Valuation Multiples for a Fast-food Restaurant
The fast-food industry includes restaurants where customers pay for quick-service food before eating. Orders may be eaten on-site, taken out, or delivered. Most businesses also sell beverages such as water, juice, and soda but not usually alcohol. In general, a fast-food restaurant’s value proposition is dining at a low cost with a quick turnaround. This industry has approximately 291,000 businesses. These businesses generate over $273 billion in revenue. As such, the fast-food industry is highly competitive, as businesses compete for customers in a saturated market. This industry saturation creates hundreds of transactions in the fast-food industry. Whether you are buying, selling, or growing a fast-food restaurant it is important to understand the value of a fast-food restaurant.
Valuing a Fast-food Restaurant
Understanding the value of a fast-food restaurant can be complex. There are many factors a business valuation expert considers when valuing a fast-food restaurant. If you plan on selling a fast-food restaurant a business appraisal can help determine a listing price. It can also help when negotiating with potential buyers. If you are a potential buyer of a fast-food restaurant a business valuation can help you feel confident in the purchase price. A business valuation can also help identify ways to grow the business to maximize the value. Get started today by scheduling a free consultation with Peak Business Valuation, business appraiser.
A valuation expert determines the value of a fast-food restaurant using a variety of methods. One of the methods they use is through valuation multiples. Below is a brief overview of average valuation multiples for a fast-food business. Keep in mind these numbers are only a guide. Every fast-food restaurant is unique and as such the valuation multiple will be too. For a more extensive valuation and specific information about valuation multiples for a fast-food restaurant, schedule a free consultation.
Be sure to also check out Valuing a Fast-food Restaurant and Value Drivers for a Fast-food Restaurant.
Valuation Multiples for a Fast-food Restaurant
Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or any of its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional with respect to any matter contained in this article.
What is a Valuation Multiple?
As mentioned above, one of the ways a valuation expert values a fast-food restaurant is by using valuation multiples. A valuation multiple is a ratio comparing two factors to each other. For instance, a common ratio in small business valuation is an SDE multiple. The SDE multiple compares the seller’s discretionary earnings and the implied value of the company. Using multiples of similar businesses recently sold on the market, a valuation expert will apply a multiple to your fast-food restaurant to get a range of value.
For instance, a fast-food restaurant has $106,000 in SDE and receives a 2.25x multiple. Then the implied value of the business is $238,500. ($106,000 times 2.25) On the contrary, a 1.63x multiple would imply the value of the business would be $172,780. ($106,000 times 1.63x)
As a business appraiser, Peak Business Valuation works with dozens of individuals buying, selling, or growing a fast-food restaurant. Working with them allows us to recognize the average valuation multiples a fast-food restaurant transacts at. Every fast-food restaurant is different and as such the range of value can be significant. Below we discuss SDE, EBITDA, and REV multiples for a fast-food restaurant.
Average SDE Multiple range: 1.5x – 2.83x including inventory
According to our data, a fast-food restaurant transacts between a 1.5x – 2.83x average SDE multiple. To derive an implied value of a fast-food restaurant, apply the multiple by the most recent 12-month period of revenue. The calculation is as follows:
SDE X Multiple = Value of the Business
For instance, a fast-food restaurant generates $192,000 in sellers’ discretionary earnings and transacts at a 1.86x multiple. Using the calculation, the business value is approximately $357,120.
$192,000 X 1.86x = $357,120
Seller’s discretionary earnings is a common cash flow multiple used in valuing small business transactions specifically fast-food restaurants. You calculate it by starting with the company’s operating profit and adding back potential expenses that may not be incurred by a new owner. These expenses may include the owner’s compensation, the owner’s personal expenses, and other expenses such as non-recurring or non-related business items.
Average EBITDA Multiple range: 3.34x – 4.25x
The average EBITDA multiples for a fast-food restaurant ranges between 3.34x – 4.25x. Apply this multiple to EBITDA to derive an implied value of the business. The calculation is as follows:
EBITDA X Multiple = Value of the Business
For example, a fast-food restaurant has an EBITDA of $252,000 and transacts at an EBITDA multiple of 3.97x. Using the above metrics, the fast-food restaurant is worth approximately $1,000,440.
$252,000 X 3.97x = $1,000,440
A potential buyer often looks at an EBITDA multiple to measure a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets. Normalized ratios allow for comparisons to similar businesses. Normalized ratios also more accurately represent the future earnings a buyer can expect from the business.
Average REV Multiple range: 0.27x – 0.54x
According to our data, fast-food restaurants sell for an average of 0.27x – 0.54x revenue multiple. You can calculate the implied value of the business by multiplying the amount of revenue or sales a fast-food restaurant makes by the valuation multiple.
Revenue X Multiple = Value of the Business
For instance, a fast-food restaurant makes $1,392,000 in revenue and transacts at a 0.32x multiple. Then, the business is worth approximately $445,440.
$1,392,000 X 0.32x = $445,440
When valuing a fast-food restaurant, a valuation expert will usually consider several valuation multiples. What valuation multiples they use, depends on the type of fast-food restaurant being valued. Cash flow multiples such as SDE and EBITDA are often used because these multiples consider expenses that impact cash flow.
In summary, there are many factors that impact the value of a fast-food restaurant. These factors will impact the valuation multiples a valuation expert uses to value that business. As such, Peak Business Valuation loves to talk with individuals about the factors that may impact the value of a fast-food business. Be sure to also check out Valuing a Fast-food Restaurant and Value Drivers for a Fast-food Restaurant.
Peak Business Valuation, business appraiser, loves working with individuals looking to value a fast-food restaurant. We focus on providing valuable information to help you grow, sell, or buy a fast-food restaurant. Questions are always welcome! Get started today by scheduling your free consultation!
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