The Time Is Now: Conditions are ripe for renewed M&A activity

The franchise and restaurant industries are on the brink of a significant resurgence in M&A activity. After several years of subdued activity, the stage is set for a wave of transactions fueled by favorable economic conditions and industry dynamics. For buyers and sellers, understanding the driving factors behind this trend and strategic preparation are essential to seize the opportunities ahead.

The past several years have been one of the slowest periods for M&A in recent history. Economic uncertainty, pandemic disruptions, unreceptive capital markets, political elections, and valuation disconnections contributed to a stagnant environment. Pent-up demand is beginning to emerge as a key catalyst. The restaurant and franchise sectors have demonstrated remarkable resilience, outperforming other industries in areas like consumer demand and operational adaptability. This robust performance has attracted interest from investors seeking stability and growth and the ability to buy both real estate and operating businesses.

Franchise owners who delayed their exit plans during the uncertainty are now reevaluating their strategies. Many are several years older than when they last contemplated a sale and face pressure to retire or explore new ventures. Many longtime owners and operators are tired and suffering from fatigue and impatience. With election-related uncertainties largely resolved and the broader economy stabilizing, conditions are ideal for renewed activity in the M&A space.

The reduction in interest rates provided another significant factor driving this resurgence. Although future rate reductions may be modest, the current lending environment is highly favorable. Lenders are eager to fund acquisitions after years of subdued activity. They’re bolstered by confidence in the economy and the absence of an impending recession forecast. Reduced borrowing costs have made deals accessible, which appeals to potential buyers and creates an environment where financing acquisitions is more affordable than in the past few years. 

The influx of available capital is further fueling this momentum. Investors, particularly private equity and strategic buyers, are seeking opportunities to deploy their resources. With substantial capital reserves and a keen interest in high-performing businesses, competition for quality acquisitions is intensifying.

For sellers, this environment offers an opportunity to optimize the value of their businesses. One critical area of focus is understanding how valuations are determined in the current market. Financial performance, asset quality, and operational efficiency play pivotal roles in shaping a business’ worth. Sellers should prepare their companies to move quickly, ensuring that all aspects of their operations, finances, and legal/tax documents are in order.

Valuation discrepancies can pose a challenge in negotiations. Sellers may have inflated expectations about their businesses’ value while buyers often base their assessments on financial metrics and growth potential. Addressing these differences early in the process can help set realistic expectations and prevent roadblocks. Sellers who approach the market with a clear understanding of their businesses’ strengths and opportunities will inspire confidence in buyers while a lack of preparation can lead to hesitation, doubt, retrading, high legal bills, and long timelines.

Buyers also have a responsibility to position themselves effectively. Streamlining operations and maintaining robust financial reporting systems of existing portfolios are essential to appeal to franchisors and capital providers. Securing brand approval, a process that has become increasingly stringent due to bankruptcies and consolidations, requires careful attention. Buyers must demonstrate their financial planning and due diligence capabilities to stand out.

For sellers, addressing operational readiness is equally critical. Projects, like capital expenditures, remodels, and ensuring compliance with brand standards, must be prioritized. Organizing financial records, legal documents, leases, and franchise agreements will signal professionalism to potential buyers. Attention to detail in these areas enhances credibility and maximizes the likelihood of achieving favorable terms.

Experienced advisors are crucial when navigating the complexities of M&A transactions. For sellers, this means working with investment banking partners, accountants, attorneys, and advisors who specialize in franchise and restaurant deals. They can help organize records, address operational issues, and present a compelling case to potential buyers. Buyers, on the other hand, benefit from advisors who can identify high-potential opportunities, align acquisitions with strategic goals, and manage the brand-approval processes.

Timing plays a pivotal role in M&A success. Both buyers and sellers must evaluate market conditions and competitive dynamics to determine the optimal moment for action. Sellers should prepare their businesses for sale well in advance, addressing any operational or financial issues that could hinder the process. Buyers must stay attuned to industry trends and be ready to capitalize on opportunities.

The resurgence of M&A activity in the QSR and franchise industries presents unparalleled opportunities. For sellers, it is a chance to unlock the full value of their businesses by addressing operational inefficiencies, streamlining processes, and engaging experienced advisors. Buyers, meanwhile, can take advantage of favorable lending conditions and increased capital availability to secure acquisitions that align with their growth strategies.

By understanding the trends driving this resurgence and preparing effectively, stakeholders can position themselves for success in a dynamic and competitive market. The time to act is now as the combination of pent-up demand, rate reductions, and abundant capital creates an environment ripe for M&A activity. For those ready to navigate this resurgence strategically, the rewards can be substantial.

Tori Wagner is a vice president with C Squared Advisors, an advisory firm that focuses on multi-unit franchisees and franchisors. She has worked with franchisees for more than a decade, advising clients through M&A transactions as well as raising debt and equity capital to support strategic initiatives. Contact her at 508-769-0097 or tori@c2advisorygroup.com.