Lightspeed Commerce: Which Restaurant Valuation Method is Best for Your Business?
You might be so busy running your restaurant business that it’s been a while since you thought about the question: what is my restaurant really worth? The day may come when you decide to sell it, so just like you would appraise a house or a piece of jewelry, performing a restaurant appraisal exercise is a smart business practice. Alternatively, you may be interested in buying a restaurant for sale, but you need to know if you will be buying it based on its actual value.
Of course, there are many restaurant valuation methods out there (you know nothing is ever easy when it comes to finances), which is why you should take a moment to decide which method is best for you.
In this article we will cover:
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What goes into a restaurant review?
The short answer is that there is no simple, consistent rule of thumb for restaurant valuation to follow. Some aspects are more concrete, like the value of your equipment and assets, while other aspects are more fluid, like the national and local economy and the location of your restaurant. The state of the restaurant industry is also a factor to consider, as is the fact that Americans are spending more than 50% of their total food budgeton restaurants.
Name recognition and reputation can come into play, for example if you own a well-established restaurant chain or if you only have one location. According to National Association of Restaurateurs, seven out of ten restaurants are single-unit operations. Another thing to consider to add to your value is your loyal customer base. With a digital customer loyalty program, you can track the return rate of customers, which allows you to indicate predictable and loyal revenue.
Whatever restaurant rating metrics you use, it’s critical that you show off your work. Investors or potential buyers will want to know how your numbers were calculated to make sure you aren’t overpricing the business. If you’ve ever watched the TV show Shark aquarium, you have probably seen discussions arise when applicants came in with a high rating that could not be saved. The same idea applies to a real world restaurant transaction.
Calculate the valuation of your restaurant
That being said, there are a few popular methods to calculate your restaurant valuation, as explained by Modern restaurant management, an online resource for restaurant professionals. Let’s start with the simpler ones.
- Income assessment:Perhaps the easiest to understand, this method aims to predict how much revenue your restaurant will generate in the future, based on its past performance. The downside to this method is that if your restaurant is fairly new, you might not have enough historical data.
- Market valuation:While your actual profits are important when you use this approach, it’s more about the potential your restaurant needs to do well. New restaurants can choose to use this method or those who are capitalizing on a new trend that should take off.
- Asset valuation: This is more of an accounting exercise than other methods because it is based on the value of your restaurant’s assets and the amount of your liability (i.e. the amount of your debts). So suppose your commercial kitchen equipment and dining room furniture are worth $ 100,000, but you have a business loan of $ 35,000, your asset valuation would be $ 65,000. Restaurants that want to sell quickly can go this route because it’s the easiest, but you might not enjoy it as much.
Other restaurant evaluation methods
In addition to these simplified restaurant valuation methods, there are also more complex calculations that can be performed. One popular model uses what is called a “restaurant valuation multiple”.
Using a restaurant’s maintainable cash flow and taking into account how comparable restaurants operate, you can determine the cap rate (also known as income multiples). Here are the key terms to understand:
This is the net income that a restaurant can expect to earn on a consistent basis before depreciation, income taxes, and debt service.
A conversion of maintainable profits into commercial value, by taking into account the purchase prices of comparable restaurants or by calculating a weighted average capitalization rate, more commonly known as a “capitalization rate”. In general, a lower cap rate (in the range of 20-30%) affects a higher restaurant value and a higher cap rate (range 30-50%) affects a lower restaurant value.
Cap rates can also be expressed as multiples of earnings. So a 25% cap rate is a multiple of four times earnings.
Calculation of fair market value
This can be done by dividing the maintainable gains by the cap rate (or by multiplying the maintainable gains by the multiple of the gains). Here is an example using the evaluation multiple of a restaurant, adapted from RestaurantReport.com:
With a sustainable income of $ 65,000 and a capitalization rate of 25%, the restaurant would be worth $ 260,000.
So what is a restaurant valuation EBITDA multiple?
If you’ve been researching restaurant valuation, you may have come across another method called multiple EBITDA valuation. EBITDAmeans Earnings before interest, taxes, depreciation and amortization. This is basically the amount of income generated by your business.
Once you understand this, you need to decide which multiple to apply. This should be based on whether you expect the restaurant to experience continued growth and success and how popular the restaurant is. Small restaurants can use a multiple of one or two, while a more well-known restaurant (such as a well-located franchise) can use a multiple of between four and six.
If you’re in the market to buy or sell a restaurant, it’s good to have a working knowledge of the key methods and terms above.
Ultimately, it is in your best interest to seek out an independent expert who truly understands the inner workings of investment opportunities and the state of the restaurant industry in your area. This way, he or she can help you assess the current value of the restaurant you are selling (or the one you are considering buying), without personal biases getting in the way.
Are you looking for a technology partner to take your hospitality business to the next level? Talk to one of our experts today to find out how Speed of lightcan help.
Lightspeed Commerce Inc. published this content on September 17, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on September 17, 2021 10:11:07 AM UTC.