Restaurant Valuation Multiples
From breakfast to dinner, there are always families and individuals looking for a good restaurant. With the right strategy, the restaurant industry can be a lucrative opportunity. Whether you are buying, growing, or selling a restaurant, it is important to determine its fair market value. This information allows for informed decision-making. To get a quick fair market value estimate, business owners often refer to restaurant valuation multiples.
In this article, we discuss three common valuation multiples for restaurants. Keep in mind, the ranges provided are general market averages and may not reflect the precise value of your business. For an accurate restaurant valuation, it is best to consult a certified valuation expert.
As a professional business appraiser, Peak Business Valuation specializes in valuing restaurants and food service businesses. We regularly help individuals looking to buy, grow, sell, or seek financing for a restaurant. If you have any questions, you can schedule a free consultation with Peak Business Valuation below!
What are Restaurant Valuation Multiples?
Restaurant valuation multiples are financial ratios that help estimate a business’s value based on market trends. Valuation analysts determine appropriate multiples by analyzing recent sales of similar restaurants on the market. The multiple is then applied to a certain financial figure, such as earnings or revenue, to calculate the business’s value. For further insights, see Valuation Multiples for a Restaurant.
Common Restaurant Valuation Multiples
Peak Business Valuation often applies valuation multiples based on SDE, EBITDA, and revenue. Each metric provides a different fair market value estimate. As such, business appraisers often use a combination of multiples to provide a well-rounded estimate. Below, we explain each multiple and provide relevant benchmarks.
SDE Multiples for a Restaurant
Seller’s discretionary earnings (SDE) is one of the most common valuation tools for small, owner-operated restaurants. SDE represents the total economic benefit a single owner could derive from the business. Valuation analysts calculate SDE by adding back the owner’s salary, discretionary expenses, and non-recurring costs to net income.
Formula: Value = SDE × Multiple
Range: SDE multiples for restaurants can range from 2.14x to 2.96x SDE.
EBITDA Multiples for a Restaurant
EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, provides a clear view of a restaurant’s core profitability. It is particularly useful for valuing larger restaurants or multi-unit operations. Business appraisers often select EBITDA multiples since they allow for more consistent comparisons between businesses.
Formula: Value = EBITDA × Multiple
Range: Restaurant EBITDA multiples generally fall between 2.80x and 3.65x EBITDA.
Revenue Multiples for a Restaurant
Revenue multiples estimate a restaurant’s value based on its annual sales. Because this method does not consider costs or profitability, it is often used alongside SDE or EBITDA multiples for more accuracy.
Formula: Value = Revenue × Multiple
Range: Restaurants transact within an average multiple range of 0.32x to 0.48x revenue.
Peak Business Valuation, professional business appraiser, regularly works restaurant valuation multiples. We can help you understand the fair market value of a restaurant you are looking to buy, grow, or sell. Additionally, we can address any questions you may have. Start today by scheduling your free consultation below!
How to Value a Restaurant Using Multiples
While valuation multiples are an insightful reference point, business appraisers consider a variety of additional factors to arrive at an accurate valuation. A comprehensive restaurant valuation analyzes financial performance, operational strengths, industry conditions, and more. In addition, weighted averages are often applied to account for financial irregularities. For more information on the valuation process, see How to Value a Restaurant.
Rules of Thumb for Restaurants
SDE, EBITDA, and revenue multiples are popular rule-of-thumb valuation methods for restaurants. These estimates offer a general sense of value. However, rules of thumb do not account for the unique details of every restaurant. For the most accurate and reliable restaurant valuation, it is best to work with an experienced business appraiser. Contact Peak Business Valuation if you have any questions!
Factors Affecting Restaurant Valuation Multiples
Many variables can raise or lower restaurant valuation multiples. Understanding these factors allows restaurant owners to make strategic improvements to the business. Here are some common factors to consider:
- Cost Efficiency: Taking thorough measures to minimize food waste and unnecessary costs helps improve profitability. This is a key attribute that supports higher restaurant valuation multiples.
- Pricing & Portion Strategy: Strategic pricing and portion control ensure that meal production remains profitable while still delivering value to the customer. This balance makes a restaurant more competitive and stable, increasing its value.
- Skilled Workforce: Restaurants with access to well-trained, hourly staff can serve more customers effectively. A staff that consistently satisfies customers promotes stronger valuation multiples.
- Dining Experience: In addition to high food quality, customers are attracted to a memorable dining experience. Creating a welcoming environment supports customer loyalty and enhances the restaurant’s perceived value.
To learn more about increasing your restaurant’s value, read Value Drivers for a Restaurant.
Conclusion
If you need a general estimate of your restaurant’s worth, valuation multiples are a helpful tool. These financial ratios provide a quick way to gauge a business’s value based on market trends. However, these are oversimplified methods that often yield unreliable results. The best way to determine a restaurant’s true value is through a formal business valuation. During a restaurant business valuation, business appraisers conduct a thorough assessment of the business’s strengths, weaknesses, risks, growth opportunities, and more. This provides a more comprehensive valuation that stands up under scrutiny.
At Peak Business Valuation, we regularly work with restaurants throughout the United States. We can help you with a professional restaurant valuation and discuss any inquiries you may have. Schedule your free consultation with Peak Business Valuation by clicking the link below!
For more information, see Restaurant Business Valuations or Valuing a Restaurant.
