WHAT IS THE VALUE OF MY RESTAURANT?
The most common question I get as a restaurant broker is "How much is my restaurant worth?" Nearly every one is obsessive about knowing what things are worth, from their home, to their investments, to their car and to their business. But unlike all those other assets which have fair transparent value indicators such as the stock market for your investments, or the Kelly Blue Book for a car and Zillow for your real estate, getting the value of a restaurant business is a bit more challenging.
Some would like to think one can use the comparable method where neighboring restaurants are used to compare and price the restaurant business. Believe me, I wish it were that easy sometimes. But neighboring restaurant values has little to do with each other. That's not to say there may not be exceptions where the demand for a location is very high and someone may pay a premium to get into a space, but not likely.
I have brokered over 500 restaurants. Valuing one is a mix of experience with art. And two different brokers that have the experience and art behind them will come up with very similar values. But those brokers who aren't experienced and therefore don't have the artful side valuing a restaurant under their belt will likely have a very different answer than an experienced broker. So be smart about who you use to value and sell your restaurant.
So let me get to the point of this article, the value of your restaurant depends on a number of variables, each not simple to derive.
First variable if the owner's cash flow. This is calculated using the net income from the tax returns and adding back the owner perks such as a salary and related payroll costs, auto expense and insurance, depreciation, amortization, health insurance and many other owner perks the business may be paying for. This will result in a terms referred to as Owner's Discretionary Cash Flow or Seller's Cash Flow. This takes skills as well as a complete understand of financial statements, which most brokers are not qualified to understand. I was a Chief Financial Officer for a fortune 20 company, I know financial statements.
If the business broker is doing his or her job, they should be advertising this cash flow for their listings. I often talk to buyers who just don't understand this concept because the business brokers have failed to do their job by being consistent.
The second variable is the cash flow multiplier. This is a number, usually between 1 and 3 that is used to multiply the cash flow to get the value of the business. But this is where some of the art comes in. I like to apply as much science determining the strengths and weakness of the business. I do this by categorizing this component into four sections: Revenue, Cost Management, Lease and location and condition of the restaurant. I give each category a number grade of between 1 and 6 with 6 being very strong and 0 being very weak.
For example, a restaurant has had good revenue growth year after year of about 5%. I consider that pretty good, but not great, and I'd score it a 5.
Next the management has been able to reduce costs 5% year after year. I consider that very good and would score them a 6.
The lease and location though is troubling. The lease is running 10% of sale and there is only 5 years left in total. The location however is pretty good. So while the cost of the lease is high dragging the number down to a 1, the location is pretty high at a 5. So here I would grade it a 3.5.
Finally, the restaurant's condition is very good. The restaurant is clean and organized. It doesn't show ware as the owner maintained it. So I'd give it a 6.
Then I'd add all of those numbers-up and divide by four to get an answer of 5.125.
So I've successfully mixed a bit of science with subjectivity to come-up with a number. But what does that number mean. Nothing yet!
So depending on where the economy is - more buyers than sellers - or what region the restaurant is located - I'd give each score between the 0 and 6 a cash flow multiplier. So let assume we're in a strong economy in a high demand region such as California and there are a lot of buyers out there. Here is what I'd give as the ranges:
RANGE MULTIPLIER
0.0-1.0 0.5 - 0.75
1.1-2.0 0.75 - 1.0
2.1-3.0 1.0 - 1.5
3.1-4.0 1.5 - 2.0
4.1-5.0 2.0 - 2.5
5.1-6.0 2.5 - 3.0
So in my example, this restaurant had a score of 5.1 so it would get a multiplier of 2.5 on the cash flow. Let's assume the cash flow was $100,000. Then the sale price is $250,000 for this business.
That's it in a nutshell folks! Of course, you need to use a professional to do this for you! So call us and I'll gladly help you.
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 protected] if you have any questions.