How to Value a Fast-Food Restaurant
The fast-food industry is prominent in the United States. These businesses provide quick and convenient food services for customers on the go. Despite volatile economic conditions, the fast-food industry has experienced healthy growth in recent years. IBIS World notes that the industry generates over $73 billion in sales revenue each year. Moving forward, we can expect the industry to continue to grow. However, the fast-food industry is extremely fragmented and competitive. This may present challenges if you are looking to buy, grow, or sell a fast-food restaurant. Whether you are entering or exiting the fast-food industry, it is beneficial to understand how to value a fast-food restaurant. This can help you understand how to overcome the challenges associated with a fast-food restaurant.
There are various factors to consider when learning how to value a fast-food restaurant. To start, it is best to obtain a business valuation. As part of a business valuation, a business appraiser determines the value of a fast-food restaurant. They will also consider the risks and benefits of your fast-food restaurant. This information is important if you are looking to maximize the value of a fast-food restaurant.
Peak Business Valuation is a professional business appraiser. We are passionate about helping fast-food restaurants find success in this competitive industry. Peak can provide you with a business valuation for a fast-food restaurant. In addition, we can discuss any inquiries about how to value a fast-food restaurant. Start by scheduling a free consultation with Peak Business Valuation today!
How to Value a Fast-Food Restaurant
There are various valuation approaches to use when valuing a fast-food restaurant. Peak Business Valuation typically uses the market approach and/or the income approach as part of the valuation process. Business appraisers use their expertise to determine which method is most effective for your fast-food restaurant. This often involves using a combination of valuation approaches.
Valuing a Fast-Food Restaurant Using the Market Approach
The market approach is a common method for valuing fast-food restaurants. To understand this valuation approach, consider the approach real estate appraisers use to value a property. When valuing a property, real estate appraisers look at similar homes that recently sold in the area. This helps them accurately determine a fair value for the home. When using the market approach, a business appraiser looks at similar fast-food restaurants that recently sold. If the fast-food restaurant is private, the business appraiser refers to private transaction databases.
Multiples for a Fast-Food Restaurant
The market approach then uses valuation multiples to determine the value of a fast-food restaurant. Valuation multiples are ratios that compare a business’s value to a financial metric. To find the appropriate valuation multiples for a fast-food restaurant, business appraisers use a NAICS or SIC code. Below, we discuss valuation multiples for fast-food restaurants.
SDE (Seller’s Discretionary Earnings) Multiples for a Fast-Food Restaurant
- SDE multiples measure the value of a fast-food restaurant in relation to its seller’s discretionary earnings. This is a common valuation multiple when valuing a fast-food restaurant.
EBITDA Multiples for a Fast-Food Restaurant
- EBITDA multiples assess a fast-food restaurant’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment a fast-food restaurant can expect.
REVENUE or SALES Multiples for a Fast-Food Restaurant
- REVENUE or SALES multiples assess value based on the total amount of revenue a fast-food restaurant generates. This valuation multiple is less common when valuing a fast-food restaurant.
Valuation analysts determine which multiple is best when deciding how to value a fast-food restaurant. To learn more, see Valuation Multiples for a Fast-Food Restaurant.
Valuing a Fast-Food Restaurant Using the Income Approach
Another common valuation method for valuing a fast-food restaurant is the income approach. The income approach analyzes the future cash flow potential of a fast-food restaurant. In addition, the income approach assesses the risks associated with a fast-food restaurant. We discuss a few of these risks below.
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- Competition: The fast-food industry is extremely competitive. To succeed, it is vital to set your fast-food restaurant apart from competitors.
- Regulatory Compliance: There are many safety and health regulations in the fast-food industry. It is vital to understand and comply with these regulations to operate.
- Reputation: It is important for fast-food restaurants to build a strong reputation. This plays an important role in the success of a fast-food restaurant.
- Management: Fast-food restaurants need to be efficient and organized in their operations. As such, it is important to have effective management at a fast-food restaurant.
Methods to Value a Fast-Food Restaurant Using the Income Approach
There are two common methods under the income approach that valuation experts may use when valuing a fast-food restaurant. They are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a fast-food restaurant using these valuation methods.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is generally used for fast-food restaurants that have long and stable histories. Here, the valuation analyst determines a reasonable measure of economic income for one time period. These earnings are then divided by a capitalization rate. The capitalization rate represents an appropriate rate of return a buyer can expect. In addition, it assesses the risks a buyer may be exposed to, some of which are listed above.
Discounted Cash Flow Method
- The discounted cash flow method is ideal for fast-food restaurants with strong financial histories. It is also ideal for restaurants that have built reliable forecasts. This method uses 3-5 years of projections to determine the value of future cash flows. The valuation expert then discounts future cash flows using a discount rate instead of a capitalization rate. This helps them determine the value of a fast-food restaurant. Keep in mind, the discounted cash flow method is less common since it relies on future cash flows which can be inaccurate.
Summary
Business appraisers can use various valuation approaches when valuing a fast-food restaurant. At Peak Business Valuation, business appraisers often rely on the market approach and/or the income approach. To know which method is best for your fast-food restaurant, receive a business valuation. During a business valuation, a business appraiser can also help you identify the fair market value of a fast-food restaurant. This is important whether you are buying, growing, or selling a fast-food restaurant.
Peak Business Valuation, business appraiser, works with many fast-food restaurants throughout the country. We are passionate about helping fast-food restaurants succeed. As such, Peak is happy to provide you with a business valuation for a fast-food restaurant. Peak Business Valuation can also answer any questions about how to value a fast-food restaurant. Start now by scheduling a free consultation with Peak Business Valuation below!
For more information see Valuing a Fast-Food Restaurant, Value Drivers for a Fast-Food Restaurant, and Valuation Multiples for a Fast-Food Restaurant.
