How To value & Sell Your Restaurant Business
- Understand Your Restaurant's Value
The first step as you prepare to sell is to understand how much your restaurant business is worth to potential buyers. When valuing a business for sale, it's important to remain objective in order to establish a realistic and competitive selling price. There are several methods for valuing a restaurant, but most buyers and owners will begin by applying pricing multiples to get a market value range.
Market-Based Valuations and Pricing Multiples
Market-based valuations compare like businesses to each other by applying market-specific valuation multiples. These multiples are used to compare restaurants with different levels of sales and profitability, and allow prospective buyers to make informed decisions by providing an easy way to understand relative values.
The metrics used are revenue (gross sales), and earnings (cash flow to the owner). For restaurants with earnings under $1 million, Seller's Discretionary Earnings (SDE) is the most common and relevant cash flow metric to use. Larger operations with professional management may use EBITDA as an earnings metric.
Using an example to illustrate, if a restaurant generating its owner $200,000 in SDE sold for $500,000, we can derive an earnings multiple for that sale of 2.5 ($500,000 / $200,000). A month later, a restaurant earning $300,000 around the corner goes on sale. Its owner might apply the same multiple of 2.5 to get a benchmark value of $750,000. By aggregating many restaurant sales we can derive the average market pricing multiples and use them to benchmark new restaurants that enter the market for sale
Average Restaurant Earnings Multiples
While restaurant business valuations will generally fall into an average range, each restaurant is valued higher or lower in that range depending on the local market, and the specifics of the business's financials and operation. Just like buying or selling a home, accurate valuations need to compare businesses in the same local market. For owners just starting their exit plan though, it's helpful to look at general market averages to get a starting range.
For restaurants and related food service businesses in general, the average earnings multiple is just over 2, and 75% of restaurants will fall into a range of 1 - 2.5. The wide range illustrates just how much local market trends and specific business qualities can impact the ultimate valuation and sales price.
Valuations Based on Sales or Revenue
Restauranteurs aim to sell their establishments for 25-40% of their yearly revenue or gross sales. Good news for prospective sellers: according to BizBuySell's insight data, trends over the last five years indicate that restaurant sellers have been getting closer to 40%.
For example, if the business is making roughly $600,000 in sales a year, the sales price could be around $240,000. This calculation excludes the costs of doing business—labor, food, equipment, lease, etc.—that takes a dent out of profit. Neglecting to account for profit margin is the shortfall of revenue-based valuations.
Financial Documents You Will Need
In order to determine your asking price, you'll need to assemble the following formal financial records for this year, and the past two-to-three years.
- Income/Profit & Loss Statement – showing gross revenue, costs, and how much your restaurant made or lost each year
- Cash Flow Statement – showing how much money was received and paid out of your business and how business assets changed as a result
- Balance Sheet – showing the value of all tangible assets owned by your business, less the liabilities your restaurant owes
- Seller's discretionary earnings statement – showing how much your business makes after adding back non-recurring and discretionary expenses
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