Restaurants (Full Service)
We have years of experience in this industry for the valuation of the business, equipment and real estate. Let us help you with our valuation consultation in all areas of the valuation of full service restaurant businesses. Below is a brief synopsis of the industry.
Description of Business
This industry group is comprised of businesses whose primary objective is the preparation and service of food and drink for immediate (on-site) consumption. A wide range of companies are included in this category. These businesses may or may not offer alcoholic beverages.
General Industry Information
The food preparation and service industry is the largest employer amongst retail businesses in the United States. As of the recent census, full service restaurants alone provided jobs for 3.9 million workers, and obtained revenues of approximately $145 Billion.
This industry can be quite competitive, given the rise of franchise operators. Chain-owned establishments have come into dominance in terms of number of units. This phenomenon can be attributed to their notable stability and lower failure rates. Another aspect of this business that contributes to competitive pressure is the constant emergence of new eateries. While a majority of new restaurants fail during the first year of operation, the market share of an existing business can still be challenged with a single new competitor.
Nevertheless, more than 70% of restaurant businesses in the country remain independently operated, reflecting an industrial stronghold of small business. (source: National Restaurant Association) Aside from a good reputation, factors that are associated with profitable restaurants include a locally dense population, along with good visibility and ample parking.
Eating-and-drinking places are extremely labor-intensive. According to restaurant.org, sales per full-time employee were $57,567 in 2003. The sale per employee ratio is significantly lower than for other industries, making management of employee compensation and other costs critical to the long-term profitability of an eatery. Typical expenses can be found at www.restaurant.org, which breaks out typical expenses as a percent of total sales.
Red Flags and Risks
Restaurants and food service businesses face risks that are common to other industries, such as expiration or change of lease terms, interest hikes on financed equipment, minimum wage increases, worker’s compensation, etc. In addition to these potential issues are variables unique to food service companies. Restaurants are subject to strict regulation for maintaining sanitation, health, and safety standards. It is important for a restaurant owner to be mindful of local alcohol restrictions and license requirements, as well as zoning restrictions. Revoking of permits can hinder operations, and result in sizeable penalties for owners. For several reasons, the emergence of new competition can be particularly devastating. As consumer tastes change and franchise restaurants are rapidly absorbed into the industry, business owners may have difficulty keeping up with evolving markets. Aside from the risks of external competition and regulation, business owners face fluctuations of input prices. Increases for fresh ingredients (dairy, produce, etc.) pose a greater threat to companies engaged in price competition, where profit margins are more likely to be thin. Employee management is a key issue for many operators. High turnover rates can mean costly training, so potential buyers should consider worker retention before finalizing an acquisition. Skilled employees, namely managers and food handlers, are often the most difficult to replace in a timely manner. Trustworthy employees are often critical to the success of these businesses, which are susceptible to cash theft or inventory abuse by workers.
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