Valuation Multiples for a Restaurant
The restaurant industry includes local businesses that provide food services to seated customers. This industry is 100% fragmented as there are no major players in the restaurant industry. As such, restaurants face extreme competition from both internal and external players. According to IBIS World, there are about 157,000 restaurants throughout the country. In recent years, these small businesses generated over $208 billion dollars in sales revenue. Moving forward, industry revenue will continue to grow. With improving profit margins, buying, growing, or selling a restaurant may be lucrative. Whether you are entering or exiting the restaurant industry, it is vital to understand valuation multiples for a restaurant.
Valuing a Restaurant
When buying or selling a restaurant, it is important to understand the principles of valuing a restaurant. To better understand how to value a restaurant, receive a business valuation. If you are buying a restaurant, a business appraisal can help you understand effective negotiation strategies. In addition, an appraisal may help you determine a fair purchase price. If you are selling a restaurant, receiving a business valuation can help you decide on a fair listing price. Business appraisers can also help you understand how to maximize a restaurant’s value.
Peak Business Valuation, business appraiser, works with many restaurants throughout the country. We are passionate about helping restaurants succeed! Peak can provide you with a business valuation for a restaurant. Any questions about valuing a restaurant are also welcome! Start today by scheduling a free consultation with Peak Business Valuation.
Valuation Multiples for a Restaurant
There are a variety of valuation approaches that experts may use to value a restaurant. The market approach is a common method that uses valuation multiples. The diagram below shows average valuation multiples for restaurants. Keep in mind, these values are only a guide and may not apply to your restaurant. To understand what multiples are suitable for your restaurant, receive a business valuation with Peak Business Valuation. Schedule a free consultation with Peak today!
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 its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.
What is a Valuation Multiple?
Valuation multiples are popular when determining the value of a restaurant. Valuation multiples are like ratios. For example, a common ratio in business valuation is an SDE multiple. This multiple compares the seller’s discretionary earnings of the restaurant with its implied value. Business appraisers then compare your restaurant to similar restaurants that have recently sold. Doing so helps them determine a range of value for your restaurant.
For example, a restaurant has $280,000 in seller’s discretionary earnings. If it receives a 2.21x SDE multiple, the restaurant has an estimated value of $618,800 ($280,000 times 2.21x). Conversely, if it receives a 2.83x multiple the value of the restaurant would be $792,400 ($280,000 times 2.83x).
Peak Business Valuation, business appraiser, works with many individuals looking to buy or sell a restaurant. We are proficient in using valuation multiples to determine the fair market value of a restaurant. Keep in mind, every restaurant is unique. As such, the range of value can vary. Below, we discuss SDE, EBITDA, and REV multiples for a restaurant.
SDE Multiples for Restaurants
Average SDE Multiple range: 2.14x – 2.96x
On average, restaurants transact at an SDE multiple of 2.14x – 2.96x. Valuation experts derive an implied value of a restaurant by applying the multiple to the seller’s discretionary earnings. See the calculation below.
SDE X Multiple = Value of the Business
For example, a restaurant generates $376,000 in seller’s discretionary earnings. It transacts at a 2.58x multiple. This suggests that the restaurant’s value is approximately $970,080.
$376,000 X 2.58x = $970,080
SDE multiples are common when determining the fair market value of a restaurant. To calculate the seller’s discretionary earnings, valuation experts add back any expenses the new owner may not incur to the restaurant’s value. Some common add-backs include non-recurring or non related business expenses, the owner’s compensation, and personal expenses. By considering add-backs, valuation experts can determine the cash flow potential of the restaurant. Knowing the cash flow is vital when valuing a restaurant.
EBITDA Multiples for a Restaurant
Average EBITDA Multiple range: 2.80x – 3.65x
Restaurants transact at an average EBITDA multiple range of 2.80x – 3.65x. An appraiser will apply this multiple to EBITDA to determine an implied value of the business. The calculation is as follows.
EBITDA X Multiple = Value of the Business
For instance, a restaurant has an EBITDA of $301,000. The appraiser determines a 3.21x EBITDA multiple is appropriate. In this case, the restaurant is worth about $966,210.
$301,000 X 3.21x = $966,210
EBITDA multiples measure a restaurant’s return on investment (ROI). Valuation experts at Peak may prefer EBITDA multiples since they help normalize differences. These ratios allow the business appraiser to compare your restaurant to similar businesses. Normalized ratios also provide an accurate projection of the future earnings an investor can expect from a restaurant.
REV Multiples for a Restaurant
Average REV Multiple range: 0.32x – 0.48x
According to our data, restaurants transact at a revenue multiple range of 0.32x – 0.48x. A business appraiser at Peak can derive the implied value of a restaurant by multiplying its revenue by the market multiple. See the calculation below.
Revenue X Multiple = Value of the Business
Suppose a restaurant makes $2,200,000 in revenue. It then transacts at a 0.41x multiple. In this example, the restaurant is worth approximately $902,000.
$2,200,000 X 0.41x = $902,000
A REV multiple measures the total revenue generated by the restaurant. Keep in mind, this multiple is less common when valuing a restaurant. Business appraisers generally rely on the cash flow multiples – SDE and EBITDA. However, valuation experts will use their expertise to determine which methods and multiples are best for your restaurant.
Peak Business Valuation often uses market multiples for a restaurant to determine the fair market value of a restaurant. There are various valuation methods and multiples that may apply to your restaurant. To understand which methods and multiples are most suitable for your restaurant, receive a business valuation. As part of a business valuation, Peak identifies the strengths and weaknesses of your restaurant. In addition, we can help you understand how to maximize a restaurant’s value. This is beneficial if you are buying, expanding, or selling a restaurant.
At Peak Business Valuation, we value many restaurants across the nation. We are happy to help you value a restaurant and understand valuation multiples for restaurants! Get started today by scheduling a free consultation with Peak Business Valuation, business appraiser.