How to value a restaurant 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!
Download Supporting Documents