Valuation Multiples for a Restaurant Franchise
One of the most effective ways to enter the restaurant industry is through franchising. Running a restaurant franchise enables you to reap the rewards of entrepreneurship while avoiding the challenges of building a brand from the ground up. Whether you are looking to purchase, expand, or sell a restaurant franchise, it is important to receive a business valuation. This can help you understand the risks, opportunities, strengths, and weaknesses of a franchise. In addition, you will learn about valuation multiples for a restaurant franchise. This information can help you achieve your goals with a restaurant franchise.
In this article, we talk about valuation multiples for a restaurant franchise. It is important to remember that the figures presented in this article are general averages. For a more accurate assessment, consider obtaining a business valuation for a restaurant franchise.
Peak Business Valuation, professional business appraiser, helps individuals buy, grow, or sell restaurant franchises regularly. We can provide you with a restaurant franchise valuation and answer any questions you have on the value of a restaurant franchise or valuation multiples. Start today by scheduling a free consultation with Peak Business Valuation below!
Valuing a Restaurant Franchise
When valuing a restaurant franchise, Peak Business Valuation often uses the market approach. This method relies on valuation multiples to estimate the fair market value of a restaurant franchise based on its financial performance. Below, we outline some of the common valuation multiples that Peak Business Valuation uses when valuing restaurant franchises. For further insights, see Restaurant Franchise Valuations. If you have any questions, reach out to Peak Business Valuation!
Valuation Multiples for Restaurant Franchises
The chart below illustrates average valuation multiples for restaurant franchises. To determine the most applicable valuation multiples for your restaurant franchise, receive a professional business appraisal. Peak Business Valuation can help you with a business valuation. Reach out today!
Disclaimer: These figures are for educational purposes and do not replace professional valuation advice. The ranges provided here are not the opinion of Peak Business Valuation or its professionals. For precise valuation advice, consult with a qualified business appraiser.
What is a Valuation Multiple?
Valuation multiples are financial ratios that help determine the fair market value of a restaurant franchise by comparing the business’s financial performance to industry benchmarks. One of the most common valuation multiples for a restaurant franchise is the seller’s discretionary earnings (SDE) multiple.
For example, if a restaurant franchise reports $270,000 in SDE and is valued at a 2.89x multiple, its estimated value would be $780,300 ($270,000 x 2.89x). Whereas, if the franchise were valued at a 3.30x multiple, its value would increase to $891,000 ($270,000 x 3.30x).
At Peak Business Valuation, we frequently use valuation multiples when valuing restaurant franchises. The following sections explore the use of SDE, EBITDA, and REV multiples in determining a restaurant franchise’s value. Keep in mind, that each franchise is unique. As such, the values we use may not apply to your restaurant.
SDE Multiples for a Restaurant Franchise
Average SDE Multiple Range: 2.74x – 3.36x
Based on our data, restaurant franchises frequently transact within an average SDE multiple range of 2.74x to 3.36x. Business appraisers use this multiple to estimate the fair market value of the franchise. The formula is as follows:
SDE X Multiple = Business Value
For example, if a restaurant franchise generates $265,000 in SDE and sells at a 3.05x multiple, the estimated value would be $808,250.
$265,000 X 3.05x = $808,250
At Peak Business Valuation, we use SDE multiples regularly when valuing restaurant franchises. SDE is calculated by adjusting the franchise’s operating profit by adding back discretionary and non-recurring expenses. This adjustment reflects the franchise’s true earning potential. For more information, read Understanding Seller’s Discretionary Earnings.
EBITDA Multiples for Restaurant Franchises
Average EBITDA Multiple Range: 3.82x – 4.17x
Restaurant franchises typically transact within an EBITDA multiple range of 3.82x to 4.17x. To calculate the franchise’s fair market value using EBITDA multiples, apply the following equation:
EBITDA X Multiple = Business Value
For instance, if a restaurant franchise generates $200,000 in EBITDA and is valued at a 3.98x multiple, the estimated value would be $796,000.
$200,000 X 3.98x = $796,000
EBITDA multiples help assess the return on investment (ROI) of a restaurant franchise. Peak Business Valuation may use EBITDA multiples since they normalize differences. This allows for easier comparisons between similar franchises in the market.
Revenue Multiples for a Restaurant Franchise
Average Revenue (REV) Multiple Range: 0.29x – 0.66x
Lastly, restaurant franchises generally transact within a revenue multiple range of 0.29x to 0.66x. The revenue multiple is multiplied by the franchise’s revenue to determine its fair market value.
Revenue X Multiple = Business Value
If a restaurant franchise generates $1,600,000 in revenue and receives a 0.52x multiple, it would be worth about $832,000.
$1,600,000 X 0.52x = $832,000
Revenue multiples are common but are often less reliable than cash flow multiples. When conducting a restaurant franchise valuation, Peak Business Valuation evaluates which multiples are most appropriate. For more details, see The Valuation Process.
Summary
If you are planning to buy, grow, or sell a restaurant franchise, it is crucial to obtain a professional business valuation. During the valuation process, valuation experts will apply various valuation multiples to get an accurate estimate of your restaurant’s value. In addition, you will discover the strengths, weaknesses, risks, and opportunities of your restaurant franchise. You can leverage this information to maximize the fair market value of a restaurant franchise.
Peak Business Valuation works with restaurant franchises across the country. We are happy to provide you with a professional restaurant franchise valuation and answer any questions on valuation multiples for a restaurant franchise. Start today by scheduling a free consultation with Peak Business Valuation below!
