In mid-November each year, operators, investors, advisors, lenders, lawyers, and service providers meet in Las Vegas for the annual convergence of industry insight and expertise: the Restaurant Finance & Development Conference. G2’s Heidi Piché and Jenn Faulk attended and synthesized the key themes coming out of the three-day event. 

Everyone is approaching 2024 with caution. Brands wary of consumer cost-consciousness are breaking from existing strategies to test traffic-driving discounts and value offerings. Operators fatigued by ongoing challenges are looking for an exit—likely leading to a spate of seller activity.  Lenders are watching how consumers react to recent price increases, subsequent traffic declines, year-over-year profit margin trends, and the overall share-of-wallet relationship as they assess internal credit appetites. 

What does all this mean for restaurant operators looking for a life raft—namely, capital or a change-of-control transaction in 2024? We’ve broken down the four most important insights. 

Bigger is Better

Why scale matters more than ever. 

It is simply more expensive to do business today. The cost of inventory, labor, real estate, and capital improvements have all risen. What’s more, the borrowing index has surged by 200 bps compared to 2022, coupled with elevated risk premiums being charged by lenders. For many, the price to secure the capital is at a premium, but for those who can scale, mainly through acquisition, opportunities await, including:

• Bolstered buying power and cost synergies on overhead 
• Easier access to capital due to size and scale
• Premium platform valuations gained through multiple arbitrage    

Hold, Please

When waiting to raise capital is wise. 

While gaining market mass is one winning strategy, holding tight is another. That’s because there are fewer active lenders today—most with more restrictive credit risk appetites and many prioritizing existing relationships. What’s more, many lenders are reducing leverage at underwriting and covenant setting by at least half a turn. The depth of the syndication market also poses challenges, requiring larger commitments from the top-tier banks. This exclusive credit club leaves a lot of restaurant operators out; therefore, if you have the runway, sit tight with your existing agreements.

If you are still considering borrowing, be aware that most banks require ancillary business, meaning business owners are tying up funds that in prior years could have been used for growth—and are increasingly coming forward with personal deposits to meet requirements. If you are exploring private credit to fill the gap left by the tighter senior credit market, be prepared to pay a premium on top of what senior lenders offer. 

Don’t Despair

Which deals are getting done. 

The dynamics may seem complex, but the reality is that strategic and private equity groups have capital to deploy and are still actively looking to acquire businesses. Another benefit: Given deal scarcity, strong assets still command competitive processes and high multiples. 

Here’s what we expect to see in terms of deal flow and close rates in 2024:

• Conference participants expressed optimism about the prospects for increased M&A activity in 2024, particularly for well-capitalized, credit-worthy companies looking to scale, acquire alternate revenue channels, or underwrite cost synergies.
• Despite a disconnect between buyers and sellers over the last two years, operating trends have stabilized, leading to a compression in the bid/ ask spread between buyer and seller.
• Fatigue is expected to prompt more owners to ask, “Is now the right time to sell?” 
• Due diligence will take center stage, resulting in more extensive analyses performed over a longer period and posing higher investment committee hurdles.

More deals and diligence mean a potentially lower close rate but an overall healthier M&A year, resulting in the survival of the fittest.

Get Prepared 

How to make a successful exit.

Given today’s market, you must prepare well ahead of an exit. Consider the past and present: Do you have a strong historical track record and the right team to support your business going forward? Are you confident that your operations are strong today and sustainable in the face of future market shifts? 

At G2, we are available as a proactive resource to help assess your financial and operational health as well as strategic alternatives. Our sector strength gives us a point of view on where the restaurant industry and lending community are headed—and how not to get left behind.  

To learn more about how our industry insight can support your business goals, contact our Consumer & Retail team. 

Heidi Piché Managing Director,  Consumer & Retail [email protected] 617.823.9398

Jenn Faulk Vice President,  Consumer & Retail [email protected] 508.654.2346

Matt Konkle President [email protected] 317.371.6608