Restaurant Unit Sales in Q1 2022 Up 42 Percent Over Previous Year While Selling Prices Surge 51 Percent
Robin Gagnon, CEO and Co-Founder of We Sell Restaurants
The latest BizBuySell Industry Insight Report tracking restaurant sales contains good news for the industry, as business brokers report gains in units sold and higher selling prices. The median selling price for restaurants in the first quarter of 2022 gained 51% over the prior year, but more importantly outpaced the comparable selling price for 2019.
Restaurants sold for a median price of $225,000 in the first quarter of 2022, versus a low of $149,000 in 2021, and a pre-COVID result of $180,000 in 2019. That’s a gain of 51% over the prior year and a healthy improvement of 25% percent over 2019 levels. This is an important distinction since by default, 2019 has become the comparative year to measure the level of recovery for the industry.
Lenders and buyers alike are focused sharply on the period pre-Covid (2019). They see 2021 as a recovery year, making 2019 a benchmark for the industry. While many lenders and buyers are comfortable pulling 2020 off the table for obvious reasons, that leaves 2019 as the industry barometer of the restaurant’s overall health. For that reason, the latest results with a median selling price that outpaces all prior years is among one of the most favorable findings in the recent research.
Median revenue of restaurants sold in first quarter of 2022 is also sharply up. The latest BizBuySell report tracks median revenue of sold units at $720,000 versus 2020 results of just $600,000 and 2019 median revenue of only $580,000. This correlates with strong jumps in median cash flow which increased nearly 33% over 2021 and 2019. This quarter’s median cash flow jumped to $132,846 versus the $100,000 mark for both 2021 and 2019. This data indicates that the most valuable and profitable listings are finding buyers at an accelerated rate. Units with the highest revenue and earnings are undergoing new ownership in this quarter’s report.
These financial gains in the restaurant industry are exceptional in the BizBuySell Quarterly Insight Report for Q1 2022, as overall businesses reported slower gains. It states, “The median revenue of sold businesses in Q1 was down 5% over the previous year, with median cashflow showing a slight 2% gain.”
The industry news continues to show restaurants resiliency. The National Restaurant Association analyzed U.S. Census Bureau data and recently said, “Consumers shrugged off record gas prices and continued to boost their restaurant spending in March” after seeing sales rise month over month in the first quarter. March restaurant sales were $75.4 billion, and that was up 1% from February which was 3% better than February.
Full-Service Continues to Struggle
QSR or Quick Service Restaurants emerged from the pandemic as the darling of the industry and continue to turn in strong performances based on their ability to quickly pivot to the third-party delivery or takeout model. Full-service restaurants lagged that dimension and continue to suffer.
According to Black Box Intelligence, “Full-service restaurant sales have yet to recapture sales lost during the pandemic due to softer spending by older guests.”This important demographic is below pandemic levels in spend when compared to all other age groups.
They cite reasons for the pullback by seniors as related to health risks which this author feels are diminishing concerns. This group is most tied to a fixed income and thus, most at risk from inflationary pressure, which is increasing pricing for seniors and contributing to higher sales volumes in restaurants.
Overall, as seen in the recession of 2008 and during COVID, when times get tough, the family will not relinquish some form of a dining experience. In 2008, they traded the full-service experience for less expensive quick casual concepts. Moreover, those typically visiting quick casual concepts trade down to fast food experiences. In short, Americans love the dining experience over cooking for themselves but may modify the level of that occurrence to fit into a family budget hit with price increases. This is especially true at the gas pump.
While the BizBuySell Q1 2022 Insight Report does not segregate data by restaurant type, our internal results from We Sell Restaurants show that fast-casual or quick service restaurants (QSR) remain the most favored among buyers and consumers. QSR units retained profitability over the past year by focusing on controllable elements including enhanced digital changes, improved speed with service and making data-driven decisions to drive actions and results. Overall, they were more agile than their full-service counterparts leading to higher buyer demand and strong financial results. This trend will continue as full-service restaurants seek a return to pre-COVID days.
Geography Still Impacting Restaurant Sales
The Pacific coast results are finally seeing a turnaround in transactions with 21% of the units reported sold in first quarter of 2022.* That’s up two full percentage points from the prior year where restaurant transactions declined, led by results in California. It is also a slight improvement over the 20% share reported in 2019 and a larger shift from Q4 2021 when Pacific Coast Transactions accounted for 17 percent of all sales.
The South* continues to dominate the board when measuring the percentage of restaurants sold by geography, turning in 42% of all transactions for the first quarter against last year’s 45% share. This could indicate that the North to South shift is beginning to slow as mask requirements are lifted and society normalizes in nearly all parts of the country. The South’s share is comparable to pre-Covid rankings for 2019 where they also accounted for 42% of all restaurant listings sold.
Growth in the Mountain States* was four percentage points higher than the same period last year. In 2021, the Mountain States only accounted for 7% of all restaurant sales. For this year, they have recovered to exceed pre-COVID levels at 11%.
Restaurant Multiples Are at Pre-Covid Levels
The average multiple of cash flow has also recovered to 2019 levels. The first quarter of this year saw restaurants trading at 2.11 as an average multiple of cash flow. That’s against an average multiple of cash flow of just 1.84 last year. That is a rise of 15%, another data point pushing listing and selling prices higher. The average multiple of earnings also exceeds the barometer year of 2019 when multiples quoted in the BizBuySell Insight Report were 2.10. This also outpaces the same measurement for all businesses cited in the report which showed only a much more modest 2% gain. The combination of higher median cash flow along with stronger multiples has resulted in the higher selling prices commanded by the restaurant industry in the latest quarter.
What is on the Horizon for Restaurant Sales?
Despite economy challenges, BizBuySell data shows optimism for an industry that has experienced the worst of times and resiliently emerged profitable. That being said, there are still multiple points of concern for buyers and sellers.
Inflation
The path forward for restaurant sales will be influenced by the most troubling economic factor: inflation, including how sellers, buyers, and brokers react to the rapidly changing environment.
With inflation weighing heavily on their mind, expect restaurant buyers to closely focus on current trends. They are no longer just looking backward at performance, but will instead be requesting, “right now” numbers. Sellers should have up-to-date trailing twelve-month financials ready to present along with a clear business case in response to any scenario unfolding. For businesses in control of their financial picture, this should help to keep buyers in contract and deal flow proceeding, as well as satisfy lending demands.
Sellers should anticipate questions about measures already implemented amid inflationary pressures. They must explain any menu pricing changes already employed. If a seller has adjusted menu pricing by 2.5% across the board, there may be room to further adjust pricing as inflationary pressure continues. If the seller has already realized a 15% hike, the buyer is at risk of alienating customers by pricing them out of the marketplace with any further adjustments.
Labor
The restaurant labor crisis is now showing signs of easing. The U.S. Labor Bureau reported that in January of 2022, hourly wages for food service and drinking places rose over the past year from $15.78 to $17.90. This could be attributed to a combination of better recruiting and hiring practices among restaurant owners, plus improved store conditions and a commitment to a team culture. Restaurant owners rely heavily on the skills of talented employees to deliver a great customer experience and are responding through higher wages, more flexibility in scheduling and even housing in some cases. This commitment to employees is expected to endure and labor pressures are expected to ease over the coming year. In addition, workers who have been on the sidelines for more than two years are likely feeling the pinch of inflation, which may force them to re-enter the job market.
Building Costs and Delays
Continued sales in restaurants are likely to be buoyed by the performance of the construction industry. Those seeking to build a new restaurant are seeing dramatic delays in building amid labor shortages, material shortages, along with cost increases. High demand and competition from residential construction are extending timelines for opening new units. For those in the market to build a restaurant, the path forward may be as lengthy as two years. For these reasons, anticipate those in the market for new restaurant units to buy instead of build.
Construction delays drive demands at two levels. At the highest level of cash flows and performance, transactions will continue to flourish as buyers deploy capital for established money-making units. At the other end of the spectrum, assets sales are trending much higher in pricing because they are turnkey (or need minor re-imaging to launch), but more importantly, are fully equipped. Restaurant equipment orders are experiencing lengthy delays, and if you build, the market is learning you may not be able to equip the business. Thus, fully equipped restaurants that are not cash flow positive are seeing a resurgence in sales and higher trading prices.
Interest Rate Increases
Interest rate increases are the government’s standard response to inflation, however associated financing challenges may lead to an overall slowing of the market. Specifically, higher interest rates can dampen buyer enthusiasm, as restaurants must have higher cash flow to meet debt service requirements. When interest rates rise, payments overall increase, placing greater pressure on restaurants to satisfy the principal and interest requirements.
Sellers Return to the Market
Many restaurant owners, either fearful of low valuations or looking to recover first from COVID, are finally entering the market. This finding is validated by the BizBuySell Quarterly Insight buyer research that indicates “more than a third (37%) say they plan to sell within 2 years.”This is the often cited, ‘Silver Tsunami’ and coincides with the retirement of the Baby Boomer generation, the largest ever age group, with immense holdings (including restaurants), who will be converting their assets to cash to fund their golden years. The report said, “Of owners recently surveyed, the majority (55%) cite retirement as their motivation for selling, while a substantial 31% say their business is doing well and they can receive a good price now.” BizBuySell states that “active for-sale inventory has climbed 10% over the past year.”
Conclusion
Higher selling prices and stronger median cash flow are positive harbingers of a restaurant market that has recovered to 2019 financial performance levels. However, supply is still limited and transactions overall are still lagging. As the aging population contributes more to the availability of strong businesses, transactions are expected to pick up and meet buyer demand at a strong pace. Meanwhile, construction and equipment delays are pushing up the values and transactions on business that are not cash flow positive.
Overall, the current comeback of the restaurant industry continues to look strong. Still, the macro-economic forces including inflation, negative GDP growth and rising interest rates have the potential to impact transactions and cool buyer’s interest in the near term. However, just as restaurants have demonstrated a remarkable resiliency, so to have buyers demonstrated they are willing to absorb the risk and move forward.
*Pacific region includes AK, CA, HI, OR, WA. South region includes AL, AR, DC, DE, FL, GA, KY, LA, MD, MS, NC, OK, SC, TN, TX, VA, WV. Mountain region includes AZ, CO, ID, MT, NM, NV, UT, WY.
Robin Gagnon, CEO and Co-Founder of We Sell Restaurants