Restaurant M&A Slows on Private Equity Headwinds

lot of excitement around it. I've I've really enjoyed the transition, very cool. How long has it been now? So I started with kne Resnick in November as a as a conference circuit, started with Restaurant Finance and Development, and I was initiated into kone Resnick by being given a cape that has cone resinck on it. And I was told that I was a superhero coming on to kone Resin

and stepping out into new territory. So I had my capeon at Restaurant Finance and we are firmly in grain now within the restaurant industry that I am with kne Resinic. No longer an auDA partner focused on advisory and helping restaurants in their growth and strategic initiatives and really enjoying it. So it's it's been a great transition. Yeah, it's exciting. You are a superhero and you're joining a great team.

Gary and Cindy are are great. I'm very close to both of them, and so I think this is a great fit for both, for both you and the team. And I'm excited for you guys. Yeah, I am too. It really it really brings me back to my roots back in the days that I started with Ey, you know, working with emerging growth restaurant companies, those that are looking to either grow in units, grow in concept or in

geographic location, or marching towards a strategic transaction. When when I was younger in my career with Ernst and Young, I've worked with restaurants that are four or five six units and help them grow to a level to where they can first do a private equity transaction and then and then assist them and in their initial public offering.

So it's it's very similar to that. You know, Cone Resinic has over six hundred restaurant clients, which I found very surprising and interesting because I didn't realize they had that breadth within the restaurant industry. But it really is impressive. And when you talk to folks within the restaurant industry, most of not all know Cone Resnic well for sure. They definitely have been good partners to me and to

Bloomergant Intelligence. M All right, so let's let's dive in here. Man, what can you give us an update on the M and A market for US restaurants. How does the twenty twenty three deal flow stack up to last year? Yeah, as has been evident in the marketplace, the deal flow is significantly down from from last year. There's been some deals that have taken place, but it's it's not very many, and they've been mostly smaller restaurant companies tuck ins and

add ons as opposed to larger transactions. As far as in the strategic marketplace, there have been you know, there's a number of players now that have multiple concepts, and there's a number that have indicated that they're looking at perhaps another transaction to add on to their existing brand.

So it's going to be interesting because that that marketplace seems like that's a more likely area where there could be transactions when when you look at the overall economic environment today, you see higher interest rates, the bank crisis which we are currently going through, and all of those items point to it being more difficult vote for a private equity firm to be able to obtain appropriate financing

and return on a deal. So that allows the strategics that may have cash on their balance sheet to invest that cash without having to incur significant debt, which which you know would would result in a better pricing model for the strategic and also for the target. So it's uh, it's it's rough seas and it's uh, I think going to continue a little bit longer because of the financial crisis that that um, we just have that we're going

through at this point. Yeah. Um. And it's interesting with the strategics, right, you make a great point, um, the fact that that this may enable to give them more opportunities with private equity more on the sidelines. But valuations are still pretty high for restaurants stocks, so it makes

for for a unique situation. Yeah, it really does. I mean it's restaurants have held up pretty well, um as it relates to their value as um and and you know, entering this uncertain time go forward where um, some believe it's going to be recessionary, and it's a matter of how recessionary is it going to be. What's that impact going to have on restaurants and what's that going to

have on on valuations? But but certainly it is an interesting time when you see the valuations out there, and if if those types of acquisitions where the strategics take place, the pricing is going to be going to be quite interesting. Yeah, for sure. UM. You know, let's talk a little bit about you know, some of the companies that are looking to get an IPO done right Like, it's no secret that Full with the shown and CoV are looking to get something done. Are there other companies waiting in the

wings right now? Yeah, there are several companies that are waiting in the wings where we've got a number of them that we're working with. UM. I would say somewhere in the five to seven company range. Are they're all looking rightfully so at a dual path right there. They're looking at setting themselves up to be ready to go public of the markets open, but they're also looking at having private equity and strategics come in and and uh,

provide whatever opportunity they may have. So UM, the challenges and your right Kabbat and fog Chaw are both UM sitting there and they both have fantastic results, and that's what you need in this public market. However, with with the financial crisis, I think that put us back some. I was thinking that the markets were going to open up closer to the second quarter. Uh. Don't think that's probably going to be the case. But but you know, all it's going to take is one to come out.

I'm I'm of a strong view that UM, once one brick gets taken out of the dam and that water starts flowing, I think the pressure of that water and the concepts that are out there that are strong concepts, and I think you know that that we could see some activities still this year, but but I think it's gonna be later in the year than it was. Um. Uh it originally projected to be. Also the most recent

IPOs it took place a couple three years ago. You know, their valuations aren't as good, so everybody kind of looks to that as most recent activity and that that as additional angst to UM whether companies are able to come out during this unsettling time frame. Yeah. Sorry, Are you seeing maybe a different type of company in terms of maybe maturity and size versus some of the things that

we saw called public a few years ago. Yeah, I think you certainly have to have more maturity, more size, demonstrate that you've had the opportunity and success opening in new markets on a fairly consistent basis UM, and that your your numbers, you're you're hitting it out out of the park as it relates to your numbers and having some good trends. So it's it's UM. It's definitely a different UM market now and a different expectation from the

public markets for sure. So what what can some the companies that you're you're speaking to some of your clients, what can they do to prepare so they're ready when transactions do pick up? Yeah? I think that's that's the key right now, is that the preparation, because there's a little bit of a lull, you really need to I would say preparing what i'd call two broad mega areas.

One is focused on your operations. You know, figure out how you're going to drive sales, figure out how you're going to cut costs, and really be able to find tune your operations and be able to put up the numbers that you would would need to do for a public offering. You need to act like a public company, so you need to close your books on a quarterly basis. You need to be able to do the things that a public company would do almost in a dry run. So those would be the ones that are on the

sidelines right now that are ready to go. They've been, you know, thinking about doing an offering for probably twelve to twenty four months, so they've done a lot of the blocking and tackling. So the other restaurant companies, once the market opens up a little bit, you know, they need to take advantage of making sure that they are

ready to become a public company. So make sure your financial statements are all on a gap basis, and make sure that you have the appropriate capital structure and corporate structure to go forward as a public company. That means looking at your people, making sure you have the right people on board from all different disciplines, whether it's in the finance accounting team to the IT group to the HR make sure you have those people that are that are going to be able to take you into a

public arena. Make sure that you have your technology and your processes are all in good working order to be able to sustain growth and produce the results, produce the numbers on a timely basis, and that you have good controls in place to be able to ensure that there's not going to be a hiccup because the market's not forgiving if if if you miss earnings or if you are not able to produce the information and timely basis. And you know, it takes some time to do that.

So I think this is the ample time to really make those investments into the organization that are necessary in order to have a successful offering. That's great, and you mentioned you know, it's time for these companies, emerging brands, people that want to go public to to really focus on improving their operations and cutting their costs. So is there any types of technology maybe that that um, you know, you're you're suggesting your clients maybe invest in to kind

of help them along that path. Yeah, as we've seen as a result of COVID, the restaurant industry is finally investing into technology. Yeah, you know, restaurants are not one to be on the cutting edge on the front end, but they were, you know, very very late bloomers to invest in COVID really cause the restaurant industry to take

note and invest in technology. I've always been a big believer, and I think the restaurant industry has demonstrated this that you've got to look outside of the four walls of your industry and look at what other industries have done to be successful embracing technology, and certainly as it relates to digital, restaurants have looked at the airline industry the hotel industry to be able to look at how they've

done as it relates to digital. Loyalty programs certainly are prolific within the airline and hotel and now we're starting to see or not starting to see, but we're seeing much more robust loyalty programs with restaurants. But embracing technology

to maximize the customer's experience, that's key these days. The customer really expects that and in order to grow your top line, whether that be when you walk into a restaurant, embracing technology as it relates to ordering, or if it's related to payment, if it's related to looking at the menu and offerings. There's a number of things that you could do from a technology standpoint to enhance and maximize

that customer's experience. And because of the no touch and COVID rules that were put into place, a lot of that now is common. Course. Then you look at technology that you can have in the back of the house, and I think that a lot of that technology can help with improving your employees experience. So you can automate a number of the functions back of the house that will allow a employee that's doing a mundane task not do that task, but have technology do it and put

that employee doing something that would be more interesting. So you're improving your labor there, and you're also can embrace technology as it relates to your labor scheduling, laboral staffing to be able to best maximize the technology to minimize your So I think technology can both you know, expand on the customer's experience and improve on your employees morale and retention. Yeah, which is so important right now. Obviously with with you know, the issues a lot of the

restaurants have faced in terms of staffing. Obviously it's improved, but there are still parts of the day, especially late night, that um chains are struggling to you know, find employees for Yeah, yeah, it's and the employee you know, labor is is the largest line on a restaurant's P and L. And as we all know, restaurants are the second largest

employer behind the US government. So it's it's a it's a big number and um it's it's had its challenges of recent times, but um, I think it's it's leveling lawf a little bit. I think that labor is now finally you know, leveled off. It's it's not climbing like it has been, which has really been a challenge, and that's resulted in significant menu pricing increases. So we've you know, we've seen the costs are wed, we've seen the menu

prices go up. I think we've we've hit some elasticity within the environment where consumers are not willing to continue to pay more and more. But at least labor is leveling off a bit. And also costs are from a from a food cost standpoint, are are leveled off a bit and expected to reduce throughout the remainder of the year. So there's been two big tail winds that have really been pressing the restaurant industry, and those are lightning up

a little bit now. Granted they're much more, they're much higher than they have been, and inflations cause to go up, but I think there's going to be at least, you know, some reprieve there, and hopefully that will allow restaurant companies to be able to focus on those costs, managing them a little bit better with things that will be in

their control. Yeah, for sure that the inflations expected to be more like mid single digits um for both commodity and labor this year versus you know, high single digits and low teams last year year. So it'll give them a chance to close that gap, right because they haven't been able to there's a gap between how much they've raised prices and how much inflation they've seen for the last couple of years. So they'll be able to close that gap, hopefully a little bit this year and help

those margins that were hit pretty good in twenty twenty two. Yeah, yep, yep. You know, one of the things that I tell our restaurant clients all the time, especially in this environment, is you've got to crush the basics, you know, crush the basics, just focus on the key items that are your basics of operation, and during this time you've just got to nail it because if you don't, then then you're not going to be able to do it during more difficult

times come forward. So I think this time, where where markets are a little bit slower as it rates to transactions, you really just need to focus on your basics. Yeah, it's great advice. And to your point about labor, Yeah, we've seen some loosening up of the labor market here.

For the restaurant companies recover. We get some data from black Box Intelligence and a year over year there was pretty significant improvement in management and non management turnover for the casual dining chains in their index, But would um not so much for Quick Service, which was interesting. Quick Service continues to struggle a little bit more. And my guess that that part of that is that late night, part day part that Quick Service tends to compete in

a lot more heavily. Yeah. I think that's that's right. And it's also for whatever reason, you know, when when all the stimuluts was provided to to a number of people, the employees that were in Quick Service, they didn't want to go back to Quick Service they they didn't feel that that was the position that they wanted to be in. So it was it was difficult to find employees to be able to fill those spots because there wasn't the demand that used to be there for those people working

in those types of position. So I think we're still struggling a little bit and have the um the hangover effect of the stimulus impact on quick service. Yeah, for sure, it's um. It looks like it's stimulus is coming to an end though, right, I mean, we have a we have a split Congress now. I guess one of the final stimulus UM policies was the halting of the student loan payments, right, and I think that's that's ending next month.

So um, you know, with without all the stimulus that that you know, us consumers have had over the last few years, you know, it could be a bad omen for restaurant spending here in twenty twenty three. Your thoughts, Yeah, I think that it's going to be challenging with without a doubt, just uh, we're seeing, you know, there being a number of consumers that are stepping down, uh to the next level that the consumers spending. The concern over

inflation and the concern over was sessionary times go forward. Um, people are are spending less, not only with restaurants, but you know throughout the economy, and I think that trend's going to continue. So I think, you know, the winners are certainly going to be fast casual and QSR because you'll get those that are in upper casual or casual stepping down too Fast casual and QSRUM. So it's it's it's going to be you know, top line is going

to be going to be more challenging. That's why, you know, like I said, getting back to the basics and crushing the basics, to really focus on costs and make sure you're looking at your cost structure and especially discretionary costs. I think those are going to be difficult to fund prospectively. Going to have to really focus on the key areas maybe, um, you know, look at look at the operations, pull the operations in a little bit. Don't expand your menu, but

contract your menu. Focus on the right products that are providing the right return. Making sure you've got your supplier network and in place to ensure that you're going to get adequate supply at the appropriate cost. So you know, a lot of things that the restaurant industry focused on during COVID, I think are things that need to be focused on here and go forward in this future economic times. Yeah, that makes a lot of sense. You know, there's been

some restructuring in the news recently. McDonald's and Wendy's are two of the names that have been in the news McDonald's this week. What do you think is motivating these moves and could we see more companies do the same, maybe lay off some employees. It seems like maybe now is the time for them because they have cover, right do we have as a lot of other tech companies and different companies like that in the news that are

laying off employees. And so even though McDonald's sales haven't fall fell off yet, maybe they're seeing this as an opportunity because there's cover. Yeah, I mean, this is kind of what has been predicted that there was going to be some some some layoffs. We saw it first in tech than in financial services and UM and restaurants usually aren't on the forefront of that. They're usually the tailwind.

And I think that's where we're at now, and that's what you're seeing with McDonald's and Windy's and I think you're going to see that with others. I think when they look out and the future and look at what their demand is and what their sales are going to be and what their cost structure is, UM, there's certainly going to be more more layoffs and it's going to be UM. You know. I don't think it's going to be as deep as it has been in the past, but I think it's gonna, you know, certainly make the

news because again, we're the second largest employer. So if layoffs are happening in other industries and across the country, and you're starting to see a little bit less consumer demand for uh, for products and for restaurants, you're you're going to have a little bit of a blip. Yeah. So outside of the economic slowdown and a potential recession, what's what are your clients most worried about right now? Uh, Well, they're just worried about making sure that they're able to

drive margins. I think that's where their focus is, UM trying to drive sales because their constructures aren't going to come down a lot. So it's it's it's really UM

driving sales. Depending on where what sector they're in I think, you know, more of the fine dining, the the casual sectors are more concerned than quick service and fast casual, just because of that trade down element that I had mentioned earlier, and um, you know, just just trying to make it through what I think most believe could be, you know, not a not a severe recession, but more

of a mild recession and a shorter term recession. So get through those those those difficult times and getting back into growth mode. Most restaurant companies aren't aren't growing, They're not opening up nearly the number of stores that they had before. So there's some of the discretionary spend that I had mentioned that they have to keep an eye on, um, but it's really you know, trying to, like I said earlier, maximize a customer's experience so they get the return visits

and keep the sales lineup. So sales I think is key today, not that that it is in other times, but I think it outweighs costs containment now because costs are starting to level off a little bit. Yeah, for sure. And it's interesting with the development piece, right, you mentioned that some companies are pulling back. You know, we have

also companies that are going full steam ahead. But I think that the increased amount of telecommuting has kind of made that difficult, right, because we don't know, we still don't know what the long term run rate for these stores in you know, urban business center locations are going to be moving forward, right, and we're not really sure where these suburban stores are going to settle out right.

They had the huge spike during COVID, and now they're kind of you know, sales or they're losing some sales back to maybe urban locations. But that that part has made development very difficult and interesting to watch. I think, yeah,

it really has. Because now that there's the ability to work remotely, even if it's a couple of days a week, that's a couple of days a week, you don't have as many people in the urban locations and the office buildings and the areas that would generate a significant lunch, breakfast lunch traffic. And then the development of urban areas with housing a lot of the metro areas that really

were expanding in housing in urban areas. And then with the safety issue, you coupled the safety issue with with a lot of the urban areas and the homeless situation. Those developments have slowed down quite a bit, and some are picking back up. I mean I'm hearing you know, on both sides. Some cities are doing better at rebounding. You know, kind of is a city by city basis and depending on how the government in the cities are focused on it. But there's just a lot of uncertainty

about the urban environment. And I think you're right it's it's leveraging out or it's starting to level out a little bit in the suburbs. But we're still seeing a lot of restaurant companies very successful in expanding in the suburbs, and I think, you know, that's what we're seeing more

of the expansion as opposed to urban expansion currently. Yeah, that makes a lot of sense, you know from what I'm here on Mondays and Fridays in New York City or have been tough, and Fridays are historically probably the best day of the week. Yeah. Yeah, Now that's and that's not only New York City. I think that's you know, you look at the top ten cities in the US of A. I would say that those all mirror of

the same trend. Yeah, all right, So what are we looking for in terms of green shoots, whether it be the M and A market, the restaurant industry. What are we kind of looking for to see things maybe you know, turn around and improve. Whether it's in the second half of this year or early twenty twenty four, what are we looking for. Well, I think the macroeconomic environment hast got to stabilize and we're seeing inflation come down. I think we've got to still continue to see inflation come down.

We've got to, you know, make sure this banking situation is nipped and and there's no no further failures and that concern is UH is addressed. And then I think, you know, we're going to go through this period of a little bit of a m deceleration, layoffs and such. But you know, I think that towards the end of the year, I would expect that things are going to start stabilizing a little bit. I think we're going to start then to see a couple of transactions take place.

I think once the financial markets start to be comfortable with with new transactions, whether it be restaurants or whether it be other industries, UM, I think that's going to be the catalyst that's going to be the foundation to build go forward, to be able to uh you know, hopefully have the have the end of the hockey stick and start going back up the other direction. Yeah, Cole.

And and if we've nothing else from the last three years, it's that restaurant industry, the hospitality industry is very resilient. Figure figures away, figures away, right, very entrepreneurial and and um you know, always kind of figures a way out. Yeah, and and and you said it, well, it's very resilient. And because of the experience that was caused by covid I mean, covid is is the worst that could have ever happened to the restaurant industry. And to be able

to survive that with with stronger players. Now, it did have a lot of um independence that that were impacted and weren't able to make it through, but the stronger performing, larger restaurant companies for the most part made it through. There is a few that didn't, but you know, it just made the industry I think stronger in a in

a weird way, right, in a bad way. But when you when you look at the other side, the industry is stronger and much more nimble and extremely resilient to be able to deal with um hiccups that come in future, and these are I think more hiccups as opposed to something much more severe as we dealt with with COVID. Yeah, it was cool to see, you know, increasing sales channels.

You know, companies that didn't really mess around with delivery and still don't, like Texas Roadhouse and Darting, but just increasing there to go sales and having additional sales channels. You look at a chain like Bloomin Brands whose margins are higher now than they were in twenty nineteen to despite all of the inflationary headwinds. So the adaptability is definitely impressive. I'd say the other thing I love about this industry is the people, and a lot of great people,

including you. So I want to thank you for doing this. Man. I appreciate you. I know you're you're very busy. I appreciate your time. What's the best way for listeners to get in touch with you? Best way to get in touch with me is through email, which would be Michael dot Gottlieb at Cone Resnick dot com. Or you can always reach out and text or call me at nine for nine three two two two one two zero and be happy to talk strategy, happy to talk you know,

future growth plans. That's that's my Baileywick. That's what I enjoy doing, and that's it's a win win for for for both the restaurant company myself. It's really satisfying. So I really appreciate you having me on today, Michael. It was a great discussion. I look forward to to more of these on a positive note, go forward. Yeah, it's always great to catch up. And yeah, hopefully next time I have you on here we can talk about a bunch of m and a deals will be a lot

more fun, right, Yeah, no doubt. I'm looking forward to that and we know it's coming. It just a matter of when, right for sure? All Right, Thanks again, Mike uh and for the listeners, Thanks for listening in. If you liked the episode, please tap on the bell to subscribe, and don't be afraid to give us a review. Thanks, Thank you. Thie