Lease expense often represents one of the largest operating expenses for restaurant companies. Given its magnitude, it is a key focus of financial due diligence in restaurant transactions. It is important to understand how lease expense could change post-transaction when a company’s existing lease accounting is subject to purchase accounting. While restaurant and other multi-unit deals are commonly valued using cash rent, the post-closing accounting outcome can differ materially when business combination accounting under Accounting Standards Codification (ASC) 805 requires acquisition-date measurement of leases accounted for under ASC 842, the US GAAP lease standard. 

For buyers, sellers, and financial due diligence teams, that gap creates confusion when it surfaces after closing. It is therefore important to define the earnings basis and understand the post-closing accounting impact early. 

Executive Summary 

In our experience, restaurant transactions are frequently valued and modeled using adjusted EBITDA that reflects cash rent rather than the GAAP operating lease cost reported under ASC 842. When cash rent is lower, this treatment increases the adjusted EBITDA used in the transaction analysis. After closing, however, the company may need to report lease cost on a GAAP basis, depending on its reporting obligations and the terms of any lending agreement. If the acquisition is accounted for as a business combination, ASC 805 requires the acquirer to measure the acquired leases at the acquisition date under ASC 842. The resulting post-closing lease cost may differ materially from the rent expense reflected in pre-closing adjusted EBITDA. 

Why This Matters in Restaurant Transactions 

In multi-unit restaurant concepts, occupancy costs, including rent, are among the largest expense lines. Buyers and sellers often anchor valuation discussions around adjusted EBITDA and unit economics and make pro forma adjustments for recent openings, remodeled stores, closed stores, and store maturity. Using either cash rent or GAAP operating lease cost can significantly affect EBITDA. 

The difference is typically largest when lease terms are long and include significant timing differences, for example, a 20-year lease with rent-free or reduced-rent periods at the beginning, fixed annual escalators, or sizable tenant improvement allowances. Under ASC 842, operating lease cost is generally recognized on a straight-line basis over the lease term unless another systematic and rational basis better represents the expected pattern of benefit.[1] Contractual cash rent, by contrast, can be lower at the beginning of the lease term and higher at the end. 

Under GAAP lease accounting, even when contractual cash rent remains unchanged, lease cost can change after an acquisition because ASC 805 requires acquisition-date measurement of leases acquired in a business combination using the acquirer’s assessments under ASC 842.[2] This can lead to post-closing reporting surprises, questions about covenant definitions, and, in some cases, financial due diligence or valuation debates about whether earnings should be presented using cash rent or GAAP operating lease cost. 

Cash Rent vs. GAAP Operating Lease Cost: A Quick Refresher 

Most deal professionals understand cash rent: It is the contractual rent paid or payable for the period. 

For operating leases, GAAP lease cost under ASC 842 reflects the recognition of lease consideration over the lease term. It can differ from cash payments when there are rent-free periods, fixed escalators, lease incentives, or other timing differences. In restaurant portfolios, where leases often include structured escalations and landlord concessions, this difference is common even before a transaction. 

The key point for transactions is that a buyer may perform diligence on a business using the seller’s reported historical GAAP lease cost or may use cash rent as an approximation of cash flow. Purchase accounting under ASC 805, however, can establish a different starting point for the acquirer’s GAAP lease cost. 

For additional background on the distinction between cash rent and GAAP operating lease cost under ASC 842, see A&M’s 2024 article, “The FASB’s Lease Accounting Rules Leave Restaurant Investors Searching for Deferred Rent.” 

The Purchase Accounting “Reset”: What ASC 805 and ASC 842 Require for Acquired Leases 

When a restaurant business is acquired in a business combination, the acquiree’s existing lease balances are not simply “carried over” unchanged. ASC 805 generally requires the acquirer to recognize assets and liabilities arising from the acquiree’s leases in accordance with ASC 842 and sets out specific acquisition-date measurement requirements. For leases in which the acquiree is the lessee, the key requirements include: 

1. Lease classification is generally retained unless the lease is modified and the modification is not accounted for as a separate contract under ASC 842. 

2. The lease liability is measured as the present value of remaining lease payments, as if the acquired lease were a new lease at the acquisition date. This includes reassessing the lease term, purchase options, lease payments, and discount rate under ASC 842.[3]

3. The right-of-use (ROU) asset is generally measured at the amount of the lease liability, adjusted for favorable or unfavorable terms compared with market terms. Under prior GAAP, those terms may have been recorded as separate favorable or unfavorable lease intangibles; under ASC 805, they are reflected through the ROU asset.  

These acquisition-date measurements can produce a different lease liability and ROU asset from those previously recorded by the acquiree. For operating leases, they can also change the amount of GAAP lease cost recognized after closing.[4]

Why GAAP Rent Can Increase Post-Closing Even If Cash Rent Doesn’t 

In our experience, a common restaurant-deal scenario is that the seller’s historical GAAP rent is reasonably close to cash rent, but the acquirer’s post-closing GAAP rent changes, sometimes sharply. One reason is that, after the acquisition-date reset, the acquirer’s operating lease cost reflects the remaining lease payments and remaining lease term from the acquisition date. If rent-free or reduced-rent periods occurred earlier in the lease, those periods are no longer part of the remaining term over which the remaining lease cost is allocated. The average remaining lease cost may therefore be higher even though cash rent has not changed. 

Additionally, GAAP rent can change because the acquirer’s acquisition-date measurement incorporates: 

• A different assessment of the lease term. The acquirer makes its own acquisition-date assessment of whether renewal options are reasonably certain to be exercised, and that assessment may differ from the acquiree’s conclusion. This can affect the lease liability and the amount of lease cost recognized. 

• An adjustment to the ROU asset for off-market lease terms, meaning favorable or unfavorable terms compared with market terms, which can affect post-closing lease cost and comparability across portfolios. 

As a result, two companies can pay the same contractual cash rent but report different amounts of GAAP operating lease cost. 

Pre-Acquisition Periods vs. Post-Transaction Reporting: The Financial Due Diligence Disconnect 

In practical terms, financial due diligence teams should be explicit about whether “rent” in the adjusted EBITDA calculations reflects: 

1. The seller’s historical GAAP lease cost 

2. The seller’s cash rent 

3. A pro forma post-closing GAAP operating lease cost view intended to approximate how the acquirer will report after applying purchase accounting, although this is less common in our experience 

When Should Buyers and Sellers Consider a Pro Forma Post-Closing GAAP Rent Adjustment? 

In our experience, there isn’t a one-size-fits-all rule, but the following factors frequently drive whether a pro forma adjustment is useful in restaurant deals: 

1) The portfolio has meaningful “front-loaded” concessions 

If many leases include free rent or very low early-year rent periods that have already elapsed, those periods are no longer part of the remaining lease term over which the remaining lease cost is allocated. The average remaining lease cost may therefore be higher. Portfolios with heavy concession structures can warrant a specific pro forma discussion.