California’s statewide minimum wage hit $16.90/hour on January 1, 2026. Fast-food workers at chains with 60+ locations have been at $20.00/hour since April 2024 — a 25% overnight jump. The Fast Food Council is considering pushing that to $20.70/hour this year.
For restaurant owners thinking about selling, these numbers aren’t just a line item on a P&L. They’re rewriting what your business is worth.
The Math That Matters
Restaurant valuations are driven by seller’s discretionary earnings (SDE) — what’s left after all operating costs, before owner compensation and non-cash expenses. When labor costs jump 25% on a category that represents 30% of revenue, you’re looking at roughly a 7.5 percentage point hit to profitability before any mitigation.
In an industry where average net profit margins run 3-5%, that’s not a squeeze. It’s an extinction event for operators who can’t adapt.
The National Restaurant Association’s 2024 data makes the bifurcation clear:
- Profitable full-service restaurants: labor costs at 34.2% of sales
- Full-service restaurants reporting a loss: labor costs at 42.9% of sales
That 8.7 percentage point gap is the difference between a business worth selling and one worth closing.
What the Data Shows
Nearly two years into AB 1228’s implementation, the evidence is in:
Job losses are real. A National Bureau of Economic Research study found California’s fast-food employment declined by 2.7% relative to the rest of the country — an estimated 18,000 jobs lost. Updated analysis through March 2025 puts the figure over 23,000.
Menu prices are climbing faster than the national average. California fast-food prices increased 14.5% from September 2023 to October 2024, nearly double the national average of 8.2%. About 62% of increased labor costs were passed through to consumers.
Hours are being cut. Non-tipped restaurant workers lost up to 5 hours per week after implementation — equivalent to roughly 7 weeks of lost work annually. Nearly 89% of fast-food operators reduced and capped employee hours.
Automation is accelerating. Self-service kiosks, drive-thru voice bots, and third-party delivery apps are replacing headcount. Pizza Hut franchisees eliminated over 1,000 delivery driver positions statewide, switching entirely to Uber Eats and DoorDash.
The Valuation Impact
Here’s where it gets personal for business owners. Restaurant valuations typically apply a 1.5x to 3x multiple to SDE. When labor costs compress SDE, the damage is compounded:
Lower SDE × Lower multiple (because higher-risk environment) = Significantly lower valuation
Consider a restaurant generating $800K in revenue with labor at 30% pre-AB 1228:
- Old labor: $240K → SDE of $150K → Valuation at 2.5x = $375,000
- New labor at 35%: $280K → SDE of $110K → Valuation at 2.2x (higher risk) = $242,000
That’s a $133,000 drop in business value from a single cost category change. And we haven’t even factored in food cost inflation, rising rents, or increased insurance premiums.
Who’s Getting Hit Hardest
Rubio’s Coastal Grill closed 48 California locations and filed Chapter 11 bankruptcy, explicitly citing minimum wage increases. Pizza Hut, Papa John’s, and Round Table Pizza all laid off delivery drivers. McDonald’s and Chipotle announced price increases to offset labor costs.
But the national chains will survive through scale and pricing power. It’s the independent operator — the family-owned taqueria, the neighborhood breakfast spot, the single-location pizza shop — who faces the existential threat. These businesses don’t have McDonald’s 85% markup above marginal costs to absorb a 25% labor increase.
The California Restaurant Association’s president, Jot Condie, summed it up: “When labor costs jump more than 25% overnight, any restaurant business with already-thin margins will be forced to reduce expenses elsewhere.”
What Smart Operators Are Doing
The survivors are adapting through a combination of strategies:
- Menu engineering — removing low-margin items, increasing prices strategically on high-perceived-value dishes
- Scheduling optimization — technology-driven labor scheduling to eliminate overstaffing during slow periods
- Reduced operating hours — cutting hours that generate negative margins (early mornings, late nights)
- Concept simplification — streamlining menus to reduce labor intensity per plate
- Hybrid service models — counter service for lunch, full service for dinner
Each of these strategies directly affects the financial performance factors that drive what your business is ultimately worth.
The Broker’s Takeaway
California’s wage environment isn’t going backward. The statewide minimum will continue indexing to CPI. The fast-food floor will likely increase annually. For restaurant owners, the question isn’t whether labor costs will keep rising — it’s whether your operation can maintain healthy SDE despite them.
If your financials still show strong cash flow after absorbing these increases, your business is more valuable than ever — because you’ve proven you can operate profitably in the toughest labor market in the country. That’s a compelling story for any buyer.
If your margins are eroding and you’re not sure how much longer the math works, now is the time to understand what your business is worth while you still have a business to sell.
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