How to value a restaurant business

restaurant image by Francis Lempérière from <a href=''></a>

If you're a restaurant owner, your restaurant is more than an eating establishment--in many cases, it's your retirement account. Restaurant owners invest long hours in their businesses in the hopes of creating value that can be realised when it is time to sell. Valuing a restaurant for the purpose of a sale can be a complicated process, influenced by the profitability of the business, market conditions and the sale of other restaurants. Understanding the valuation process can mean the difference between walking away from your business with a large check, or walking away with a lifetime of questions and regrets.

Value your restaurant based on its assets. Asset valuation is most common for restaurants that are not profitable. While the business itself may not be sustainable, its assets may have value. The asset valuation method would consider the current value of your restaurant equipment, fixtures, inventory, building and land. If you do not own your land but do have a long-term lease, those lease rights may be considered an asset.

Value your restaurant based on its income. The income-multiplier method assigns a value to your restaurant based on the cash flow it has generated historically and can be expected to continue generating. An appraiser using this method may consider your EBITDA (earnings before interest, taxes, depreciation and amortisation) for the past several years, and expand your average EBITDA by a certain multiplier. Your multiplier can be affected by the economy, which multiplier was used during other restaurant sales, the perceived health of your business, and various other factors. A restaurant that may sell at a multiplier of six in a strong, acquisition-friendly economy could sell at a multiplier of three during an economic downturn. Fluctuation is inevitable.

Value your restaurant based on rule of thumb. Rule-of-thumb valuation is based on what similar restaurants have sold for in similar situations. An appraiser may consider restaurant sales in your area over the past several years, and compare your revenue and profitability figures to the restaurants that were sold. This type of valuation is considered rough, and it is a bit unusual to see a restaurant sold just on the basis of a rule-of-thumb valuation. Rather, a rule-of-thumb valuation may be used to provide additional insight for an asset or income-multiplier valuation. It serves as a reality check on the other methods.

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