Restaurant owners invest significant time, energy, and money in the establishment, maintenance, and growth of their businesses, often forming a personal, emotional connection to the endeavor. When the time comes to determine the value of a restaurant, however, the owner or owners must be able to approach the restaurant valuation process objectively.
So how much is a restaurant worth? Traditional real estate and business valuation approaches can fall short when applied to valuing a restaurant. Owners and appraisers need to understand the peculiarities of valuing restaurants in order to arrive at a fair and accurate figure.
Why Is Restaurant Valuation Different?
Valuing a restaurant requires assessing the value or liability of a variety of factors and sub-factors, many of which lack objective, definitive worth. The value of assets held, amounts owed in liabilities, and past income are among the more tangible considerations, though these do fluctuate over time.
Other components of a restaurant’s value include market conditions, industry trends, location, and reputation. While these elements are important to determining the value of a restaurant, they can be difficult to establish and substantiate.
The methods used for restaurant valuation vary based on the reason for the valuation and specifics unique to the business, among other factors. An experienced restaurant attorney who knows the industry and the laws that govern it and related business transactions can help identify both tangible and intangible assets in a way that reflects your restaurant’s true value.
Reasons to Determine How Much a Restaurant Is Worth
The reason for valuing a restaurant is one of the first matters to consider because the goal of valuation should guide the approach. An owner or prospective owner might need to establish the value of a restaurant business for various reasons, including the following:
- Buying, selling, or merging;
- Changes in business entity structure;
- Financing (seeking loans or investors); or
- Changes in ownership, including new or diverging partners, succession planning, divorce, or development of a general exit strategy.
Overview of Basic Business Valuation Approaches
Understanding the idiosyncrasies of restaurant valuations should begin with a general knowledge of the basic approaches to business valuation:
- Income valuation;
- Market valuation; and
- Asset valuation.
Income valuation is calculated on the basis of current or projected income. Multipliers are often applied to take other aspects of value into account. Market valuation compares recent sale prices of similar companies and is typically better suited to large companies for which the sale data of comparable entities is more readily available.
Asset valuation primarily considers the book value of the actual assets owned by the restaurant, like equipment, furnishings, and property. This valuation requires subtraction of debts and liabilities, and the value of some assets may be depreciated. While asset valuation can be used when a business is sold as a going concern (the new owner intends to continue operations), this method does not capture the value of intangible assets, like a loyal customer base.
Factors that Make Restaurant Valuation More Complex
Is there a standard restaurant valuation rule of thumb? There are structures and standard calculations that provide the framework within which your restaurant attorney, appraiser, or other professional should operate. However, valuing a restaurant is more complex than many other business valuations due to the nature of the industry and the many fluctuating factors that should, ideally, be involved in the assessment.
Restaurant assets are both tangible and intangible. Some have defined value (even if that value can fluctuate), while other assets are more subjective. Factors that may need to be considered when determining the value of a restaurant include the following:
- Assets (physical and financial);
- Revenue, profits;
- Economic, industry, and market conditions;
- Goodwill, reputation, and presence (customer base, years in business);
- Location and accessibility;
- Recipes, trademarks, and intellectual properties;
- Technology in place; and
It is difficult to account for intangible assets like goodwill or beloved staff when valuing a restaurant. Will the value of community affection transfer to new ownership? Are customers and staff loyal to the current owner and likely to lose interest or leave upon their exit? If the value is expected to be maintained, how do you quantify these benefits?
Assessing the value of a restaurant is difficult because a true assessment requires not only determining the current value, but also the potential. It’s a bit of an exercise in predicting the future albeit with a sound, educated basis for the predictions.
In addition to many variables that are unique to each restaurant business, there are also economic and market factors and forecasts to consider. An assessment of a restaurant’s value should include an understanding of broad industry trends and expectations, a look at the overall economy, and a review of both industry and economic factors within the geographic location of the business being evaluated.
Accounting for the Complexities in Restaurant Valuation
As noted previously, there are frameworks within which a restaurant attorney, appraiser, or other qualified professional may operate to best determine the value of your restaurant (or restaurants). Valuation multiples can be useful for comparing financial metrics and extrapolating potential value from baseline data, like income or earnings.
Factors that can be included when using multiples to value a restaurant include the following:
- Maintainable earnings;
- Capitalization rate/earnings multiples;
- Revenue multiples;
- Fair market value;
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization); and
- Seller’s Discretionary Earnings (SDE) multiple.
There is no standard valuation rule of thumb for restaurants because there are few restaurants that have the same set of data to feed into the calculations that determine value, and one standard set of calculations will not reach the best conclusion for all situations. Knowing which factors and multiples should be applied to a specific valuation requires specific knowledge and the ability to apply that knowledge skillfully to obtain the most reliable valuation.
Discuss Your Restaurant Valuation with a Restaurant Attorney
As a restaurant owner or potential buyer, understanding the value of your holdings or potential investment is critical. The complexities of the restaurant industry call for the guidance and counsel of someone with experience in the restaurant business, law, and business transactions.
If you would like to discuss restaurant valuation or other business law matters, contact the firm by calling (304) 523-2100 or completing this online contact form.