How to Value a Restaurant Franchise
One of the most viable paths to running a restaurant is through franchising. Restaurant franchise owners reap the benefits of entrepreneurship without the hassle of building a brand. If you want to buy, grow, or sell a restaurant franchise, now is a great time to do so. The first step is to receive a restaurant franchise valuation. As part of a business valuation for a restaurant franchise, you will discover how to value a restaurant franchise. In addition, you will receive professional guidance to help you make strategic decisions about your franchise.
The best way to learn how to value a restaurant franchise is by obtaining a business valuation. During a business valuation, valuation experts assess the strengths and opportunities of your restaurant franchise. They also determine the fair market value of the company. This information can help you take steps to increase the value of your restaurant franchise.
As a professional business appraiser, Peak Business Valuation works with restaurant franchises across the country. We are happy to provide you with a business valuation for a restaurant franchise. In addition, Peak can answer any inquiries about how to value a restaurant franchise.
How to Value a Restaurant Franchise
When valuing a restaurant franchise, a business appraiser considers several business valuation approaches. In many cases, experts will use a combination of the market approach and the income approach. Each method uses a different basis of valuation. As such, the business appraiser will determine which method(s) are best for the restaurant franchise business valuation. See Common Business Valuation Approaches for more information.
Valuing a Restaurant Franchise Using the Market Approach
The market approach is a common method when valuing a restaurant franchise. This valuation approach is similar to how a real estate appraiser values a property. These professionals compare similar homes that recently sold in the area. Similarly, a business appraiser compares similar restaurant franchises recently sold on the open market. The valuation expert refers to private transaction databases to gather information for privately owned restaurant franchises.
Multiples for a Restaurant Franchise
When using the market approach, experts work with franchise valuation multiples. Valuation multiples are values that measure a restaurant franchise’s value based on financial metrics such as cash flow, revenue, or earnings. To find the appropriate valuation multiples for a restaurant franchise, experts apply an NAICS or SIC code. Below, we highlight SDE, EBITDA, and REV multiples for a restaurant franchise.
SDE (Seller’s Discretionary Earnings) Multiples for a Restaurant Franchise
The SDE multiple is most common for valuing a restaurant franchise. This valuation multiple determines value based on the franchise’s seller’s discretionary earnings.
EBITDA Multiples for a Restaurant Franchise
EBITDA multiples reflect a restaurant franchise’s earnings before interest, taxes, depreciation, and amortization. This multiple helps the valuation expert to understand the return on investment (ROI) a franchise can generate.
REVENUE or SALES Multiples for a Restaurant Franchise
REV multiples measure the total amount of revenue or sales a restaurant franchise generates. Business appraisers apply the multiple to the revenue of the restaurant franchise to determine its fair market value.
The franchise valuation multiple a business appraiser uses depends on various factors. To learn more about how to value a restaurant franchise using the market approach, see What is a Valuation Multiple?
Valuing a Restaurant Franchise Using the Income Approach
Furthermore, the income approach is another popular valuation method that determines the value of a restaurant franchise based on its future income potential. In addition, this method considers the risks associated with buying or selling a restaurant franchise. We highlight a few common risks below.
- Competition: The restaurant franchising industry is highly competitive. To succeed, operators need to develop strong brand recognition and offer a unique dining experience.
- Market Fluctuations: Demand for restaurants may fluctuate depending on location, time of year, and customer preferences. As a result, it is crucial to manage inventory and staffing efficiently.
- Location: The location of a restaurant franchise plays a key role in its success. Franchises in high-traffic areas tend to perform better than those in less visible or accessible locations.
- Financial Performance: Rising food costs, labor expenses, and lease obligations can impact a restaurant franchise’s profitability. As such, strong financial performance is essential for the success of a restaurant franchise.
Methods to Value a Restaurant Franchise Using the Income Approach
There are some variations of the income approach for valuing a restaurant franchise. The most common income approaches are the capitalization of cash flow method and the discounted cash flow method. Below, we explain how to value a restaurant franchise using these methods.
Capitalization of Cash Flow Method
Business appraisers typically use the capitalization of cash flow method for restaurant franchises with long and stable financial histories. When using the capitalization of cash flow method, the business appraiser determines an appropriate measure of income for a certain period. They then divide it by a reasonable capitalization rate which represents the rate of return a buyer can expect. This method also accounts for the risks an investor may encounter.
Discounted Cash Flow Method
Next, the discounted cash flow method is ideal for restaurant franchises with strong financial histories and predictable forecasts. The business appraiser projects future cash flows over a 3-5-year period and applies a discount rate that considers the time value of money. It is important to note that the discounted cash flow method is less reliable due to volatile future cash flow estimates.
Summary
There are several valuation approaches to consider when valuing a restaurant franchise. The most common methods at Peak Business Valuation are the market and income approaches. To learn how to value a restaurant franchise you are buying, growing, or selling, obtain a business valuation. As part of a restaurant franchise valuation, experts calculate the value of a restaurant franchise and highlight the strengths and weaknesses of the business. You can leverage this information to reach your franchise goals.
Peak Business Valuation is happy to help you! We work with many restaurant franchises across the United States. We are happy to provide you with a business appraisal for a restaurant franchise. In addition, Peak can answer any questions about how to value a restaurant franchise. Schedule a free consultation with Peak Business Valuation today to start valuing a restaurant franchise!
