks, all while proving the underlying financials are sound and the valuation is defensible. These advocates will help restaurant owners find the right investor pool and guide them through the sell-side process to maximize the purchase price while ensuring the process is seamless from start to finish.

How can operators be fiscally responsible when they are trying to contain costs, be efficient, while still meeting guest expectations?

SR: Controlling costs and running an efficient operation are essential, and buyers look for these attributes in a business. However, it should never come at the expense of the guest experience. Customer satisfaction and service quality must remain the top priorities, as excessive cost-cutting could impact the experience and ultimately hurt a restaurant’s reputation.

Operators should look for ways to improve efficiency without compromising service. That starts with optimizing labor by analyzing staffing levels against daily and seasonal demand to ensure schedules are efficient while maintaining appropriate service levels. Operators can also reduce costs by negotiating more favorable pricing and terms with vendors for food, beverage and supplies, or by diversifying their supplier base to capture rebates and strengthen their negotiating leverage in the face of rising costs.

Finally, investing in operational improvements like production speed while maintaining quality can improve service and throughput while also reducing labor or other variable service costs such as utilities.

Is now a good time for operators to consider expansion or is it brand-specific? Is expansion evolving with interest in smaller footprints, focus on digital, etc.

SR: Yes, expansion opportunities are available; the decision is less about the brand and more about having a strong operating and financial foundation in place to support expansion. You also need a well-thought-out strategy to successfully execute the initiative.

Small footprints and businesses that have automation or digital infrastructure built into their operating models can provide a strategic advantage by improving efficiency, supporting scalability, and positioning a business more favorably during a sale process.