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1. HOW DO I VALUE MY RESTAURANT OR BAR?
Generally there are three different valuation methods used to attach a value or price to a restaurant or bar.
PERCENTAGE OF REVENUE: One method is the percentage of revenue method. To derive a value, one merely selects a percentage, say 30%, and multiplies it by the revenue or sales of the business not including sales taxes.
For example, if the business had revenues of $1,000,000 and the percentage factor of 30% was used, then the business value is $300,000. This method is used when the financials are not readily available or are not accurate.
To determine the percentage to use, one takes into account five factors. (1) the strength of the revenue, (2) the condition of the facility, (3) the lease and location (4) the strength of the management and cost management of the business and and finally (5) the type of restaurant business.
I generally look at each item and assign a number between 1 and 4, 4 being it's awesome or a high margin business. The closer the average is to 4, the closer the percentage factor is to 40%-45%. The close to 1, then the percentage will be closer to 20%.
This method, in my opinion, has some serious flaws and leads to bad valuaitons. I don't suggest using it.
SELLER'S DISCRETIONARY INCOME(SDI): This method takes some edcuation and skills to accurately apply the concepts. Simply put, SDI attempts to identify all the seller's perks including salary, payroll taxes, auto, medical insurance and any other personal items included in the profit and loss statement that's truly not a business expense.
CALL 800.576.3615 For Deatils. How do I value my restaurant? This is more of an art than a science; however there is a science behind analyzing the financials, that is an important part of a restaurant's value, that requires a skilled and experienced restaurant broker.
But properly valuing a restaurant business is the most important step in selling or buying a restaurant. A poor valuation certainly leads to either a restaurant not sellng or one where the seller takes a signficant hair-cut on the price due to a bad valuation and bad marketing. On the flip-side, for a buyer it could lead to over-paying for a restaurant.
CASES IN POINT
SellingRestaurants was approached by a sports bar owner whose restaurant was just appraised by large national chain business brokerage at $250,000. The Seller rightfully thought the restaurant was worth more and called SellingRestaurants to prepare a valuation analysis.
One of our agents spent the time to listen to the Seller and perform a detailed and thorough analysis of the tax returns and income statements. We came-up with a cash flow of about $425,000! Wow! We priced the business at $900,000+ and we are in escrow with this business at near asking price! A whooping $550,000 more than National Franchise Broker quoted the owner.
In another case, a buyer purchased a couple yogurt shops and was told each shops nets $10,000 a month. The price for each store was $150,000. Common sense would tell one that if each business nets $120,000 a year on books or $240,000 for both stores, that the price should be higher, right? The buyer purchased the stores for $300,000 without seeking a professional broker. As it turned out the stores were doing about $15,000 gross per month, which by definition made it impossible to net $10,000 a month per store. Needless to say, the buyer is not happy.
These are typical examples of how our expertise can make the difference for you and save you a lot of money and heartache.
We like to think we don't cost you money, we make you money!
Now that I've done my sales pitch, let's get into why you're reading this article in the first place. There are several value methods used to determine the sales price of a restaurant. First, there is the income valuation method. This is the most favorable and trusted method used to value a restaurant by nearly all buyers. If the restaurant has solid profit history, it is likely a buyer can purchase the restaurant with 20% down or less and obtain an SBA loan. This significantly increases the number of potential buyers for a restaurant and therefore commands the highest possible price. A SellingRestaurants agent takes the time to dig into the tax returns and find the entire hidden owner's discretionary cash flow that most brokers will over look. Restaurants with good tax returns will command a multiple of about 2.5 times owner's discretionary cash flow depending on the condition of the restaurant, location, lease, revenue growth, earnings growth and the economy and could retrieve as much as 3 times owner's cash flow.
A professional broker can help you value the business.
ALWAYS GET TAX RETURNS IF THE BUSINESS IS SELLING FOR A PREMIUM...NEVER SETTLE FOR LESS! IF THE BROKER DOESN'T GIVE THEM TO YOU OR SOME WORKSHEET DERIVED FROM AND TIED TO THE TAX RETURNS, THEN MOVE ON!
GROSS SALES PERCENTAGE METHOD
Second, the annual gross sales valuation method, although not relied upon by most buyers, uses a percentage of annual gross sales to determine the value. The percentage used depends on the lease, location, condition of restaurant, whether it is a franchise or not, and validity and stability of the annual revenue number. The better these traits, the higher the percentage commanded. Restaurants with poor records and in poor shape will only command perhaps 15-20% of the gross sales. One with a good lease, location and verifiable numbers could command up to 40% or more of gross sales and some franchises such as Subway could command 65-90% of gross sales.
REPLACEMENT COST METHOD
Finally, the replacement cost method assumes a buyer pays the seller a large premium over the income value and annual gross revenue techniques in order to benefit from the existing investment in the restaurant facility, the lease and the location of the restaurant. In other words, a buyer will pay for the right to avoid spending hundreds of thousands and even possibly a million+ dollar to avoid all the city regulations, delays and headaches of building a new restaurant. How much a buyer pays depends on the buyer's need. Some buyers will pay more for the same space because they may see the value in a lease or location while others may see that they have too much improvements to make to convert to their existing concept.
Be smart about selecting a restaurant broker who knows what he's talking about. Make sure he/she have sold a lot of restaurants in the past, both income generating as well as asset sales. We at SellingRestaurants have sold 500+ restaurants during a tough economy because we know how to value a restaurant and market to find a buyer!
So give us a call and we'll gladly show you how to value a restaurant business and get top dollar for it.
Contact a SellingRestaurants agent nearest you. Meet the Brokers, click here
MORE ARTICLES ON VALUING A RESTAURANT
NO SUCH THING AS A PROFITABLE BUSINESS FOR SALE...NOT!
We at SellingRestaurants feel obligated to educate the public, our customers and our clients with information that can help them make more intelligent buying and selling decisions.
Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry. Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer. Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world. There he participated in more than $11.5 billion of merger and acquisition transactions. He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attened Law School at Gonzaga University. Give Mel a call at 480.274.7000 or e-mail him at email@example.com if you have any questions.