How to Value a Restaurant
Businesses in the restaurant industry are typically single-location restaurants that are independently or family-owned. These restaurants provide food services to seated customers who pay after eating. An industry report on IBIS World notes that restaurants in the U.S. generate over $41 billion in revenue each year. However, many restaurants have struggled to increase profits in recent years. This is due to various factors such as economic downturn and high turnover rates. Despite these poor conditions, we can expect healthy growth as the economy improves. As such, it may be a good time to buy, expand, or sell a restaurant. Whether you are entering or exiting the restaurant industry, it is important to understand how to value a restaurant.
The best way to learn about valuing a restaurant is to receive a business valuation. During a business valuation, a business appraiser discusses the risks and benefits of your restaurant. In addition, you will learn the fair market value of a restaurant. This information is beneficial whether you are buying, growing, or selling a restaurant.
Peak Business Valuation, business appraiser, values restaurants across the country. We are happy to provide you with a business valuation for a restaurant. Peak can also answer any questions you may have on how to value a restaurant. Schedule a free consultation below!
How to Value a Restaurant
There are a variety of valuation approaches to consider when determining valuing a restaurant. At Peak Business Valuation, our appraisers often use the market approach and/or the income approach. The approach the business appraiser uses depends on various factors such as the business transaction and the size of the business. The expert will determine the best approach during the business valuation. This often includes using a combination of valuation approaches to value a restaurant.
Valuing a Restaurant Using the Market Approach
The market approach is a common method when valuing a restaurant. This method is similar to the real estate appraisal process. When valuing a property, real estate appraisers evaluate similar homes that were recently sold in the area. This helps them understand the fair value of the property. When valuing a restaurant under the market approach, a valuation analyst compares similar businesses that recently sold on the market. If the restaurant is a private business, the appraiser gathers information from private transaction databases.
Multiples for a Restaurant
The market approach uses valuation multiples to determine the value of a restaurant. Valuation multiples are financial ratios that measure a business’s value based on a financial metric. To find the valuation multiples for a restaurant, business appraisers apply the proper NAICS or SIC code. We highlight valuation multiples for restaurants below.
SDE (Seller’s Discretionary Earnings) Multiple for a Restaurant
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- SDE multiples are popular when valuing a restaurant. The SDE multiple measures a restaurant’s value based on its seller’s discretionary earnings.
EBITDA Multiple for a Restaurant
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- EBITDA multiples help determine the return on investment (ROI) a restaurant can expect.
REVENUE or SALES Multiple for a Restaurant
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- REVENUE multiples measure the value of a restaurant in relation to the total revenue or sales it generates. This multiple is less common when valuing a restaurant.
Valuing a Restaurant Using the Income Approach
The income approach is another common valuation approach for deciding how to value a restaurant. The income approach assesses the future cash flow potential of a restaurant. Additionally, this valuation approach assesses the risks associated with a restaurant. We list a few of these risks below.
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- Financial Performance: Owning a restaurant may come with high overhead costs. To retain profitability, restaurants need to have effective financial planning and budgeting.
- Competition: The restaurant industry is very competitive. It is important for restaurants to differentiate from competitors to succeed.
- Quality Control: The success of a restaurant correlates with its quality. Restaurants should provide high-quality meals and customer service.
- Location: The location of a restaurant is a vital factor to consider. It is ideal for restaurants to locate near key markets to maximize sales revenue and profitability.
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Methods to Value a Restaurant Using the Income Approach
There are two common variations of the income approach. They are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a restaurant using these valuation methods.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is ideal for restaurants with long and stable histories. When using the capitalization of cash flow method, business appraisers determine an appropriate amount of economic income for one period. This income is divided by a capitalization rate. The capitalization rate reflects the rate of return an investor can expect. In addition, the capitalization of cash flow method analyzes any risks associated with buying or selling a restaurant. We highlight some of these risks above.
Discounted Cash Flow Method
- Generally, the discounted cash flow method is best for restaurants with a strong financial history. Additionally, restaurants that have built reliable forecasts benefit from the discounted cash flow method. This method uses 3-5 years of projections to determine the value of future earnings at a restaurant. The business appraiser discounts the future earnings using a discount rate instead of a capitalization rate. This process allows them to estimate the fair market value of a restaurant. Keep in mind, this method is less reliable since it uses future cash flow estimates which can be arbitrary.
Summary
Business appraisers may use the market approach and/or the income approach when valuing a restaurant. To understand which method is applicable to your restaurant, receive a business valuation. During a business valuation, a business appraiser assesses the risks and benefits of your restaurant. They will also determine the fair market value of a restaurant you are buying or selling. With this information, you can take steps to increase the value of a restaurant.
Peak Business Valuation is a professional business appraiser. Peak works with restaurants on a regular basis. We are happy to provide you with a business valuation for a restaurant. We can also discuss any questions you may have about how to value a restaurant. Start by scheduling a free consultation with Peak Business Valuation below!
For more information see Valuing a Restaurant, Value Drivers for a Restaurant, and Valuation Multiples for a Restaurant,
