Consistent Due Diligence Is Crucial

Restaurant operators should run their business as though a buyer is going to conduct due diligence tomorrow because the best transactions are generally the ones where diligence confirms the investment thesis rather than uncovers a new one, Akash Chilka, a Managing Director at Capital Insight, told Modern Restaurant Management (MRM) magazine.

Ideally, operators should begin preparing 12 to 18 months before a contemplated sale, although he would distinguish between preparing a business for sale and actually running a sale process.

The first 12 months should focus on institutionalizing the business: cleaning up financial reporting, addressing underperforming locations, resolving lease and franchise agreement issues, completing necessary remodels and/or discussing with the franchisor, and building management depth.

For a complicated transaction involving multiple entities, brands, jurisdictions, real estate interests, or ownership groups, Chilka would lean toward the longer end of that preparation window. Once the business is ready, the actual marketing, diligence, and closing process may take another four to six months, depending on financing, franchisor approvals, and transaction complexity.

“A business with a demonstrated track record of improving performance will generally command greater buyer confidence than one with a compelling turnaround forecast. One mistake operators make is confusing a strong year of financial performance with being transaction-ready. You can have record EBITDA and still have a business that is extraordinarily difficult to sell because of other macros factors.”

The objective isn’t simply to prepare for a sale, Chilka stressed. It’s to create optionality, so that when the right buyer or opportunity emerges, the operator can act from a position of strength rather than necessity.

When to Sell

The optimal time to sell is not necessarily when the business reaches peak profitability, but when its EBITDA is sustainable, its future capital obligations are manageable, and the next owner can clearly identify additional growth opportunities, he added. There are several indicators he looks for: same-store sales and traffic performance, stable or improving restaurant-level margins, a strong management team, a healthy balance sheet (if stock sale), and a meaningful remaining term on franchise agreements and leases. Importantly, operators/ sponsors should also evaluate where they stand in the capital investment cycle.

“There’s also a more personal consideration. Owners should ask whether they have the capital, appetite, and organizational infrastructure necessary to execute the next phase of growth. A business might be performing exceptionally well, but if the next chapter requires substantial investment and operational complexity, it may be worth more in the hands of a larger, better-capitalized operator.”

Ultimately, the best time to sell is often when you don’t have to, he noted. Buyers recognize the difference between an owner choosing to monetize a successful investment and one who needs an exit.

Buyers place considerable value on the predictability, sustainability, and transferability of operations and earnings, Chilka added. There are macro factors that have to be taken into account incl. franchisor’s approval requirements, debt capital markets etc.

“I would start with an important distinction: Maximizing EBITDA and maximizing enterprise value are related, but they are not necessarily the same thing. Buyers place considerable value on the predictability, sustainability, and transferability of operations and earnings.”

At the restaurant level, operators should focus on the fundamentals: labor productivity, food and paper costs, waste, throughput, transaction growth, and occupancy costs, he noted. However, cost reductions should not come at the expense of the customer experience or future performance. A buyer will recognize the difference between genuine operating efficiencies and a temporarily inflated EBITDA margin achieved by deferring necessary expenditures.

At the corporate level, there are often meaningful opportunities to rationalize G&A, centralize administrative functions, improve management reporting, and remove unnecessary complexity across entities (if the operator is a large multi-brand franchisee). Operators should maintain clean, store-level financial statements and understand the profitability of each location, not just the consolidated portfolio, he said.

“I also encourage franchisees to evaluate capital expenditures through a return-on-investment lens,” Chilka said. “A remodel that improves customer traffic, throughput/ flow through, or operating margins can create value. Conversely, a substantial upcoming remodel obligation with an uncertain return can diminish what a buyer is willing to pay.”

As for internal audits, he recommends daily and weekly dashboard views to understand trends and inefficiencies, as well as monthly reviews of restaurant-level performance, quarterly reviews of the broader financial and operational infrastructure, and a comprehensive annual assessment that views the business from a buyer’s lens. That annual review should address financial reporting, leases, franchise agreements, remodel obligations, tax matters, insurance, compliance, and management succession.

“Ultimately, valuation is a function of EBITDA (post G&A) and the multiple applied. Certainty in closing of a transaction depends on a capital structure that makes sense and is achievable. Banks typically lend < 2.5x to 3.5x FD/ EBITDA and the remainder purchase price is the buyer’s equity check.”

Red Flags Discovered During Due Diligence

One of the biggest red flags buyers or lenders discover during due diligence is the disconnect between what an operator believes the business earns and what a buyer or lender can actually substantiate, Chilka said.

“Inconsistent financial reporting, aggressive EBITDA addbacks (annualization of stores, any documented savings are fine), and an inability to reconcile point-of-sale data with financial statements create unnecessary uncertainty. So while it is easier to gauge EBITDA multiple by brand per precedent transactions in the last 12-24 months, EBITDA that is being provided by the seller doesn’t always pencil on the buyer side of the equation.”

Another red flag is deferred capital expenditures and remodel obligations because these obligations effectively become a deduction from purchase price and can materially change the economics of a transaction, he said.

Third, and often overlooked, according to Chilka, is the underlying contractual infrastructure: franchise agreement expirations, lease maturities, assignment restrictions, personal guarantees, and insufficient remaining control period. These are issues that cannot always be remedied in the middle of a sale process.

Finally, concentration of management responsibilities in the owner is a major concern, he said.

“If the owner is effectively the CEO, CFO, and head of operations, the buyer isn’t just acquiring a business; they’re inheriting a management vacancy, which has to be factored into the G&A lowering EBITDA further for a buyer.”

M&A Trends for 2027

Chilka expects 2027 to be an active year for restaurant franchise M&A, but doesn’t necessarily expect a broad-based recovery in valuations.

“We’re seeing a growing distinction between well-capitalized, operationally sophisticated franchisees with resilient cash flows and operators struggling with declining transactions, margin compression, deferred capital expenditures, and overleveraged balance sheets. Both groups will generate transaction activity, but for very different reasons.”

For strong operators, acquisitions remain an attractive avenue to gain scale, enter adjacent markets, and leverage existing management infrastructure. For under capitalized operators, refinancing requirements and upcoming debt maturities (Legacy 2021/ 2022 loans) may increasingly force a decision between refinancing, restructuring, or selling. Financing arranged during the exceptionally favorable conditions of 2021 and 2022 will become particularly relevant as those facilities approach maturity, he said.

“I also expect continued consolidation within established QSR brands. Larger franchisees are increasingly able to achieve operating efficiencies through procurement, technology, labor management, and regional infrastructure that smaller operators struggle to replicate. Franchisors, too, will continue to influence consolidation through development commitments, refranchising initiatives, and operational standards.”

One aspect Chilka finds particularly interesting is the disconnect between sales growth and actual consumer demand.

“The industry has experienced periods where higher menu prices supported nominal sales even as transaction counts declined. That’s not a sustainable long-term growth strategy. Buyers are becoming more discerning about the quality of revenue, particularly whether growth is being driven by traffic, pricing, or promotional activity. Discounting is not a long term sustainable strategy to drive traffic.

He expects appropriately priced, high-quality portfolios to continue attracting strong interest, while challenged businesses will face greater valuation scrutiny and more creative deal structures.

“My overarching view is that 2027 will be less about a rising tide lifting all boats and more about a transfer of assets from operators who need to sell to operators who are positioned to buy.”