Food service is big business. Restaurant operators need to value their business for various reasons including negotiating a sale price, for financing purposes or to assess new worth. This article will explain the way to value your restaurant business.
There are countless ways to value a business or a restaurant.
Technical Report
There are several technical methods financial experts will go about coming up with what they believe to be a fair deal. Below are three of the most common business valuation methods that restaurateurs should consider first.
1) Income Valuation Method
The income approach looks at how much income a business will generate for its owners. Needless to say - the higher the projected income, the higher valuation a business tends to be given.
There are two ways within the income valuation method to determine a restaurant's worth. One is Multiple of Discretionary Earnings (and you can see an example walkthrough here), the other is Discounted Cash Flow. Of these two, I'll suggest sticking with the multiple method, as it's better fit for smaller businesses and adjusts for factors like the company's net working capital (aka inventory).
The multiple method is an accurate representation of a company's worth at one time to make an educated estimate of its worth in the future. Because of that, it's simple enough to find this number and apply it in the valuation process, because this number tends to be more of a simplified snapshot of what the restaurant's worth will be, the multiple method can be less-than-reliable, especially when external forces like the economy come into play. The number is also the trajectory of a business based on its current performance, and so a change of hands in leadership could also change the valuation.
2) Market Valuation Method
This method speaks to a restaurant's potential more than its current earnings. Like its name alludes to, the market valuation method is a subjective approach where a company is valued based on what it would be worth in an open, competitive market.
For smaller restaurants, this number can be based on what other restaurants have recently sold for in the area or with the same concept. Two fast casual restaurants might have all of the same assets, but if one is by an office complex and one is on a road inaccessible from the interstate, you can bet one will be worth more than the other.
For larger restaurants, the number can be based off stock performance of other enterprises and - you guessed it - how the stock market is behaving.
3) Asset Valuation Method
Sometimes, it's just time to call it quits. If a restaurant had a bad publicity scare it could not recover from or if years of poor service resulted in no loyal customers, a restaurant may be worth nothing.
Asset valuation just looks at the worth of a restaurant based on its assets and minus its liabilities. If all the tangible assets a business owns equate to $30,000, that is the asset-based valuation for the business.
It's relatively straightforward and tends to be the lowest a business is worth. In the end, if an investor tries to revamp the restaurant, but to no avail, they could theoretically break even on their investment by selling the supplies one-off. It's also an easy way for a new owner to enter the industry due to low acquisition cost of used materials.
Due Diligence
Make sure to try out a few of these methods to understand the price floor and ceiling you should consider when it comes to the restaurant's valuation. Every restaurant is different, and therefore, the valuation will vary based on countless considerations.
Internal factors such as sales, profit margins, and customer loyalty, and external factors like the market and the economy impact the history and the future of sales performance. Before fronting hundreds of thousands (or even millions) of dollars, go over all of these aspects and consider consulting a financial professional to make sure the sale is fair and the deal will be beneficial to both parties.
