The worth of a restaurant is predicated on what someone will pay to buy that restaurant. As restaurants come in as many shapes and sizes as do their owners, determining worth is complex. In the most general terms, value can be established through either a multiple of annual profits or by the restaurant's assets.
Restaurants fall into two major categories: full-service and limited-service (or quick service). Then there are many subcategories such as fine dining, casual dining, dinner house, bar and grill, deli, fast food, pizza take-out, and the list goes on. Within those categories are independently owned restaurants, franchises, corporate-owned, single location to international multilocation. Thus, “typical restaurant” cannot be rationally defined.
Profit vs. Assets
Let’s look at individually owned and operated restaurants. In the simplest terms, there are two ways in which restaurants can be valued, whether they are full-service or limited-service. The first is by a multiplier of annual profits in the case of successful operations. For a restaurant that is not making a profit, its worth is determined by its fixed assets, known as furniture, fixtures and equipment (FF&E). Whether or not a restaurant is making a profit, the fact is that the market is going to be the ultimate determinant of what any restaurant is worth.
In a good economy, the "rule of thumb" for profitable restaurant value is two to three times the restaurant's annual profits (or discretionary earnings) plus inventory. However, in the Los Angeles region during hard economic times, it appears that profitable restaurants can expect a 1.5 to 2 multiple of discretionary earnings plus inventory. The more successful the restaurant is at making a profit for the current owner, the more valuable it is for a buyer. This is typical of any business.
No Profit, No Problem
If a restaurant is not turning a profit, there still is value to a buyer. The biggest barrier to entry in the restaurant industry is the initial build-out cost. If a restaurant has a permitted and functioning hood, flood drains, three-part sink and a permitted refrigerator unit, and it’s in a good location, then the restaurant will generally sell. If it has a liquor license, the restaurant will sell for more. This is true also for a profitable restaurant.
Replacement Cost of Equipment
The value or worth of a restaurant that is not making much of a profit is in its working, permitted equipment and other assets. The owner must determine the replacement cost of each piece of functioning equipment and other assets, then put it all together in a list to ascertain the current worth of the restaurant.
Enlist a Professional
Whether trying to determine the worth of your own restaurant for financing purposes or to put it on the market to sell, you will likely arrive at a value tainted by emotions and the price you want vs. the actual market value. For financing intentions, talk to a commercial lender before you start the loan process. When contemplating selling your restaurant, enlist an experienced business broker. A professional can help you determine market value and discreetly bring you qualified buyers, so you can spend your time and money running your restaurant and living your life.
- "Business Reference Guide"; Tom West; 2009
Based in Los Angeles, Shelli Margolin has assisted and advised businesses for more than 15 years as a business broker and municipal economic development professional. She has a background in restaurant and business permitting, public/private partnerships and knowledge of government-funding tools for businesses. Margolin holds a master’s degree in international policy.