In every area of life, things are getting more expensive. Gas, rent, and essentials from the grocery store have all skyrocketed in price. While the restaurant industry is no stranger to experiencing the side effects of inflation there is good news to report. Inflation is having a positive impact on the sale of restaurants.
Restaurant Values Rise and Median Revenue Increases
The value of restaurants being sold increased 51 percent for the first quarter of 2022, according to the latest BizBuySell Insight Report. Restaurants sold for a median price of $225,000 versus a low $149,000 in the prior-year period. The BizBuySell Insight Report is a nationally recognized economic indicator that tracks the sales and listing prices of small businesses across the United States. The report, which is produced by the online marketplaces of businesses for sale, includes data from more than 70 major U.S. markets and across 65 small business industries, including restaurants.
A second indicator of the rising tide in restaurant value is the median revenue of restaurants reported as sold. In the first quarter of 2021, the BizBuySell Insight Report tracked revenue for sold restaurant transactions at a record $720,000, versus $600,000 for 2021. A 20 percent increase in revenue aligns with inflationary pressure on pricing and accompanying sales increases.
The financial gains in the restaurant industry are extraordinary, especially considering overall businesses are reporting slower gains. The median revenue of sold businesses dropped 5 percent during the first quarter, the report revealed.
Buyers: How to Navigate Inflation Landscape
Buyers seeking to navigate the changing landscape for buying restaurants within an inflationary period should consider these strategies.
Focus on the “Right Now”—Inflation is a game changer for many businesses. Typically, the buyer would look deep in the restaurant’s history, but now buyers are focusing on the current trends. So, sellers should have an up-to-date trailing of the last 12 months of financials ready to present.
Understand Inflation Implemented Policies—Be mindful of the current practice of the establishment. If the present owner has already made inflation adjustments, take that into consideration since the sales and earnings will be affected.
Plan to Spend More—It’s important to be aware of how other industries are impacted by inflation. For example, if the buyer chooses to shift their ideas of buying an existing restaurant and instead chooses to build their own, that includes working with a construction team. Construction has been hit hard by inflation, and the wait time for equipment, plus the delay in launching, could put you in the red way before your grand opening.
Pay Attention to Geography —Location is still one of the most significant factors for potential buyers, but it also remains very fluid. According to the same BizBuySell report, the Pacific coast is seeing a turnaround in 2022 with 21 percent of the units reported sold in the beginning of the year. The Mountain states are four points higher than the same period last year. This year, they’ve completely exceeded pre-COVID levels. Meanwhile, the South continues to dominate with 42 percent of restaurants sold.
Time is Right to Buy—It’s important to recognize the U.S. government will try to push inflation down by tightening credit through higher interest rates. For many, it would be advantageous to lock in a rate now before higher rates go into effect. While ongoing labor challenges continue to be a concern for potential business owners across the country, the foodservice industry is chipping away at the shortfall. Eating and drinking places added 46,100 jobs in May, the National Restaurant Association reported.
2022 Outlook Positive
The outlook is bright for restaurant sales. The number of closed transactions was up 42 percent during the first quarter. Ultimately, the increased value of restaurants creates an optimistic outlook for the industry. Higher selling prices presents itself as positive evidence that the industry is recovering.
As we know, inflation has positive and negative influences on the economy. While it isn’t the death of a deal for those interested in investing in a restaurant, it’s important for buyers to recognize the opportunities available to them, especially if they are willing to take a chance.
Robin Gagnon is the CEO and Co-Founder of We Sell Restaurants, the nation’s largest restaurant brokerage firm and the only national franchise specializing in restaurant sales.