How to review a Restaurant Profit and Loss Statement
Understanding how to review a Restaurant Profit and Loss Statement is a crucial variable for a Restaurant Valuation to determine the restaurant’s actual value. Restaurants are one of the industries that the ratios on a profit and loss statement can give valuable clues on how a seller operates his/her restaurant.
Unexperienced buyers will look straight down to the Net Income number when reviewing a Profit and Loss Statement. Experienced restaurant operators/buyers will start from the top and work down; they will check the key variables’ ratios.
EATS Restaurant Brokers -5 Critical Categories to review ratio percentages on a Profit and Loss Statement:
• Sales
• Cost of Goods Sold
• Payroll
• Rent/ Occupancy
• Net Income
Let’s start from the top of the Profit and Loss Statement:
1. Sales: This category is the most critical number because all the other key variables are based on the net sales number. Today, restaurant owners can automatically pull the total sales numbers from an integrated Point of Sale( POS). Total Sales is a good indicator to show if the restaurant sales are improving or declining yearly.
2. Cost of goods sold (COGS): Refers to the direct costs of producing the goods sold by a restaurant. Cost of Goods should typically run around 28%-32% of sales. This number can increase or decrease depending on the restaurant concept.
Example:
Pizza restaurants COGS are usually lower, ranging from 25%-28%
Full-Service Restaurants COGS are higher, ranging from 33%-36%
Sub Sandwich Franchise COGS typically range from 28%-33%
3. Payroll: Includes labor cost, including hourly and salaried, payroll taxes, 401K contributions, and other employee benefits. An average payroll rate should be around 25%.
Restaurant Brokers come across some diverse Payroll expense ranges when providing restaurant valuation. Here are some scenarios:
-Low under 20%- Restaurant has family members working extensive hours, or husband and wife are working over 40 hours weekly
-Low under 20%-Owner debits some payroll expenses under Cost of Goods Sold (COGS).
-Low under 20%-The most common scenario is CASH-owner is paying employees in CASH, aka under the table.
(These factors are essential because they make a difference in the restaurant valuation)
4. Rent/ Occupancy Expense: Occupancy costs are costs related to occupying space, including; rent, real estate taxes, personal property taxes, and insurance on the building. Occupancy Costs should be between 7%-11% of sales.
EATS Restaurant Brokers Tip-PAY CLOSE ATTENTION TO THIS LINE:
Occupancy Costs that are 5% or less and 12%-18% should get an experienced Restaurant Broker’s attention providing a restaurant valuation. Leases that have a monthly occupancy cost of 12%-18% are an indication of a bad lease. This ratio number for rental occupancy can be challenging for restaurant owners trying to sell a restaurant to a buyer.
On the opposite end, Occupancy Cost that is 5% or less should be explained in detail. In most cases, the restaurant seller owns the building and pays a low mortgage, or the landlord provided reduced rent as a concession.
5. Net income (NI), also called net earnings, is calculated as sales minus the cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expense.
Restaurant Net Incomes usually range from 5%-10%, a well-managed restaurant can see percentages increase up to 15%.
EATS Restaurant Brokers Tip-PAY CLOSE ATTENTION TO THIS LINE:
Net Income over 20% should be analyzed and explained. Most times, sellers are not deducting all expenses, under-reporting numbers, or combining multiple restaurant expenses.
**Disclaimer if the seller provides a net income over 20% for numerous years on the TAX RETURNS, then it makes it easier to believe.
Restaurant Sellers should understand their Profit and Loss statement and be ready to explain specific ratios if they are irregular from the average ratio ranges. EATS Broker reviews restaurant Profit and Loss Statements daily. We understand the restaurant business down to the percentage numbers.
EATS Broker are Subject Matter Experts in Restaurant resales. Let us provide you a complimentary Certified Restaurant Valuation; contact us today at sales@eatsbroker.com
or 404-993-4448.
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3 Types of Buyers after Covid-19
EATS Broker talks to 3 Types of Buyers after the Covid-19 pandemic outbreak about buying a restaurant. The conversations we had before Covid-19 were much different than the conversations now. Today’s conversations come with a collection of unknown factors.
Today’s market is buzzing with a large number of buyers and sellers entering the market. Some want to become an entrepreneur while others want to sell a business. According to BizBuySell.com traffic has increased with Buyers and Sellers activity and now exceeds pre-Covid-19 levels. Traffic to the website was up 19% May 2020 compared to May 2019.
Dominique Maddox of EATS Restaurant Broker says, “ it’s a golden opportunity for savvy buyers in today’s market. Restaurants that were for sale at high valuation prices before Covid-19, now need to be reevaluated and the listing price lowered”.
3 Types of Buyers in today’s market after Covid-19:
- Sit on the sideline– these buyers are pessimistic and believe that the worst will happen with the Covid pandemic. These buyers will sit on the sideline to watch and wait. They are waiting to see what emerges next. These buyers will look but will not move forward to purchase.
- The Savvy Buyer– has the Entrepreneur Spirit these are the people looking to buy up businesses at some attractive prices. These are the buyers looking for value at a great price. We saw this in the real estate recession in 2009 and 2010 when prices were low, the savvy buyers were bullish and bought properties.
- The recent unemployed buyer– according to CNBC the employment-population ratio of the number of employed people as a percentage of the U.S. adult population plunged to 52.8% in May. This news means 47.2% of Americans are jobless, according to Bureau of Labor Statistics. As the coronavirus-induced shutdowns tore through the labor market, the share of the population employed dropped sharply from a recent high of 61.2% in January.
With 42 million people out of job, some of those people will be looking to buy a business. These buyers have been furloughed from corporate jobs, or buyers wanting to use their 401K to purchase a business.
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com
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How does Covid-19 affect Restaurant Valuations?
Everybody has a unique story about how the coronavirus crisis has affected their lives. During my alone time I have thought about how does Covid-19 affect Restaurant Valuations moving forward?
My personal story as a Restaurant Broker is that I was scheduled to close my 1st deal with my brokerage EATS Restaurant Brokers in March and the deal got canceled. The buyer was worried about the uncertainly of the future regulations for the restaurant industry.
My experience of eight years as a Restaurant Broker has prepared me for the “new normal” in the restaurant industry. The biggest concern I hear from my current clients is, “how much is my restaurant worth now after Covid-19 pandemic”?
While most restaurants struggle to open the doors back up for business, others apply for the Paycheck Protection Program (PPP) to help with expenses. Regarding Restaurant Brokerage one of the biggest questions not being talked about is, what happens to the restaurants that were listed for sale before the Covid-19 pandemic?
My personal experience is that I was able to save my deal that was canceled but my seller client had to reduce the asking price by 40% to keep the buyer interested. Now the deal is scheduled to close in June. If you are asking yourself why the price reduction, the restaurant industry has changed in the last 60 days, uncertainly will drive restaurant prices moving forward.
How does a Restaurant Broker recommend a price valuation for a restaurant?
1. EBITDA: An acronym, EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and is a useful metric for understanding a business’s ability to generate cash Add Backs flow for its owners and for judging a company’s operating performance.
2. Replacement Cost Method
The restaurant advertised as an Asset Sale is valued using the Replacement Cost Method. The replacement cost method assumes a buyer pays the seller in order to benefit from the existing investment in the restaurant facility, lease, leasehold improvements, location of the restaurant, and equipment. This helps the buyer avoid spending time and money to build and comply with city regulations, and delays in building a new restaurant.
Due to the Covid-19 pandemic, some restaurants that were priced as profitable restaurants will be sold as an Asset Sale. The remaining profitable restaurants listed for sale should be ready to lower the asking price.
Restaurant valuations are based on 2019 sales numbers and 2020 sales projections. Banks will require quarterly 2020 profit and loss statements for bank lending approval. Based on national sales reports, most restaurant owners have seen a 70%-80% sales loss in March-April. Today’s buyers are more worried about how sales will increase moving forward much more than previous profit and loss statements.
For restaurant buyers seeking restaurant ownership buying an existing restaurant that is being sold as an Asset Sale is a quick path to Restaurant Ownership. The previous seller has done the hard work of building out the restaurant, dealing with contractors, getting the permits, negotiating terms on the lease, and establishing the location as a restaurant. Now it is time to bring your experience, ideas, menu, leadership skills and buy a restaurant that is priced pennies on the dollar.
My advice to restaurant owners looking to sell a restaurant or currently listed for sale:
-Be flexible with your asking price and be ready to negotiate.
-Re-evaluate your listing price after your restaurant is listed for sale a couple of months.
-Be realistic about the “new normal” in the restaurant industry
-Offer owner financing to a financially qualified buyer
-Listing with equipment liquidation company is a terrible idea- you will get pennies on the dollar for used equipment.
-Use a professional trained Restaurant Broker
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbrokers.com. Visit our website at www.EATSbrokers.com
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