Following a challenging period for transactions in the hospitality sector, the industry saw some significant closings in the second half of 2023 and activity has continued to accelerate in 2024. 

Successful M&A activity in the hospitality sector hinges largely on meticulous preparation. Allocating at least three to nine months to prepare to go to market allows companies, especially entrepreneurial and closely heled businesses, time to address operational complexities, align shareholder goals, and cultivate relationships with advisors all while still focusing on the businesses’ operations and performance. Early preparation also means companies have the flexibility to go to the market at the right time. 

Understand the KPIs

To increase valuations, there are several key performance indicators to focus on:

Same-store sales: Positive same-store sales is essential for securing high valuations. Consistent growth in this area demonstrates strong market performance and customer engagement and retention, making your business attractive to investors. Companies should strive for consistent same-store sales increases and regularly monitor and report on customer traffic to highlight ongoing market engagement and success.

Productivity metrics: Data like entrees per labor hour is the type of data that helps to indicate a restaurant’s level of productivity across the P&L and is the key to understanding what is driving the financial metrics. 

Customer data platform (CDP) metrics: Understanding your customer behavior is crucial for a restaurant owner to fine-tune what works, and what doesn’t. For example, customer data platform metrics can come from online orders, credit card tokenization, and third-party delivery which all help to identify what works and what doesn’t and the steps to increase customer frequency, and improve sales. 

Return on investment (ROI) metrics: Show investors how efficiently you use capital with clear ROI metrics. Calculating the payback period for restaurant investments illustrates prudent resource management and growth potential. 

The importance of a sell-side Quality of Earnings (QofE)

A comprehensive QofE analysis is indispensable for identifying sustainable earnings levels and validating valuation adjustments. A sell-side QofE can help to expedite the transaction process, increase transparency, improve upon favorable deal terms, mitigate any financial discrepancies or weaknesses, and maximize valuations.

More food for thought

Additional considerations for optimal M&A outcomes: 

• Determining which team members need to be “under the hood” working with you on the transaction, building a strong communication plan, and whether transaction bonuses should be part of the plan for retention during this period. 
• Having an audit ready. If you don’t have an audit, having time to have one conducted can help to mitigate any discussion around purchase price reduction.
• Conducting a consumer or brand study for market feedback and strategic refinement. 
• Fostering cultural alignment and emotional readiness in partnerships, and prioritizing relationships with partners who share your vision.
• Being vigilant: Successful M&A transactions demand vigilance. Be mindful of alternatives, avoid underestimating transaction costs, and seek professional advice. 
• Not compromising on accounting and finance integrity. Cultivate a dedicated champion within your finance team and anticipate the analytical needs from a buyer's perspective.