How To: Buy or Sell an Existing Food Hall
Are you interested in buying or selling an existing food hall? While new starts on food halls have decreased slightly with rising interest rates, we’re seeing an active deal market for second generation food halls (July 2024). So, how do those transactions work and what should you look for? This article goes through the necessary areas of focus in a transaction environment.
We’re going to cover:
Valuation
Lease review
Infrastructure review
Retail review
Valuation
When it comes to valuation of a transaction there are two important questions to ask quickly. Firstly, we want to understand if the food hall owns or leases its own real estate. Secondly, we want to know if the food hall generates an operating profit (or not). The answers to these two questions are the most important things in determining price and acquisition/disposition strategy.
If the food hall owns its own real estate, the price may be substantially more (because the bricks may be valued as a second asset), but the ownership of the bricks opens many conventional financing doors, since the real estate can be used as a security. For sellers, this means frothier sales prices. A second reason is that the improvements to make a food hall can easily be north of $300 per square foot in the least expensive US construction markets, so there’s a good chance that the replacement costs of the improvements are as much or more than the real estate itself. For these reasons, we typically encourage transactions where the building can be a part of the overall deal. However, more often than not, only a leasehold is available, so we’ll get to that in just a bit.
The second most important aspect of the valuation is the profitability of the business. Sellers come in two variants: profitable and unprofitable. Profitable businesses are typically sold for a multiple of EBITDA less debt/liabilities. This process is fairly straight forward. Those multiples change fluidly with market conditions, but are available from business brokers, investment bankers, and other transactions professionals. For example, in July of 2024, we solicited three estimates from brokers and found an average transaction rate in counter service F&B of 7.32x, meaning that a food hall netting $1mm in EBITDA would sell for around $7.32mm.
On the other hand, a lot of opportunities come from a seller who has become exhausted and is looking to get away from ongoing losses. These businesses are the hardest to value, because they involve a turnaround which is usually operationally intensive. Such transactions are especially risky for the buyer, so the price can range from $0 to some fraction of the depreciated value of those improvements, but usually less than 50% and dependent very much on the location/visibility/leasehold terms of the asset.
Lease Terms
An unprofitable business in a leasehold situation has liabilities that exceed revenues, so a buyer must take care to negotiate a transfer of the lease that enables the enough time to get the business righted, which brings us to a lease review. You should read the lease in its entirety. Here’s a quick list of things we immediately look for (on behalf of a buyer):
Is the rent “market rate?”
Is the tenant able to transfer or assign the lease without requiring the landlord’s approval? If not, is the landlord a willing participant?
How much time is left on the lease and what are the option terms (if any)?
Are there cuisine restrictions/exclusives that prevent your future tenanting freedom?
Are there termination or other rights, if you are unable to affect the “turnaround” as quickly as you want?
Are you able to negotiate a modification of the lease that involves some rental relief while you effect change on the business?
Is the landlord offering an additional tenant allowance to help you with operational modifications?
Is there an expectation of a personal guaranty?
Secondly, since food halls typically involve an element of sub-leasing or re-letting, we want to know the obligational mismatches between the master lease and the subleases. In the interest of brevity, we like to see that subleases leases are no less than 25% of the term of the master lease and that there are termination clauses in place for issues that may conflict with the buyer’s ability to create necessary change.
From a seller’s standpoint, your buyer simply wants flexibility, so if you have a good lease with reasonably flexible terms that is fairly priced for the market and you’ve taken care to paper sub-leases for the similar reasonable flexibility, then you’re probably in a very good position to ask for more favorable pricing (even if the business is unprofitable).
Infrastructure
It’s important to be careful with this one as it requires some operational knowledge and nuance. Again, buyers want flexibility. Sellers will do everything in their power to avoid discussion of major issues as will financially incentivized transaction professionals. It’s best to seek the advice of a disinterested party (Yes, you can hire us for this). The main things we look for in infrastructure are:
Things that affect guest experience
Access (do guests feel like getting there is convenient?)
Seating (is it enough?)
Atmosphere (is it comfortable?)
Things that imply major expense, but can quickly create change:
Adding hoods to unhooded stalls
Lack of sufficient air conditioning
Lack of appropriate lighting/sound
Reworking customer flow
Changing signage or visibility
Retail Attributes
This final section could be the most important because a buyer needs to determine that a retail failure isn’t “unfixable”. These principles apply to most retail developments, so they aren’t unilaterally focused on food halls, but we include some numerical context where it is beneficial.
The location needs to be proximal to identifiable traffic sources and drivers
The business needs visible signage
The business needs to get its customers in and out efficiently/easily
Specifically, food halls need volume to be successful over the long-term. We typically look for existing transactions of 5,000 per week as a starting point or the reasonable ability to get there based on existence of the above fundamentals. If there are serious limitations or transactional volume, it typically points one of the above issues being in place. It’s crucially important for the buyer to pinpoint this issue and successfully determine that the issue is fixable.
Summary
In the transactional environment, we typically see food halls of a few varietals.
A healthy, profitable food hall that is being monetized by the seller (go get ‘em champ!) to a strategic buyer
A food hall that isn’t profitable, but needs identifiable corrections/investment and the right manager
A food hall that isn’t profitable, and has an unfixable retail problem
Which is yours? If you have any questions, feel free to reach out to us for more guidance.
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Politan Group specializes in operating food halls, bars, and bars within food halls. We also provide remote accounting, HR, and administration for food halls. Finally, we provide fractional management services for existing food halls where a team needs a leadership group that understands the business of food halls. If you are thinking of building a food hall or need help with an aspect of a food hall you already own, reach out to us. Politan is the most-awarded food hall operator in the industry.