Why M&A in Quick Service Restaurants Will Be Active in 2025

While the QSR industry is unlikely to reach frenetic dealmaking levels in 2021 and 2022, the QSR industry is set to see a surge in mergers and acquisitions (M&A) in 2025. What’s driving this forecast? Pent-up demand coupled with supply, the need to implement strategic technologies and natural inorganic growth all play a role.

Here’s our view of the market ahead and how buyers and sellers can seize opportunities in the New Year.

A Brief Look Back

Quick-service restaurants have been some of the biggest winners of the pandemic as diners clamor for COVID-safe alternatives to eating at home. QSRs were also a hot commodity in the M&A space as they could quickly meet COVID demands and improve their profitability.

With rising inflation and, as a consequence, increase in interest rates however, M&A activity has declined since 2022. With the Fed’s recent half-percent rate cut, as well as another potential rate cut next year, M&A activity could pick up in 2025.

What the numbers say

In his 1H24 restaurant and financial sector assessment update, Restaurant Research found that 2024 M&A activity was 9.5 percent lower than projected at the start of the year, but the current target of $9.6 billion in deals still represents a more than 10 percent increase from 2023 year.

To overcome lagging organic growth and achieve more specific expansion goals, many franchise owners are turning to inorganic growth strategies such as mergers and acquisitions. Both small and large deals are making headlines this year, involving concepts such as Burger King And MOD Pizza. Bank of America reported 70 Transactions in the food and beverage sector during the first quarter of 2024, which will allow this year to reach or exceed the 2023 total number of transactions (271 transactions).

Most recently, Baird issued an outlook on mergers and acquisitions following the recent Fed rate cut, saying:

We expect M&A activity to benefit from a series of benchmark rate cuts by the US Federal Reserve through 2025. This phase of the rate cycle should be characterized by a decline in loan yields, leading to higher leverage ratios and M&A valuations, especially for LBOs. As in the past, lower rates and higher multiples are likely to spur additional M&A activity, especially as the current backdrop appears more favorable than the previous two periods of rate cuts.

Economic experts predict further rate cuts in the near future. The Baird report predicts whether this will happen:

• Loan prices could steadily decline by a total of 200+ bps. to below 8 percent over the next 12 to 15 months as expected Fed actions become reality.
• Based on the data presented above, a reduction in loan yields to the 6-8 percent range would correspond to a half-turn or more increase in the leverage ratio from 4.8x EBITDA in H1 2024.
• History shows that valuation multiples can increase by nearly a full turn on average in this scenario.

Key steps to take

While mergers and acquisitions activity is expected to increase, there is still some doubt about the timing of this event. We don’t expect a sharp rise in the near future as interest rates are still significantly higher than they were three years ago. Lenders are becoming more cautious about lending to restaurants, and some buyers continue to stay on the sidelines during uncertain election cycles. Compared to today’s pre-COVID years, buyers must be prepared to enter with more capital, and sellers may have to provide a certain level of seller financing to achieve the desired multiple.

To prepare for a transaction, buyers and sellers should consider a number of steps:

• For buyers
  • Clearly define the short-term and long-term goals of the deal.
  • Set realistic spending limits and explore available financing options.
  • Find business exchanges and talk to other QSR owners to identify potential targets
  • Study the brand concept policy

• For sellers
  • Collect current and clean financial statements for the last three years.
  • Ensure that the business lease is transferable and that all other transfer requirements are met.
  • Invest in artificial intelligence and technology that streamlines pre-sale operations.
  • Meet with QSR industry experts, accountants and legal advisors to determine a competitive price for the business.
  • Inform managers and other employees about the sale sooner rather than later.
  • Communicate openly with the franchisor and use them as a resource throughout the process.

Looking to the future

While the outlook for restaurant franchise mergers and acquisitions in 2025 is more positive, success will largely depend on preparation, planning and adaptation. Using expert advice and taking a proactive approach can maximize the potential for finding and closing a successful deal.

Alicia Chandler is the President of Indianapolis-based First Franchise Capital Corporation (“FFCC”), a First Financial Bank company that provides customized financing solutions to franchisees of multi-unit quick service restaurant concepts with best-in-class concepts throughout the country.