The mergers and acquisitions (“M&A”) market continues to be quite healthy compared to historical periods. The reason the M&A market is so healthy is because of the amount of excess capital available to fund alternative investments. For example, private equity funds (“PE”) and family offices have excess cash on their balance sheets and are looking to put capital to work in the form of buying private companies. Furthermore, if the PEs are unable to utilize the capital according to the fund’s Bylaws, and in a specific period, the PE must return the capital to the initial investors of the fund. These events have created the perfect storm where buyers outpace sellers, causing valuations to increase.
But before we present our tips, here is a little more information concerning the private equity markets over the past two years. In 2017, PEs invested more than $320 billion in deals and in 2018, the amount exceeded $340 billion. Additionally, in 2018, the median valuation multiple was greater than 10x EBITDA with more than 2,200 deals closed with a median deal size of just under $200 million. Of course, different industries receive different multiples, but overall, it is a great time to sell.
In our experience, we have found that the following tips can maximize your restaurant group’s value.
- Decrease the risk to the buyer by closing underperforming locations. Perform an analysis of every location on a stand-alone basis. Make sure to exclude all corporate overhead in the analysis. This will provide a clearer picture of the profitability of each location. If any outliers exist, consider closing the location before you market the business.
- Access future capital expenditure requirements. Invest now in capital assets necessary to grow the operations. This demonstrates that the business is turn-key ready to the investor.
- Analyze the profit and loss statement. Begin to maximize profitability today by paying market-based rates for owners’ compensation and related-party rent. Begin to document non-recurring and non-operating expenses over the past three years today so the due diligence process is smoother.
- Be prepared to provide a pro forma profit and loss statement for any new location(s). As the seller, you will want to include future earnings from a new location in the transaction price to maximize value.
The tips listed above affect both the economic benefit of your restaurant group (EBITDA) and the risk of the investment (valuation multiple). At the end of the day, a prudent seller wants to focus on minimizing the risk of their restaurants while maximizing profits to achieve the highest purchase price possible.
Michael R. Metzler, CPA, ABV, CMA, CGMA, ASA