Restaurant Valuation – The Basics

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 sales or by its assets.

Restaurant Categories

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 & grill, deli’s, fast food, pizza take-out and the list goes on. Within those categories are independently owned, franchises, corporate owned, single location to international multi-location. Thus, “typical restaurant” cannot be rationally defined.

Profit vs. Assets

Let’s look at individually owned and operated restaurants. In the most simplistic terms… there are two ways in which a restaurant can be valued, whether they are full-service or limited-service. The first is by a multiplier of annual profits for 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) or an asset sale. Whether or not a restaurant is making a profit, the fact is that the market is going to be the ultimate determination of what any restaurant is worth. asia baden baden

Multiplier for Restaurants

Earning a Profit Prior to the current recession, profitable restaurants were valued at two to three times their annual profits (or Discretionary Earnings) plus inventory. However, currently in the Los Angeles area, it appears that profitable restaurants are generally worth 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 for 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 costs. 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 also.

At Cost Equipment Value

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 at cost value of each piece of functioning equipment and other asset. Then put it all together in a list to ascertain the current worth of the restaurant

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