Restaurant Valuation – A side peace of the

hustle

Despite the fact that there are multiple business valuations on the restaurant
business, there is no single rule book on how to evaluate a restaurant business,
but there are still fair amount of factors that determine the worthiness of the
restaurants. So all the techniques discussed are partially objective to the
evaluator. So here are different methods of valuation available for restaurant
businesses.

No matter which restaurant valuation metrics one use, it’s vital that the work and
efforts are shown. On top of the psychology of the evaluators, one thing that they
are careful of is over evaluating the business so, they want to know how the
numbers were derived while using their metrics. Since Business is always about
the future building a strong base for the business like the inventory and cash flow
will have a positive influence on the evaluation.

1. Amity: On The Basis of Revenue & Profit

Generally Amity can be explained by the reputation of a business and it can be
calculated on the basis of total revenue or net profit generated by the restaurant.
Anything between 25-30% of the yearly revenue can be considered as the
goodwill of a restaurant business. For example if a restaurant generates a yearly
revenue of £500,000 (£9,615/week) it’s goodwill can be around £125,000 (on the
basis of 25%) which is also the profit margin (25-30%) in restaurant industry.

2. Value of Asset, Fixtures & Fittings

This factor may or may not add value to a business valuation but it holds a chunk
of potential to boost your valuation depending on the evaluator. For example, if
you are selling a barbeque and beer business and a purchaser is an Indian
restaurant entrepreneur, the value of asset, fixtures and fittings may be limited.
When calculating the price of these assets, the value of depreciation over time
must also be taken into consideration.

3. Stock Valuation
Most of the restaurants for sale are listed without their stock value. Stocks are
generally added at the end. As an evaluator, one must not forget to consider
looking at the stocks. If they have the supplier accounts and receipts, it is fairly
simple to get the stock value.

4. Lease Conditions
This is bit tricky aspect because it is difficult to quantify the value of lease terms
however, if the remaining terms on the lease is above 10-15 years, it is always
better. Is the lease secure and renewable? How often the rent is reviewed? What
are the terms of the Landlord? These questions may have an impact on
restaurant valuation.

Conclusion
There is no specific way for Restaurant Valuation. Every restaurant is different so
are the sellers and buyers. While selling a restaurant business there may be
several unseen aspects which may affect the valuation. But the restaurant’s
Goodwill, Value of FF&E, Stock, and Lease Terms will more or less give the rough
estimate.
Considerations for Restaurant Valuation
Keep in mind, there are countless considerations potential buyers and
investors will mull over before they cut you a check. Here are just a few of
them.
1) Cost of Assets/Equipment

Restaurants have various types of equipment required to run the business. If

someone buys your business, are they also buying this equipment or just the
name? If they are buying the equipment, is it all paid for, or is some of the
larger equipment being leased or rented?

This also ties in to liquidation valuation, since when it comes down to it, the
assets is the only guaranteed worth of the business. After all, you can buy a
pizzeria with the world's best oven included, but if you don't have a good pizza
cook on your team, that oven will only generate its market worth when you sell
it after you go out of business.
2) The Economy

The state of the economy and the market can have an enormous impact on the
valuation of your business. If the economy is down and the deal is over a high-
end restaurant, chances are the sales aren't going to skyrocket overnight,
meaning the restaurant could be worth less than it once was or could be. As
always, this is a risk one would face when buying or selling any business, and
this can be frustrating since this is mostly out of your control.
3) Experience/Expertise of the Investor

If you're like me, you've seen your fair share of "Shark Tank" episodes. In
some of these episodes, a shark will make a bid for a larger share of equity
(ownership) of a company at a lower price because they believe they will make
the company worth more in the long run.

This is all part of the negotiation. Let's say you are looking for a strategic
investment partner to help grow your restaurant business or expand into a
franchise.
 One investor offers you an equity deal of $200,000 for 20% - a $1
million valuation.

 Another potential investor offers you $200,000 for 25% - only an

$800,000 valuation.

At a first thought, you may tell yourself this is simple and side with the first
investor. You'll keep more equity and control. However, while the second deal
leaves you with less ownership of the restaurant, it does not necessarily
devalue your company - at least not in the way that you think it will.

Maybe the second offerer has years of experience growing restaurant

businesses. Would you be more likely to accept the offer then? Now you must
decide if your 80% retained from partnering with the first investor will be
more in the long run than 75% with the second investor.

If the second investor has the potential to grow your business more than the
first investor, your slice of the pie would be comparatively smaller - but you'd
have a much larger pie. In other words, 75% of a billion dollar company is
much more than 80% of a million dollar company.

So when valuing a restaurant, ask yourself what value each partner will bring
to the table and how they can grow the business.
4) Age of the Business

How established is the company? If it's a relatively new business but has been
performing well, this could entice an investor or a business buyer into getting
in on the ground floor. However, it can be just as equally scary to other
investors, who may see your restaurant as a fad instead. Ultimately, when it
comes to the age of the business, investors want to know how much your
business will grow, whether or not it will stay consistent, and if it's doomed for
failure.
5) Customer Loyalty

Some restaurant owners make a point to know their customers. Some

restaurants also have well-known chefs behind the scenes.

When a restaurant is acquired, one or both of these individuals may be out the
door - as could be the customers they bring in.

Before determining a restaurant's worth, find out if the customers are loyal to

the brand or the people behind it. If all the business' regulars disappear when
the ownership papers are transferred, the initial valuation goes out the
window.