How to Value: Full-Service Restaurants

Industry Description

The Full-Service Restaurant industry consists of establishments primarily engaged in providing food services to patrons who order and are served while seated (i.e., waiter/waitress service) and pay after eating. These establishments may provide this type of food service to patrons in combination with selling alcoholic beverages, providing carryout services, or presenting live nontheatrical entertainment (NAICS 722511).

The following are some basic characteristics of the of the industry:

  • Full-Service Restaurants had a combined $898 billion in sales, down from previous years due largely to COVID.
  • There are approximately 299,000 Full-Service Restaurants in operation, down from previous years due largely to COVID.
  • Full-Service Restaurants employs approximately 14.9 million people, down from previous years due largely to COVID and The Great Resignation.

Industry Trends

Full-Service Restaurants are a fully-mature industry to the point that most U.S. markets have reached the point of saturation. This means (i) thin margins, because price-based competition is common to attract customers, and (ii) restaurants must compete intensively for high profile locations. For future growth, many larger companies are looking to foreign markets for expansion opportunities.

Prior to the pandemic, Full-Service Restaurants generally experienced an increase in revenue as per capita income generally increased.

During the pandemic, Full-Service Restaurants revenue declined as compulsory closures, stay at home orders, and mask mandates made them impractical. Many restaurants pivoted to take-out and delivery services in place of indoor dining. As restrictions lessened, certain restaurants with outdoor dining spaces (or the ability to create them) began reduced operations. Other restaurants laid off employees in an effort to cut costs. All the while, pent-up demand for restaurants is continued to grow.

After the pandemic, Full-Service Restaurants are expected to see an increase in sales once the economy recovers and customers have more disposable income to spend on outside the home eating. Restaurants may continue to struggle hiring employees due to the labor shortage.

Key Performance Metrics

In evaluating an Full-Service Restaurants , the following metrics can provide useful information in comparing a subject company to guideline companies and transactions:

  • Food/Liquor Costs – wisdom is these should be approximately 33% of revenue
  • Labor Costs – another 33% or revenue
  • Rent Costs – somewhere less than 10% of revenue
  • Break-even point
  • Historic sales by day, week, month and year
  • Employee Turnover
  • Sales per Labor Hour
  • Sales per Square Foot
  • Server Benchmarks

Industry Organizations & Publications

The following organizations publish useful information:

  • National Restaurant Association
  • Restaurant News Resource
  • Nation’s Restaurant News

Guideline Information: Private Purchase Transactions

Most Full-Service Restaurants are privately owned. While there are publicly traded companies, data regarding the sale of 100% of closely-held Full-Service Restaurants is generally the best source of information to appraise a subject company. However, because there are so many, the multiples are generally too variable to be meaningfully applied without further analysis.

The following are typical appraisal multiples from sale of full-service restaurants:

  • Revenue multiples between 0.14 and 0.60 times
  • Gross Profit multiples between 0.21 and 1.0 times
  • EBITDA multiples between 0.9 and 11.4 times

In selecting guideline transactions, it is of critical importance to select transactions that are similar to 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 Full-Service Restaurants are closely-help (i.e., privately owned). However, there are several 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 similar to the subject company. Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company

The five largest publicly traded companies Full-Service Restaurants, ranked by market capitalization, are:

  • Darden Restaurants, Inc. (DRI) – $15.6 billion market capitalization
  • Texas Roadhouse, Inc. (TXRH) – $5.1 billion market capitalization
  • Bloomin’ Brands, Inc. (BLMN) – $1.9 billion market capitalization
  • The Cheesecake Factory Incorporated (CAKE) – $1.8 billion market capitalization
  • Brinker International, Inc. (EAT) – $1.4 billion market capitalization

The Price-to-Earnings ratios of these five companies range between 8.7 times to 21 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.

Full-Service Restaurants 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.