Arizona restaurant owners were put through the wringer from 2020 through 2022 as pandemic lockdowns, rapid inflation and labor issues threatened and ended the viability of restaurants in the Valley.
Last year was the first year that Arizona restaurant owners found sustained success and returned to baseline growth after two years of losses. This period of recovery and growth means that Arizona restaurant owners who wanted to sell their business three years ago can finally do so.
Restaurant values are finally at a place where business owners who want to sell can make money off the sale. However, the Arizona restaurant market is not perfect as high interest rates are pushing some potential buyers out of the market.
The Arizona restaurant industry is back to a state of pre-pandemic normalcy. People are going out to eat again and restaurants are growing and filling tables. The average restaurant owner in Arizona is going to have two good years of tax returns showing consistent growth and increased revenues.
Good growth and increased revenue are the best tools to prove to prospective buyers that a restaurant is increasing in value. The simple fact is that if you are looking to sell your restaurant in the Valley, you are going to find some interest. This especially applies to turnkey restaurants. Quality restaurants are selling in the current market and restaurant owners dealing with burnout from rebuilding their business are looking to get out of the industry and sell.
The most popular restaurants for prospective buyers are quick service restaurants (QRS) worth $500,000 and under. QSRs are the best value for buyers since they typically have lower rent and labor costs and are easiest to manage for investors that are new to the industry.
There is a greater opportunity cost for a QSR over a full-service restaurant (FSR) since an FSR has significantly more overhead costs and requires someone with years of experience to operate successfully. A $500,000 and under price point is popular because it is a more realistic price point for buyers looking to pay with cash.
Any deal that needs to be financed is going to push some buyers out of the market. High interest rates make borrowing money an expensive proposition right now and higher costs make an investment riskier for the buyer and the bank handing out the loan.
A prospective investor is going to rethink their purchase if they have to finance a restaurant for $3 million at a prime interest rate. If a buyer needs to finance a restaurant they are probably going to reinvest in something else and wait for rates to go down. High interest rates were an issue in 2023 and they will remain an issue in 2024 if they don’t go down.
Restaurants are always a risky investment and they are more risky if rates are high. Uncertainty scares investors away and we did not know what the market would do in 2023 and we are still unsure what will happen in 2024.
High-interest rates, along with increased restaurant revenues, meant Arizona restaurant owners saw their restaurants' values increase, but they saw a smaller pool of buyers who could enter the market. Cash buyers helped improve the Arizona restaurant market in 2023 and we hope interest rates go down in 2024 to improve access to financing in 2024. Better access to financing is key to growing the Arizona restaurant industry in 2024.
No one can predict the Arizona restaurant market, but we expect to see improvement in 2024. We expect to see an increase in new and old investors looking to buy restaurants this year. Interest rates are slowly decreasing this year and lower rates mean that buyers who were priced out of the market last year can enter the market this year. We expect a plethora of quality buyers this year and no shortage of quality restaurants to buy.
Bryan Vitagliano is the leading restaurant broker at Strategic Business Brokers Group, a brokerage firm in Scottsdale. They specialize in helping restaurant owners sell their business.
