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Unprofitable Restaurants Can Have HUGE Value!

May 5, 2017
Article #368
Author: Mel Jones

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I recently listed a restaurant business doing more than $4.1 million a year. The owner struggles with managing labor cost, which are running 48% of the revenue, making this a marginally profitable business despite having a rent factor of 5.5%. 

But this article isn't about discussing the labor problems of the restaurant; rather is about determining whether the revenue of a restaurant has value, and how does one quantify such a value?

It is clear it take an enormous amount of effort and money to drive people through the doors and keep them coming back. So there is value there. Exactly how much depends. 

But one can't look solely at the revenue number to determine the value; rather one must look at a number of factors to measure the value.  The main factors to consider are rent, labor and food costs as well as the lease terms. 

Not to make this some long dissertation analyzing each factor and how it affects value, the rule of thumb is the the closer each factor is to industry norms, the higher the value.  But of course, we're talking about high revenue businesses where one or two of the cost structures is out of line.  But the important point is the cost items are manageable?  Clearly not too much can be done about rent, but plenty can be done about food and labor costs. Even a short lease term may have a solution with a cooperative landlord (yes an oxymoron). 

For purposes of this article, let's focus on the $4 million amount. It takes an enormous amount of effort and money to build a restaurant generating $4 million of sales. The rent is great at 5.5%. So no rent issue. The labor costs are 48%.  Clearly there is an issue the buyer needs to consider whether he or she can fix the problem. 10% off the labor factor drops $400,000 of profit.  Food and beverage costs are 28%. Not bad. The lease has 20 years. Great too!

So in this example the business has one issue, labor. The issue is fixable to a degree.  In my opinion, there is tremendous value in the $4 million of revenue. My rule of thumb would put 20% to 25% of revenue to the value of this restaurant or $800,000 to $1,000,000.  I have it listed for $500,000!

Looked at another way, if this restaurant was operated properly, the net would be about 20% of the revenue or $800,000.  The location is AAA.  This business has a great location and a long lease and would earn close to a 3 multiple.  The value of the business would be $2.4 million in this case, or less than 33% of my estimated value with the troubled labor factor. 

Each buyer needs to go through their own analysis of the business to determine whether they have the skill set to fix the problem and whether the problem is curable. If so, one could make a very, very lucrative buy!  Sort of buying a fixer-upper home and fixing and flipping it. 

Call SellingRestaurants at 800.576.3615 to help you buy or sell a restaurant or bar. 

                                                                                                                                                                                                                                                      

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.

 


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