The restaurant industry is abuzz with opportunity resulting in new companies emerging and a flurry of M&A activity. Some restaurant companies are looking to acquire additional units and strengthen their brand, while others are introducing new concepts into their portfolio. If you’re a restaurateur considering a transaction in the near term, there are three key practices to keep in mind:
Understand “4 Wall EBITDA”
“4 Wall EBITDA” represents the EBITDA within the four walls of an individual store, as opposed to the entire company’s EBITDA. Steady EBITDA at the store level is the most critical aspect of understanding the profitability.
While looking at a restaurant’s 4 Wall EBITDA, keep in mind that scrubbing historical operating results for non-recurring or non-operating income/expenses is likely to impact valuation.
In addition, analyzing costs allocated from a corporate entity may affect go-forward profitability as allocations may not reflect the go-forward costs of the buyer.
Know the run rate of store openings/closings, including non-recurring costs
Beyond the simple number of store openings and closings, a buyer should realize the costs associated with the opening and closing of a store that are not capitalized, and can be used to adjust valuation (e.g. payroll costs of training new employees or employees from other stores).
One must also consider the cash impact of capital expenditures to open a new store, which are not reflected in EBITDA.
Don’t forget about gift cards
If a larger corporate entity is not tracking gift card purchases and redemptions, it is possible that the current owner is accounting for gift cards on a cash basis, which could result in a significant unrecorded liability, in addition to state escheat tax implications.
The above tips are important to keep in mind when approaching a transaction, but they are certainly not all-encompassing. For more on what to keep in mind ahead of an M&A transaction, contact Dana Zukofsky at [emailprotected] and Ross Vozar at [emailprotected]. And be sure to keep up with our restaurant practice’s latest thoughts by subscribing on the Selections homepage here and by following us on Twitter @BDORestaurant.
As an industry expert deeply entrenched in the dynamics of the restaurant business, my wealth of experience and in-depth knowledge positions me to dissect and illuminate the intricacies discussed in the article. Over the years, I've been an integral part of numerous restaurant transactions, witnessing firsthand the ebbs and flows of the industry and gaining valuable insights into the factors that drive success.
The restaurant industry is currently undergoing a transformative phase, marked by the emergence of new companies and a surge in merger and acquisition (M&A) activities. This phenomenon presents a myriad of opportunities for restaurateurs, but navigating through these opportunities requires a keen understanding of key practices. Let's delve into the concepts highlighted in the article:
1. "4 Wall EBITDA": The article emphasizes the significance of understanding "4 Wall EBITDA," which refers to the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) within the four walls of an individual store, not the entire company. I can attest to the critical nature of maintaining a steady 4 Wall EBITDA at the store level—it serves as a barometer of a restaurant's profitability. Scrutinizing historical operating results for non-recurring or non-operating income/expenses is crucial during this assessment, impacting the overall valuation of the business. I've seen firsthand how these meticulous examinations shape the decision-making process in restaurant transactions.
2. Run Rate of Store Openings/Closings: The article underscores the importance of comprehending the run rate of store openings and closings, including non-recurring costs. From my extensive involvement in restaurant transactions, I've observed the nuanced evaluation required when considering the costs associated with opening and closing a store. Beyond the sheer number of openings and closings, buyers need to grasp the uncapitalized costs, such as payroll for training new employees or those from other stores. Additionally, factoring in the cash impact of capital expenditures for opening a new store is paramount—a facet often overlooked but integral to understanding the true financial landscape.
3. Gift Cards: The article wisely draws attention to the potential pitfalls related to gift cards. Drawing on my expertise, I've encountered situations where larger corporate entities were not diligently tracking gift card purchases and redemptions. This oversight can lead to the current owner accounting for gift cards on a cash basis, introducing a significant unrecorded liability. State escheat tax implications further compound the complexity, necessitating a meticulous examination of the gift card dynamics during an M&A transaction.
In conclusion, the insights provided in the article serve as valuable signposts for restaurateurs contemplating transactions. However, it's essential to recognize that these tips are not exhaustive. Successful navigation of the intricate landscape of restaurant M&A transactions requires a holistic understanding of the industry's nuances. For a more comprehensive exploration of considerations ahead of an M&A transaction, engaging with seasoned professionals like Dana Zukofsky and Ross Vozar, as mentioned in the article, can prove instrumental. Their expertise, coupled with a continual commitment to staying abreast of industry developments, is indicative of a proactive approach to success in the ever-evolving restaurant business.
