Restaurants (Limited 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 limited service restaurant businesses. Below is a brief synopsis of the industry.
Description of Business
This U.S. industry comprises establishments primarily engaged in providing food services (except snack and nonalcoholic beverage bars) where patrons generally order or select items and pay before eating. Food and drink may be consumed on the premises, taken out, or delivered to a customers’ location. Some establishments in this industry may provide these food services in combination with selling 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 US census, limited service restaurants numbered 228,848 establishments nationwide. Approximately $136 Billion in annual revenue is generated by these businesses, or $594,280/business/year.
This industry can be quite competitive, given the rise of franchise operations. Chain-owned establishments have come into dominance in terms of total units. This phenomenon can be attributed to the notable stability and lower failure rates that are typically associated with franchise businesses. Franchises also tend to spend more time on strategic planning & marketing, and will go to greater efforts to obtain rental space at prime locations.
Factors that are attributed to profitable limited service restaurants include the population density of the location, as well as restaurant visibility and parking. Proximity to office spaces and/or mall locations are frequently preferred.
Job opportunities should be better for salaried managers than for self-employed managers. More new restaurants are affiliated with national or regional chains than are independently owned and operated. As this trend continues, fewer owners will manage restaurants themselves, and more restaurant managers will be employed by larger companies to run individual establishments (Source: Bureau of Labor Statistics’ Occupational Outlook Handbook).
Red Flags and Risks
Restaurants and food service businesses face risks that are common in many industries, such as expiration or change of lease terms, interest rate hikes on financed equipment, minimum wage increases, worker’s compensation, etc. Buyers should be especially concerned about maintaining the existing lease agreements. Mall and other specialty locations are often critical to the success of these establishments. Franchise operators need to carefully review the franchise rights and terms. Often, a franchise transfer fee will apply, or lease terms can change if the corporation owns the real estate and leases to the franchisee. Restaurants are subject to 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. Invalidation of permits can hinder operations, and result in sizeable penalties for the owner. For several reasons, the emergence of new competition can be particularly devastating. As consumer tastes change and franchise operations are rapidly absorbed into the industry, business owners may not be able to keep pace with the evolving market. Customers frequently alter their food consumption habits.
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