For the First Time in Two Years, General Business Sales Outpace Restaurant Transactions Year Over Year

• Restaurant Sales Slow in Q3 – Declining 7.5% over the Prior Quarter
• Q3 Sales were 1.3% Ahead of Last Year compared to +9.3% in Q2
• Median Selling Prices rose 7.4% over Last Year but Declined from Last Quarter

Restaurant sales slipped in the third quarter, turning in a slower performance that was just 1.3 percentage points ahead of last year and declining 7.5% from the last quarter. That is based on data from restaurant sales provided by BizBuySell’s Quarterly Insight Report, a nationally recognized economic indicator that tracks the health of the U.S. small business economy. A decrease in median selling prices from the prior quarter was also part of the most recent transaction data released. Selling prices in the restaurant sector declined by more than 6% from the prior quarter, however, they were 7.4% over last year at the same time.

Overall business transactions also posted small gains at just 2% year-over-year increases, also slowing from the prior quarter but with a much stronger reversal from a first quarter decline of double digits and last year’s negative results. Notably, the restaurant sector, which had outperformed the general business for sale marketplace for the last two years, failed to overachieve in this quarter for the first time.

Median Revenue, Median Cash Flow and Selling Prices for Restaurants in Q3 2023

Median revenue of restaurants sold rose more than 20% from the same quarter last year to $728,254 but less than the high point of $800,000 recorded in Q2. That peak in revenue, however, was the highest median revenue of restaurants captured in the last five years. This could be attributable to price increases due to inflation since the Consumer Price Index published at the end of September shows that food away from home was still rising each month in the third quarter with an unadjusted 12 month average increase of 6%.

Higher average sales could also simply reflect continued strong consumer demand for the dining experience. The National Restaurant Association reported total sales of $91.9 billion in the last month of the quarter, marking seven consecutive months of restaurant sales growth.

The commitment of the consumer to the dining experience is also reflected in the recent forecast for growth published by Technomic and Technavio. They predict a surge in the U.S. fast casual market and estimate an increase of $55.4 billion from 2022 to 2027, a compound annual growth rate (CAGR), of 11.56%. They also calculate the CAGR for the foodservice market at 28.35% with the dining out market estimated to grow at 53.21% CAGR over the same period. The QSR or Quick Service Restaurant segment caught fire during the pandemic by adopting technology and leaning into third party delivery. This data indicates no signs the sector is slowing down.

Based on the BizBuySell data, the median cash flow of restaurants sold dipped 4% against both the prior year’s quarter, a sign that higher revenue is not translating to higher earnings. This is in line with an industry study by the National Restaurant Association which found more than nine in 10 operators stating that “the cost of food is a significant issue for their restaurant.” However, median cash flow was robust among sold transactions at $120,000, indicating the restaurant buyer is still paying for good cash flow opportunities.

That can translate to good news for restaurant sellers. Bank of America internal data cited in a recent report by FranData shows that the number of households receiving unemployment benefits is growing faster for higher-income households (those earning $125,000 or more) than for those earning less than $50,000, or between $50,000 and $125,000. They reached this conclusion by looking at the number of households receiving unemployment benefits through direct deposit monthly versus the prior year.

As laid off households seek to replace minimal unemployment benefits or severance packages with six-figure earnings from business ownership, expect restaurants, along with other businesses with strong cash flow to command strong interest. The average cash flow multiple for sold restaurants was 2.13 times cash flow versus 2.18 last quarter, offering buyers a better bargain than the prior quarter. That rate was better, however, than last year’s result for the same quarter at 2.09.

Faster turnover for restaurants was also reported, with median days on market declining from last quarter, and deals occurring in seven fewer days (174 versus 181). That trend may continue if those leaving jobs with high earnings are looking to quickly replace the income in business ownership, putting pressure on the parties to close faster. Banks, however, taking harder looks at deals, may be slowing the process since overall, it still took longer to close deals overall than last year (174 versus 169 days).

Median asking prices for the restaurant sector reported healthy gains with an increase of 8% over the prior year. The average asking price to selling ratio dipped below 90% for the first time and was more comparable to 2020, which was still feeling the impact of the pandemic. This is likely a function of buyers factoring in the cost of debt service from higher rates when calculating cash flow requirements putting downward pressure on eventual selling versus asking price.

Restaurant Industry Sales by Region

Most regions, including the Northeast and Mountain, faced challenges with declines in both listings and prices. The Mountain region had a significant decline in sold listings, dropping nearly 22% over the prior year and 27% over the previous year. The median selling price dropped nearly 29% over the previous year while sliding only 3.7% over the prior quarter. This market includes Arizona, Colorado, Idaho, Montana, New Mexico, Nevada, Utah, and Wyoming.

Historically, prior quarters were stronger for the Mountain states, possibly buoyed by those relocating from California to Arizona and Colorado, trends borne out by relocation data. Post pandemic, there has been an outward flow from California to surrounding states. As of August, however, Texas became the top destination for departing Californians, with 13.71% of those leaving the state expressing interest in the Lone Star State. Relocation data can’t be strictly interpreted however, since those relocating could affect transactions on both sides, equating to more units sold as they leave markets to more units acquired as they purchase in other states.

The Northeast (CT, MA, ME, NH, NJ, NY, PA, RI, VT), faced significant challenges with declines in both sales and pricing. The count of listings sold versus last year in these states fell by more than 21% and the median selling price declined 31%, the highest deficit in pricing nationwide. Meanwhile, quarter over quarter results show a decrease in sold listing of 13% and a decrease in the median sale price of 12% so the markets are improving on a quarter to quarter basis. The Midwest (IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI), also experienced larger drops in unit sales though the decrease in sold listings was single digit (down 8% to last year and down 9.4% to last quarter).

The Pacific Region, made up of five states, Alaska, California, Hawaii, Oregon, and Washington, turned in a banner performance reporting a 41% increase in restaurants sold over the prior year. These statistics for this region, are likely dominated by California with its $3.6 Trillion-dollar gross state product (as of 2022) representing 14.3% of the U.S. economy which on a relative basis, equates to the fifth largest economy in the world. Potentially buoyed by California’s performance, this region jumped to the front of the restaurant sales pack in the third quarter with a 41% increase in restaurants sold over the prior year.

California restaurant operators saw the third quarter usher in a massive resolution to legislation affecting all franchise restaurants with more than 100 units. If the proposed FAST Act or AB 257 had passed into law, it would have significantly impacted franchise operators in the state. This proposed legislation gave government appointed panels from outside the business the power to set wages and labor standards for the half million Californians working in these units. Vehemently opposed by the International Franchise Association, the National Restaurant Association, large franchise brands and others, enough signatures were gathered to delay implementation of the bill and force a referendum on the matter.

Faced with the prospect of a referendum which put implementation of the act on hold for two years, and with committed funds on both sides, the National Restaurant Association, International Franchise Association, key restaurant stakeholders, and the Labor Unions came to an agreement that repealed the FAST Act or AB 257 in the third quarter. In addition, there was an agreement to withdraw an act that would make franchisors responsible for the actions of the employees of franchisee. Under the compromise agreement, wages will rise to $20 per hour by 2024, but local governments are prohibited from boosting them beyond that level.

The outcome, while not ideal for either side, introduced certainty in budgeting for restaurant owners who can now accurately predict labor costs. This may have relieved some pressure on those waiting on the sidelines to acquire a restaurant until they could understand future labor costs. If this was in fact, an impetus for more sales, expect the floodgate to continue with more sales in the Pacific Coast as restaurant operators flee onerous restrictions and others take advantage of the opportunity and settle into the new normal of paying fast food workers more than $20 per hour. The compromise repealed the law and forestalled its resurrection through the end of 2028.

Finally, a region with consistent growth in restaurants sales is the south, defined in the BizBuySell data as AL, AR, DC, DE, FL, GA, KY, LA, MD, MS, NC, OK SC, TN, TX, VA, and WV. The South has been on a growth trajectory with positive trends since the second quarter of 2021, when the pandemic was starting to be in the rearview mirror for most of these states. While not yet back at pre-pandemic sales levels, they are still outperforming most of the country on a consistent basis with an increase in sold listings of nearly 4% and a significant increase in the median sales price that is 20% ahead of last year. These states also posted positive comps to last quarter, the only region to outperform both last year and last quarter.

The Path Forward for Restaurant Sales

While the third quarter results were less promising than prior quarters, the results may have simply reflected a market on a pause while buyers dealt with economic news on all fronts that was less than positive.

As we look to the fourth quarter, interest rates may have finally peaked with the Federal Reserve taking no action in its late third quarter meeting, failing to levy yet another increase after raising them for three successive quarters. For buyers acquiring restaurants for the future, they may feel the rates are finally at the top of the pendulum and what goes up must eventually come down. This signals good news for buyers since those investing in a business today at the highest rates, with sufficient cash flow to cover debt service, will be well positioned for success with decreased rates and the opportunity to refinance in the future.

The consumer’s commitment to the industry is another powerful reason the future may be brighter for restaurant sales ahead, since restaurant sales and the customer demand shows no signs of waning evidenced by the monthly increase in sales data published by the National Restaurant Association.

Lastly, some sellers are simply running out of runway to sell, which could drive unit turnover for the coming quarters. Many restaurant owners put plans to exit the business on pause due to the pandemic and the subsequent struggles with labor, inflationary pressure on menus and supply chain concerns. However, with an expected “Silver Tsunami” of baby boomers set to retire, at a rate of 10,000 per day, timing is becoming an issue. Sellers may have to modify pricing expectations and participate in some form of seller financing, but expect more inventory to come to the market.

The resiliency of the restaurant business for sale marketplace and commitment by the consumer indicates that transactions, while slowing down, have not stopped. Buyers, seeking a familiar business model and existing income, will continue to be attracted to the restaurant for sale marketplace. We Sell Restaurants experienced a significantly stronger quarter than the overall industry, with a 14.8% increase in units sold, surpassing the industry’s reported 1.1%. This suggests restaurant business brokerage specialists have a flow of buyers committed to the industry and willing to invest.

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