By admin 
While it is unlikely to reach the levels of dealmaking seen in 2021 and 2022, the QSR sector is poised for a surge in mergers and acquisitions (M&A) in 2025. What is driving this forecast? Pent-up demand coupled with supply, the need for strategic technology implementation and natural, inorganic growth all play a role.
Here are our insights into the future market and how buyers and sellers can seize opportunities in the new year.
A brief review
Quick-service restaurants were among the big winners of the pandemic, as diners clamored for COVID-safe alternatives to eating at home. QSRs were also popular commodities in the M&A space as they were able to quickly meet COVID demands and grow profitability.
With the rise of inflation and its resulting consequences interest rate increases However, from 2022 onwards, merger and acquisition activity cooled down. With the Fed’s recent half-percent rate cut, along with another potential rate cut per year, M&A activity could increase in 2025.
What the numbers say
In his 1H24 Restaurant valuation update and finances, Restaurant Research found that M&A activity in 2024 was 9.5 percent lower than forecasts at the start of the year, but the current target of $9.6 billion in deals still represents an increase of more than 10 percent year-over-year compared to 2023.
To overcome lagging organic growth and achieve more specific expansion goals, many franchise owners are turning to inorganic growth strategies such as mergers and acquisitions. Deals both small and large are making headlines this year, with concepts like Burger King And MOD pizza. Bank of America reported 70 Deals for the food and beverage sector through the first quarter of 2024, putting us on track this year to meet or exceed 2023’s total of 271 deals.
Baird recently published an M&A forecast following the recent Fed rate cut, stating:
We expect M&A activity to benefit from a series of interest rate cuts by the US Federal Reserve through 2025. This phase of the interest rate cycle should include lower loan yields leading to increases in leverage ratios and M&A valuations, especially for LBOs. As in the past, easing rates and higher interest rates are likely to stimulate additional M&A activity, especially as the current backdrop appears more favorable than in the previous two periods of rate cuts.
Economic experts predict further interest rate cuts in the near future. The Baird Report further predicts whether this will happen:
- Loan prices could steadily decline by a total of more than 200 basis points to below 8 percent over the next 12 to 15 months as the Fed’s expected actions become reality.
- In light of the data presented above, a decline in loan yields to between 6 and 8 percent would correspond to an increase in leverage ratios of half a turn or more from 4.8x EBITDA in the first half of 2024.
- History suggests that valuation multiples could rise by almost a full turn on average in this scenario.
Important moves to make
Although M&A activity is expected to increase, there is still some doubt about its timing. We do not expect an increase in the short term as interest rates are still significantly higher than three years ago. Lenders are more cautious about lending to restaurants, and some buyers remain on the sidelines during uncertain election cycles. Compared to pre-COVID years, buyers must 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 the short- and long-term goals for the deal
- Set realistic spending limits and explore available financing options
- Search for business exchanges and talk to other QSR owners to identify potential targets
- Study the brand concept policy
- For sellers
- Collect up-to-date, clear financial data from the past three years
- Ensure that the company’s lease is transferable and that all other transfer requirements are met
- Invest in AI and technology that optimizes operations before they are sold
- Meet with QSR industry experts, accountants and legal advisors to price the company competitively
- Notify managers and other employees of the sale sooner rather than later
- Communicate openly with the franchisor and use them as a resource throughout the process
Looking ahead
While the outlook for restaurant franchise mergers and acquisitions is more positive in 2025, success will depend largely on preparation, planning and adaptation. By using expert advice and taking a proactive approach, you can maximize the potential for finding and closing a successful deal.
Alicia Chandler is Chairman of Indianapolis-based First Franchise Capital Corporation (“FFCC”), a First Financial Bank company, which provides customized financial solutions for franchisees of multi-unit, quick-service, best-in-class restaurants nationwide.