Restaurant finance can help inform a myriad of decisions. From restaurant performance measurement and management analysis to strategic planning and due diligence and feasibility studies, modeling the three financial statements and benchmarking and analyzing performance gaps hand in hand with operational key-performance indicators provides with insights to solve questions like:
Margins are being compressed for many restaurants and foodservice operators around the world. But the choice between driving revenue and improving margins does not have to be binary; both can be improved while catching a wider net of performance improvements.
We encourage our clients to think of restaurant business plans on both time frames: short-term wins are necessary to gain momentum and fund longer-term initiatives, but lasting organizations that transform the industry look past the next earnings call to three-, five-, and ten-year horizons — and beyond, and combining restaurant finance with operational goals and feasibility.
Restaurants’ top-line or gross income mostly consists of the sale of food and beverage. In franchised systems, a large portion of revenue could be derived from royalties and franchising fees. Restaurant finance reveals many metrics related to revenue that allow foodservice organizations to assess their top-line performance and set targets for their restaurant business plan.
Oftentimes the franchisor offers franchise financing, in which case interest payments add to the franchisor profits.But it’s a common misconception that franchises can — or should — be sold as soon as there is interest. Part of the challenge for franchisors is in realizing that it’s almost a completely separate business to sell and support those units than managing corporate locations.
Restaurant Labor Costs: Wages increased in 2019 in the Americas (including the U.S., Canada, and potentially Mexico), Europe (Denmark, Germany, Greece, Ireland, Poland), MENA (Algeria, Qatar, Tunisia), Africa (South Africa, Uganda), and Asia (Hong Kong, Malaysia, Vietnam), to name just a few. In the U.S., minimum wages went up in 21 states in 2019, creating significant cost increases for restaurants (payroll represents about 30% of sales), which could see declines of up to 19% of four- wall EBITDA margins. Because of the type of service, full service restaurants typically have higher labor costs than QSR and casual-dining.
The higher the Current Ratio (Current Assets to Current Liabilities), the more able a company is to pay short-term loans. Current Assets include: Cash and Short-Term Investments, Accounts Receivable, Inventories, and Other Current Assets. They exclude fixed assets. Current Liabilities include: Short-Term Debt and Current Portion of Long-Term Debt, Accounts Payable, Income Tax Payable, and Others.
In the restaurant industry, the current ratio reached a median of 0.72 (FY 2019 for publicly traded companies in the U.S.) and for three-quarters of the industry, the current assets are not enough to cover all short-term debt. Some foodservice companies in the bottom quartile had current ratios lower than 0.50 (current assets covering less than half of current debt). Restaurant owners can use these same numbers (current assets and current liabilities) to calculate the working capital.
While liquidity pumping into the economy is buying time, many restaurants won’t be able to sustain their existing debt levels or access financing options and business funding. This scenario will affect restaurant financing and likely lead to plenty of distressed restaurant assets and restaurant bankruptcies in the near future, which will spur activity as the global pause on M&A lifts as travel restrictions are loosened.
Aaron Allen & Associates works alongside senior executives of the world’s leading foodservice and hospitality companies to help them solve their most complex challenges and achieve their most ambitious aims, specializing in brand strategy, turnarounds, commercial due diligence and value enhancement for leading hospitality companies and private equity firms.
Our clients span six continents and 100+ countries, collectively posting more than $200b in revenue. Across 2,000+ engagements, we’ve worked in nearly every geography, category, cuisine, segment, operating model, ownership type, and phase of the business life cycle.