After facing strong headwinds over the past three years, the restaurant industry is finally experiencing some relief from inflationary pressures, labor issues, supply chain challenges, and everything in between. To many, this environment is the “new normal.”

M&A activity in the restaurant industry turned a corner in the second half of 2023 and several deals grabbed headlines. Subway announced their sale to Roark Capital for $9.6 billion, though the deal is under review by the FTC. FAT Brands bought Smokey Bones for $30 million, which adds the first barbeque brand to FAT’s growing portfolio. Cava was one of the few hot IPOs in the summer, opening at $22 per share and peaking at $58 before settling around $42. Wingstop franchisee Far West Services enjoyed a bidding war and ultimately received significant a growth investment from Brentwood Associates and Sixth Street. These deals and others show the market for restaurant M&A is gaining momentum – and that 2024 could shape up to be a busy year of acquisitions.

A common theme was present throughout 2023’s dealmaking: both strategic buyers and private equity groups were keen on concepts that show strong performance in recent years, especially traffic. In an industry where many restaurant operators are facing negative traffic growth, M&A offers strategic players opportunities to drive efficiency and create scale – and in the current environment, adding more stores by buying an existing chain can be easier and less expensive than opening new concepts. The Smokey Bones deal, for example, adds 61 restaurants to FAT Brands’ portfolio, and the company has several initiatives underway that complement FAT’s strategy including expanding off-premise channels. The partnership enables Smokey Bones to grow via FAT’s aggressive franchising strategy as well.

Emerging concepts also captured buyer attention in 2023. Main Squeeze Juice Co., a portfolio brand of Conscious Capital Growth, acquired I Love Juice Bar and added 23 units to Main Squeeze’s growing footprint of 28 stores across five states. The deal enables Main Squeeze to enter new markets and accelerate growth, which is particularly timely given the growing consumer demand for better-for-you options at fast-casual concepts.

While the uptick in M&A activity was positive for 2023, some deals reflected adjusted expectations from sellers on valuations. Pollo Tropical sold to Garnett Partners for $8.50 a share, below its 52-week high and at only a slight premium on its trading price. The chain has high average volumes but has struggled to expand its footprint outside of Florida; it also had closed several locations. Buyer concerns were reflected in the purchase price and operators should take note: performance metrics will continue to be under scrutiny from potential buyers and lenders. A company that shows sustainable performance and growth potential, beyond one area, will be in a stronger position to pursue development opportunities and attract more buyers during the M&A process.

As we start 2024, we are cautiously optimistic that M&A will continue the momentum from the back half of 2023. We expect strong acquisition activity in the lower middle market as strategic buyers seek new avenues for growth as well as private equity buyers seeking solid financial returns from acquiring franchisees and well-managed regional restaurant operators. Whether it’s an emerging fast-casual concept that enhances a multi-brand platform or an established franchisee generating consistent cash flow, the outlook is positive for buyers and sellers to come together on deals – something we can all toast to as we ring in the new year.

The FOCUS Food, Beverage, and Restaurant team is happy to share its insights with restaurant owners/operators and answer your questions. Whether it is discussing valuation trends or positioning your restaurants for an eventual sale, our team is here to help. Please contact Mike McCraw at [email protected] or (205) 915-8282 or Jim Sowers at [email protected] or (804) 525-8541.

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