Over the past 23 years, I have had a chance to evaluate hundreds of restaurants for clients. Many of these restaurants were eventually listed and sold, and I have been able to measure my evaluation against the actual selling price. By doing this I have formulated an opinion as to how to evaluate a restaurant so that the result is as accurate as possible when viewed against actual market results. I hope it does not surprise you, but nobody can tell you exactly what your restaurant is worth. There are simply too many factors that effect value, and at best you can only be given a range of value.
When I started
selling restaurants for others, and this was after spending 5 years as President of Charlie Brown's Restaurants where we purchased 18 restaurants, I was told that there were formulas that could be applied to determine the value. I was told for example that restaurants sold for certain time's cash flow or a certain times the gross sales. I was told that restaurants sold for 3 times cash flow or 2 times cash flow, sales times a number (say 30% of gross) to arrive at a valuation.
Others suggested a method of taking the income stream over a period of years and calculating the present value of the discounted cash flow over a specific period of time. This method calculates the present value (the value today) of the discounted cash flow. None of these methods by themselves took into account the market factors that effect market value.
These important factors are as follows:
• Lease factors such as length of lease, amount of rent vs. market, escalation clauses, and assignment provisions.
• Physical condition of the facility.
• Original cost and replacement cost of the facility.
• Accuracy, completeness and ability to verify the financial records of the business.
• Sales potential of conversion to another concept and cost of conversion.
• Ability of the business to expand and support multiple locations.
• Ease or complexity of the operation and amount of training and experience required to manage the business.
• Amount and quality of the sales and the sales history of the business.
• Time of the year that the sale takes place.
• External factors such as the state of the economy, severe weather, road closures etc.
• Impact of recent competition or potential for new competition.
• Absentee ownership or corporate ownership vs. hands on ownership.
• Conditions of the sale, such as amount of cash required and terms offered.
• Site characteristics such as ingress, egress, signage, visibility, parking, etc.
• Market considerations such as demographics, changes in traffic generators, growth or potential for a decline of an area.
• Motivation of the seller, reason for the sale.
• Similar or competing properties that are on the market at the same time.
• Goodwill factors such as years of continuous operation, reputation, awards or special recognition.
• Negotiating skill of the buyer and seller.
• Who is marketing the property and how professionally the property is marketed.
Why does a restaurant that cost $300,000 to build sell for the same price as a restaurant that cost $75,000 to build? And why do two restaurants that have a net profit of $100,000 sell for very different prices?
I have found that the above factors have more to do with affecting and establishing the value of a restaurant than any simple formula could possible hope to suggest. The method that I use to establish value is a MARKET APPROACH that utilizes the factors and compares the results to the vast database of actual sales information that I have accumulated over the years.
About The Author: Jeff Back is the founder of J. Back & Associates Restaurant Real Estate. - specializing exclusively in buying , selling and developing restaurants, bars and nightclubs. View more information about Jeff Back at J. Back & Associates & his listings or phone him direct at 925-736-8200 about selling or buying a restaurant in Northern California.
Watch for more blog posts / articles from me in the future!
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