Restaurant Valuations Remain High Despite Unpredictability of the Market

Volatility seems to be the norm again on Wall Street, but the impact on restaurants appears to be modest for now

SPONSOREDUpdated 6:18PM • 03/16/16

According to a recent story in Nation's Restaurant News, the Dow Jones was down more than four percent as of late February amid concerns about low oil prices, the stronger U.S. dollar and where the global economy was headed.

That drop has affected publicly traded restaurants as well in early 2016, with several reaching new 52-week lows in the first two months of the year.

According to industry experts, multiples, the method for measuring valuations by multiplying the purchase price or enterprise value of a company by its earnings, have also fallen a few notches, but continue to trade at healthy levels related to historical averages.

So what does it mean? Restaurants continue to be a popular investment source for private equity firms and hedge funds looking to further diversify their portfolios.

The story highlights how investors were eager to put money into public brands such as Potbelly Corp., El Pollo Loco, Inc., The Habit Restaurants Inc., and Shake Shack Inc., earning them prices exceeding the rest of the industry.

These types of public valuations are then often used as the benchmark for transactions that occur in the private market.

However, the story went on to point out that since new laws are enabling smaller companies to go public quicker, those companies are skipping some of the deals that typically needed to happen years ago for a company to reach the public offering stage.

Investments in smaller companies drove prices up for fast casual or QSR brands, which are now taking calls from investors when they only have one or two locations open. And these valuations are not fluctuating dramatically despite what might be going on in the stock market.

To read the original story, click here.