Around the beginning of the year, restaurant owners who are considering selling want to know how to value a restaurant. The first step to defining fair market value is to get a restaurant valuation. Hiring a trained Restaurant Business Broker who is experienced in providing restaurant valuations with SBA bank lending guidelines is highly recommended.
Dominique Maddox, the restaurant business broker at EATS Broker, says, “There are several common reasons why restaurant owners will seek a restaurant valuation. It usually includes estate and retirement planning, divorce, partnership change, need for capital, or financial planning for the future.”
What is the purpose of Restaurant Valuation- The valuation seeks to determine the price an average buyer would pay in a regular market—not the highest price possible or the quickest sale value.
How much is my restaurant worth? This is a common question a Restaurant Broker receives once talking with a restaurant owner who wants to sell a restaurant business. EATS Broker uses three methods when it comes to restaurant valuations:
The Dallas Restaurant Broker provides a comprehensive overview of restaurant valuations, highlighting their purpose, methods, and factors influencing value. Here’s a breakdown:
Asset-Based Restaurant Valuation (Asset Sale)
The buyer pays the seller an amount based on the opportunity to benefit from the existing business and build-out. Most asset sales are restaurants that show little profit or are not profitable, have been open for less than three years, or have dirty books and records.
An Asset Sale is the replacement method and only accounts for equipment and items buyers can remove once they leave space and goodwill. Walk-in coolers, hood systems, and any fixtures remain with the landlord. In this method, the seller gets pennies on the dollar for equipment and the initial build-out cost. Any outstanding debt on the equipment must be paid off by the seller.
Restaurant Broker Tip: This valuation method is typical for restaurants that are closed, not profitable, or showing a small amount of profit**
Income-Based Restaurant Valuation (The best way to value a restaurant)
This approach determines an expected level of cash flow for the business using a restaurant’s past earnings record. This approach will require the seller to provide Profit and Loss statements, tax returns once under contract with a buyer, and sometimes sales tax filings.
This method helps the buyer understand the Earnings before interest, tax, depreciation, and amortization (EBITDA), which measures a company’s operating performance. Bank lenders prefer this method to qualify a business for lending and nets the highest sales price.
Restaurant Broker Tip: Restaurant Brokers prefer using this method because it allows the deal to be SBA bank lending approved. The buyer would only have to bring 10%- 20% down.
Gross Revenue Approach
This method is the most uninvolved. It relies solely on a percentage of annual gross sales to determine a value and is not accepted by bank lenders. Restaurants usually use 15% to 30% of gross sales to arrive at a listing price.
The gross revenue method is not a reliable indicator of a restaurant’s value. Revenue does not mean profit, and an increase in revenue does not necessarily translate into an increase in profits.
What Multiple Should I Use for a Restaurant Valuation?
A typical rule of thumb is to value a restaurant at 1.5x to 3x the seller’s discretionary earnings. The exact multiple used depends on several factors, such as the time in business, goodwill, profitability, type of restaurant, franchise or non-franchise.
Regarding restaurant valuation, Restaurant Owners should place their personal feelings aside regarding value for a systematic restaurant valuation by a Restaurant Broker. For more information on the restaurant market and other available consulting services or a complimentary restaurant valuation, contact Restaurant Business Broker Dominique Maddox at 404-993-4448 or email at [email protected]. Visit our website at www.EATSbroker.com
