While it’s unlikely to meet the white-hot levels of deal-making of 2021 and 2022, the QSR industry is poised for an uptick in mergers and acquisitions (M&A) in 2025. What’s driving this prediction? Pent-up demand coupled with supply, the need for strategic technology implementation, and natural inorganic growth all play roles.
Here are our insights into the market ahead along with how buyers and sellers can leverage opportunity in the New Year.
A brief look back
Quick-serve restaurants were some of the big winners in the pandemic, as diners clamored to find COVID-safe alternatives to eating at home. QSRs were also hot commodities in the M&A sphere as they were able to meet COVID demands quickly and grow their profitability.
With the rise of inflation and the resulting interest rate hikes starting in 2022, however, M&A activity cooled. With the recent half-percent rate decrease by the Fed along with another potential rate reduction by year it, M&A activity could warm up in 2025.
What the numbers say
In its 1H24 Restaurant & Finance Valuation Update, Restaurant Research found that 2024 M&A activity was 9.5 percent lower than early-year projections, but the current target of $9.6 billion in deals still represents more than a 10 percent year-over-year increase from 2023.
To overcome lagging organic growth and achieve more specific expansion goals, many franchise owners are pivoting to inorganic growth strategies such as M&A. Both small and large deals are taking over headlines this year, involving concepts such as Burger King and MOD Pizza. Bank of America reported 70 Food and Beverage sector deals through the first quarter of 2024, putting this year on track to meet or exceed 2023’s total of 271 deals.
Most recently, Baird published an M&A forecast after the recent Fed rate reduction, which says:
We expect M&A activity to benefit from a series of benchmark rate cuts by the U.S. Federal Reserve through 2025. This phase of the rate cycle should feature reduced loan yields that lead to increases for leverage ratios and M&A valuations, particularly for LBOs. As in the past, easing rates and higher multiples are likely to stimulate additional M&A activity, particularly since the current backdrop seems more favorable than in the previous two rate cut periods.
Economic pundits are predicting further rate cuts in the near future. The Baird report goes on to predict if this happens:
- Loan pricing could steadily drop by a total of 200+ bps to below 8 percent over the next 12–15 months as expected Fed moves become reality.
- In view of the data presented above, loan yields decreasing to the 6–8 percent range would correspond to leverage ratios rising by a half turn or more from 4.8x EBITDA in H1 2024.
- History suggests valuation multiples could increase by nearly a full turn on average in this scenario.
Key moves to make
Although M&A activity is expected to rise, there’s still some doubt concerning the timing of it. We don’t expect a surge in the near term as interest rates are still significantly higher than they were three years ago. Lenders are more cautious about loans to restaurants, and some buyers continue sitting on the sidelines during uncertain election cycles. Comparing now to pre-COVID years, buyers need to be prepared to come in with more equity and sellers may need to provide a level of seller financing to get the multiple they desire.
To prepare for a deal, buyers and sellers should consider a number of steps:
- For buyers
- Clearly define short- and long-term goals for the deal
- Set realistic spending limits and explore available funding options
- Search business exchanges and talk with other QSR owners to identify potential targets
- Study the policies of the brand concept
- For sellers
- Assemble up-to-date, clean financials for the last three years
- Ensure that the business’s lease is transferable and that all other transfer requirements are met
- Invest in AI and technology that will optimize operations before selling
- Meet with QSR industry experts, accountants, and legal counsel to price the business competitively
- Notify managers and other employees of the sale earlier rather than later
- Communicate openly with the franchisor and utilize them as a resource throughout the process
Looking ahead
While the outlook for restaurant franchise M&A activity in 2025 is more positive, success will largely depend on preparing, planning, and adapting. Leveraging expert advice and maintaining a proactive approach can maximize the potential for finding and closing a successful deal.
Alicia Chandler is president of Indianapolis-based First Franchise Capital Corporation (“FFCC”), a First Financial Bank company, which provides customized financial solutions for multi-unit quick serve restaurant franchisees of best-in-class concepts nationwide.
