Getting an accurate value for a restaurant for sale is usually the most challenging part of the business purchase process. To value a restaurant for sale is often more like an art rather than a science. There are many established methods that estimate a restaurant’s value but it always depends on the specific situation. Some of the methods include asset valuations, liquidation value, income capitalization, income multiple and comparing prices of similar restaurants. Although not perfect, income multiple seems to be the most effective method for valuing a restaurant for sale.
Determine the “owner benefits.” This is the amount of pre-tax profit the owner is expected to make from the restaurant, plus the owner’s salary and other perks. Depending on a variety of factors such as location, restaurant reputation and industry trends, you will multiply the owner benefits times one to three to arrive at the valuation.
Determine if the owner is essential for the restaurant to function. In many cases, customers are loyal to a restaurant because they know who the owner is. As soon as the ownership changes, the customers leave. This means the owner holds the value, and not the restaurant itself. When this is the case, you can expect to value the restaurant by multiplying the owner benefits times something closer to one rather than three.
Determine the value of the location. Compare real estate prices for other businesses in the area. Notice any trends that may potentially change the flow of customers in the future. Is there a new movie theater opening across the street? Are they demolishing the apartment building next door? Are there several new restaurants opening on the same block? All these factors affect the value of the business, and while there’s no precise way to predict the future, careful study of the potential risks can help you come to an educated value for the restaurant.
Decide on what type of return you want on the investment. This will help you decide what the value of the restaurant is to you. A 10 percent return on investment per year may seem terrible to an investor wanting to make her money back in three years, but it may be just perfect for a chef looking to settle into the neighborhood for the next 25 years. Understand that value is personal.
Consult your accountant. Ask him to give you an idea of how much other restaurants in the area are selling for. This will help you benchmark your valuation and get a better idea of what a fair price is.
Always ask for an explanation of the asking price, and challenge any assumptions that seem far-fetched or inconsistent, such as predictions of large increases in sales in the future.
When valuing a restaurant, beware of faulty financial statements or exaggerated assumptions. Ask for certified copies of the financial records or ask to see their daily books.