How to Value a Restaurant

Restaurant valuation is a difficult and complex task. Most restaurant valuations are not calculated by the same “fair market value” measures used for other businesses, due to the industry’s consistent inaccuracies in accounting and reporting. In a recent article for Modern Restaurant Manager, author David Sederholt introduces his method for doing determining the value of a restaurant. Sederholt’s valuation is the sum total of the following:

• Base Value – Approximately 3% of the average annual reported sales from the last three years. Please note, you should never accept claims of cash revenue—unless revenue is reported, it doesn’t count.
• Lease Benefits – A lease is a restaurant’s primary fixed cost. Sederholt offers a number of areas of consideration and describes how each would either be an addition to or subtraction from your final value, including:
  • Assignment Value
  • Occupancy Costs
  • Market Value Rent
• Equipment, Facility – Come up with a reasonable estimate of the condition of the facility, equipment, furniture, and fixtures. If these items are in good condition, add 5%. If they are not usable, subtract 5-10%.
• Name & Concept – If you are maintaining the brand of the previous establishment, add 5-10%. If not, add nothing.
• Staff – Retaining staff adds 2-3% in value; Otherwise, it adds 0%.
• Parking & Location – A subjective rating of the location quality, visibility, traffic, parking, and will either add or detract 2-5% of the value.

The final number you develop should also take into consider future possibilities for the restaurant—profit, breaking even, or struggling—in order to estimate how long it will take to recapture the investment.

For more details, read the article in full at Modern Restaurant Management.