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Restaurant Valuation Methods

What is a restaurant worth? In short, whatever somebody will pay for it. However, below are a variety of ways to give a valuation to a restaurant.

1. Sellers Discretionary Cash Flow (SDCF) Method:

In essence, SDCF is similar to cash flow, but is tweaked to adjust for the financing and taxes of a different owner. This is usually used for owner operators.

Valuation = SDCF  times Multiple

SDCF = Pretax earnings + owners total compensation+ depreciation + amortization + interest – expected capital expenditures

Multiple is often 1-3 depending on many factors. Think, is the restaurant growing? do I have a solid lease?

2. Assets: Add up all the assets of the restaurant. This will mostly be used in the case of a restaurant that makes no money, so the only value is in the assets that it owns, like tables, ovens, dishwashing machine, etc.

3. Revenue Method: An extremely basic method to value a restaurant is based on revenue. Value = 50% annual sales. For example, if a restaurant gets $400,000 in sales, the restaurant is worth $200,000. Of course this method isn’t very good because it doesn’t take profit into account.

4. Net Income Multiple: Take the net income and multiply it. This is more common for mature public companies like Mcdonald’s.

5. Comps: Find out what other similar restaurants sold for.

Important Considerations

  • Ask for multiple years of tax returns. If the owner tells you that he keeps two books (one for himself and one for the IRS) take this an a warning sign.
  • Review the lease and speak with the landlord. Does the lease reflect market rates? Will it be re-negotiated? How long is the lease? Is the lease personally guaranteed? I know of one situation in which a mediocre restaurant has sold for a huge amount, even though they made no money. The new owners just wanted access to a lease in one of the best locations in town.
  • Will the owner stay around to ensure a smooth transition?
  • Make sure that the equipment works. There could be broken equipment.
  • Does the owner owe taxes or have other debt? Make sure to specify who is responsible for this after a sale. Debt collectors will often go after a restaurant, even after a restaurant is sold.
  • Marketing program. Who gets the website, facebook page, etc.
  • Will the employees stay around after the sale?

As a general rule, never overpay for a business and use conservative estimates.