Folks who own restaurants may not own them forever. Sometimes owners have made their money and enjoyed the experience, and now want to retire or move on to another chapter in their lives. Other times the restaurant business wasn’t for them and they want to throw in the towel. Still other times, an investor will buy a restaurant or group of restaurants to grow it and/or improve it specifically so they can sell it at a higher multiple than they bought it for. Regardless of why you want to sell your restaurant, you need to decide how much to sell it for…and you must be able to justify your reasoning to your buyer if you hope to get what you want. The same philosophy applies to buying a restaurant. Before you consider buying it you should perform your due diligence to arrive at the value. Only when what the seller lists it for and what they buyer is willing to pay are a close match can negotiations take place. When there is a significant mismatch, one party will be eager to complete the deal while the other is proportionately eager run away.
Valuing a restaurant for sale involves assessing various factors such as its financial performance, assets, location, reputation, and potential for future growth. While there are multiple methods to determine the value of a restaurant, here are three commonly used approaches:
The income approach focuses on the earning potential of the restaurant. It involves estimating the expected future cash flows generated by the business and discounting them to their present value. This method requires analyzing historical financial statements, sales records, and forecasting future revenue based on industry trends and the restaurant’s performance. The discount rate used to calculate the present value reflects the perceived risk associated with the investment.
The market approach considers the recent sales prices of comparable restaurants in the area. This method relies on the principle of supply and demand, using the market transactions of similar businesses as a benchmark. Research local restaurant sales and compare factors such as location, size, concept, menu, and reputation to identify comparable sales. Adjustments may be necessary to account for differences between the subject restaurant and the comparable properties.
The asset approach calculates the restaurant’s value based on its tangible and intangible assets. Tangible assets include equipment, furniture, inventory, and the property itself, while intangible assets may include the brand, customer base, and intellectual property. Evaluate the current market value of the physical assets and estimate the value of intangible assets based on their contribution to revenue and profitability.
It’s important to note that valuing a restaurant is a complex process, and it’s recommended to consult with professionals such as business brokers, accountants, or appraisers who specialize in restaurant valuation. They can provide expert advice and help you navigate the nuances specific to the restaurant industry in your region.