Food for thought

January 18, 2023

How do you value a restaurant without a taste test?

Ok, I know we’re half way through January and the festive season is all but a distant memory.

However, the Valuations Team and I had our postponed Christmas sit down dinner at a Covent Garden restaurant last night.

So it’s rather apt that in today’s email I want to talk about food.

Specifically, how do you value a restaurant in 2023?

We’ve seen a surge in the number of valuations requests for both independent and chain restaurants and wanted to share some of the key challenges they present.

Alas, we’ve not yet been required to do a restaurant site visit and do a taste test!

And that’s a shame because the ability to observe the restaurant “in action” makes all the difference to understanding the nature of the business in fine detail.

You see, the raw numbers do not always give us enough information to contextualise the valuation for the specific circumstances.

Nevertheless we can learn a lot about a restaurant through looking at social media comments and news articles: these give us a great idea on public opinion when it comes to certain establishments.

We also review whether or not a business is using restaurant booking sites to bring customers in.

When analysing a restaurant business’ historical financial performance, we tread with caution.

We must account for a certain level of financial distortions, as a bi-product of both the impacts of COVID-19 in combination with the strikes at the end of last year.

These are macro-factors which may not be applicable in the future and this will of course impact the ease of producing accurate financial forecasts.

There are many negative factors impacting this sector at the moment which are important for us to consider when undertaking a valuation: staffing shortages, inflation, and the industrial action are all having an impac on the number of bookings and cancellations that a restaurant receives.

What’s more, the current cost of living crisis will impact the way in which customers decide to spend their money. This is where factors such as marketing really do make a difference in bringing customers through the door.

At a time where customers need to be increasingly selective about where they choose to eat, restaurants have to stand out.

A thorough due diligence process before undertaking a valuation, with the inclusion of reading restaurant reviews and looking at social media posts, is therefore vitally important.

These factors and general uncertainty in the market also make the forecasting of the financial future far more difficult.

There are a few things we are keeping our eye on:

• Firstly, inflation, which is completely sector agnostic in its effects. We are all hoping to witness a considerable fall in the rate of inflation which will hopefully be as much as half during 2023.
• And then there’s the impact of energy costs on the hospitality industry. We are seeing a reduction in the cost of energy, which will hopefully continue as we head further into 2023.

These key factors both need to be reviewed, monitored and stress-tested in forecasts.

An ongoing area of interest within the hospitality sector, is the current and future M&A and investment activity.

Sub-segments within the hospitality industry are showing very different profiles at the moment, so it is impossible to assume that because one type of restaurant is struggling, another is not thriving.

If the economy starts to struggle more over this year we will also be looking closely at when competition may emerge.

The success of any given business will be directly impacted by the factors we have just discussed, and are therefore are monitored by our team closely in order to aid our valuation work.