How to Value: Food Service Contractors

Industry Description

The food service contractors industry provides food services at institutional, governmental, commercial, or industrial locations (NAICS 722300). Locations where food services are provided include airports, food courts, sports venues, and college and university cafeterias.

The following are some basic characteristics of the food service contractors industry:

  • Food service contractors industry has a combined revenue of $53.3 billion, with a growth rate of 0.3% in 2017-2022
  • There are approximately 46,000 businesses as of 2022
  • The food service contractors industry employs approximately 637,000

Industry Trends

The food service contractors industry has medium levels of market share concentration, with the top three industry players comprising approximately 62% of the industry revenue in 2022. Small players are independently operated and owned in one or more states, while the biggest players have multiple locations across the US.  Some key external forces influencing the industry are (i) demand from travel, (ii) expanding cafeteria dining services, and (iii) expansion of the sports and entertainment segment.  Each of these is discussed in further detail below.

The demand for traveling has been expanding for the past few years post-pandemic.  The COVID-19 pandemic led to the suspension of international travel, but as the world recovers and enters the post-pandemic era, domestic and international travel has been rising steadily. The industry is expected to grow at compounded aggregate growth rate of (CAGR) of 3.7% between 2018 and 2028. The resumption of domestic and international travel is expected to drive up food spending within airports and generally during travel.  This will be reflected in an increase in the industry’s revenues.

There has been an upsurge in cafeteria dining services which will boost industry demand.  Current reports indicate that consumers are spending more money in cafeterias and restaurants than in grocery stores.  In January 2023 alone, they spend $86.6 billion at cafeterias and restaurants which is 24% higher than what they spent in January 2022. Consumers in various establishments across the country, including educational institutions, office buildings, military bases, museums, and hospitals, need cafeteria services to cater for their meals by providing a greater variety of food options.  As the demand for cafeteria dining services continues to expand, industry players could exploit this niche.

The emerging demand for foods and beverages in the sports and entertainment segment is another trend impacting the industry.  This is due to the reopening of sports and entertainment venues post-pandemic.  Reports indicate that the sports and entertainment segment accounts for 10.8% of the industry and that the demand experienced in the segment is expected to increase at 1.5% annually. The demand for industry players in stadiums and other sporting facilities has been surging, calling for the need for venue operators to plan for improved food selection, food quality, and menu flexibility to advance guests’ experience.  The industry is intensifying their collaboration with sports and entertainment planners to promote catering and food services in the segment.

Several external factors have affected the industry like the expansion in the travel industry, an increase in the cafeteria dining services, and the rising food demand in the sports and entertainment venues. The resumption and expansion of travelling will drive up industry revenue.  Cafeteria and dining services are seeing growing demand which is boosting industry demand.  With the reopening and growth of sports and entertainment venues the industry is seeing increased demand due to collaboration with this industry.  The industry addresses the need for food by providing a variety of foods in various locations and by meeting this ever-present need the industry is growing.

Key Performance Metrics

In evaluating food service contractors, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions:

  • Average revenue per guest
  • Labor cost per guest
  • Complaints per order
  • Turnover rate
  • Occupancy rate
  • Food waste

Industry Organizations & Publications

The following organizations publish useful information:

  • National Restaurant Association
  • International Foodservice Distributors Association
  • Society for Hospitality and Foodservice Management
  • Foodservice Consultants Society International
  • Food Management
  • Foodservice Director

Guideline Information: Private Purchase Transactions

Most food service contractors are privately owned.  While there are publicly traded companies, data regarding the sale of 100% of closely held food service contractors is generally the best source of information to appraise a subject company.

The following are typical appraisal multiples from sale of food service contractors:

  • Revenue multiple between 0.16 and 0.80 times
  • Gross profit multiples between 0.30 and 1.32 times
  • EBITDA multiples between 1.6 and 4.6 times

In selecting guideline transactions, it is of critical importance to select transactions that are like the subject company.  Unique factors for any subject company must be considered to yield credible results.  Additionally, industry economic conditions also vary over time, which must also be considered.

Guideline Information: Publicly Traded Companies

Most food service contractors are privately owned; however, there are a few that are publicly traded, meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples.  However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are like the subject company.  Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company. 

The largest publicly traded US food service contractors are:

  • Aramark (ARMK) – $8.8 billion market capitalization
  • Target Hospitality Corp. (TH) – $1.3 billion market capitalization
  • Healthcare Services Group, Inc. (HCSG) – $1.1 billion market capitalization

The Price-to-Earnings (P/E) ratios of these three companies range between 17.4 times to 39.1 times.

Appraisal Rules of Thumb

Please note you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.

Food service contractors are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.