Paying the Right Price for a Restaurant: Tips for Price Valuation

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on Sep 17, 2018 8:00:00 AM
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You’ve done the leg work, found what could be your soon-to-be dream restaurant, and now it’s down to the financial finagling. Paying the right price for your restaurant is, bottom line, one of the most important steps to take toward successful ownership. For many a restaurateur, it was their first and most critical mistake, and one that cost them their business.

So, let’s take a look at how to do it right.

  • Restaurant Profitability. Did I hear several readers respond with a “Duh”? I understand, in fact, I hesitated listing this as number one just for that reason. You would be surprised, however, how many up-and-coming restaurateurs fall in love and 

That being said, take a look at the last three years of P&Ls and balance sheets when assessing a restaurant. In that balance sheet are several key factors including the FF&E (furniture, fixtures and equipment).

Unfortunately, there are some unscrupulous individuals out there, so be sure to include bank records and tax returns in your financial review. Anyone can draw up a P&L.

Restaurants generally sell for one to three times the owner benefit—or the amount an owner can expect from their business when based on past revenue. Another term commonly used is the yearly adjusted cash flow.

This means that the seller has adjusted their financial statements for unusual income or expenses. Also called discretionary earnings, it includes items such as any personal expenses, depreciation, interest and amortization expenses on any loans that you will not be assuming, and extra legal or accounting expenses. An example is a business that includes car expenses that are not exclusive to the business.

So, what determines the sale price multiplier which can, obviously, make a tremendous difference in the sale price? Determining factors include the name, menu, concept, goodwill, cash flow, fixtures and equipment. Considerations will also include the number of years the business has been in operation, the lease value, and the potential within the business. If the restaurant has been in business for a while, has a good reputation, good earnings, and a lengthy lease you can assume that is below or at market value, you can expect a higher multiplier.

  • Assets in Place Purchase. There are those individuals that want to develop their own concept and are basically looking for the “bones” of a restaurant. This includes the fixtures, equipment, licenses, and lease. The best deal for them may be a business that is not making money or may be only marginally profitable. An asset-based evaluation is fairly straightforward. The worth of the restaurant is its assets minus its liabilities. In this case, location is a major player and care should be taken that the surrounding community can support your concept. The restaurant your considering may have hit the skids due to poor management, poor placement, or terrible food. Re-branding will be an important piece of your success story. If you’re not intending to buy the “name,” be sure it’s not included in the valuation. You are basically buying the equipment and the lease, so make sure that is all you are buying.

Restaurant Realty Company offered some general numbers that can help you ballpark an asset in place purchase. Businesses that are generating up to $350,000 in annual sales average a sales price of approximately 35 percent or $105,000. Those from $350,000 to $1 million average about 25 percent of yearly sales.

Deciding which is your best route to restaurant success will be based to a large degree on your concept, experience, and funding opportunities. Take your time and get out your accounting hat. Make sure that you can afford the rent, typically around 8 percent of sales, that favorable lease terms are transferable, and that it is located in an area with easy access, strong visibility, and the right clientele for your concept. 

 Download Now: How to Identify Locations, Choose a Site & Negotiate Your Lease!

Topics: Capital, Real Estate

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