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  • Writer's pictureMichael Reyes

How to Value a Restaurant Business for Sale

How much is your restaurant worth? Well, this is the one question that you must know the answer to if you are planning to put your restaurant on the market in the future or planning to buy one. If you don’t know how to value a restaurant, how would you know whether you are getting profitable deals or not? That being said, here we have come up with the restaurant valuation methods that will help you arrive at major financial decisions. Let’s get started. 

 

When you need a Restaurant Business Valuation?

Restaurant owners need to know the value of their restaurants in numerous cases. What are they? 

 

Selling a restaurant

There are multiple scenarios when you decide to sell your restaurant and hence actually want to know its actual value. For instance, you might be reaching retirement age, have had an injury, and now can’t work in a physically demanding industry, or bearing inflation is just too much for you. Or you can consider reducing the financial pressure off your head by considering sharing the ownership of your restaurant with a new business that can bring in more returns for you. Sometimes, an entrepreneur might approach you with an excellent business offer. So, any of these situations need you to know how to value a restaurant for sale.  


restaurants for sale

Buying a restaurant 

Restaurants are a great business investment. Buying a restaurant is a passion project for some. They have formed the business plan and concept considering the economy. Now, all they need to do is buy a restaurant to fuel their entrepreneurial goals. Knowing how to value a restaurant to buy is an important decision while doing restaurant business valuation.  

 

Applying for a loan

There are instances when a struggling restaurant can move forward to success by opting for a business loan. While applying for the loan, restaurants need to know their value with the help of restaurant valuation methods. 

 

So, what are some restaurant valuation methods?

 

How do you calculate the value of a restaurant?

There are several methods for how to calculate the value of a restaurant. Some of the restaurant valuation methods are – 


calculate the value of a restaurant

Revenue Valuation

The method of Gross Revenue Valuation is the simplest one, but keep in mind that it is an estimate rather than a real valuation. The method applies to a certain percentage of the annual gross sales of the restaurant to get a baseline figure. For restaurants, this percentage is roughly 30-40%, with full-service restaurants usually valued at around 30%, while bars and specialty coffee shops might be valued at 40%. For instance – An “XYZ” restaurant had a total revenue of 200000 US Dollars the previous year. As per the industry standards of 30-40% annual revenue appraisal, multiply 200000 by 30%(0.3) and 40% (0.4), respectively. You will get $60,000 and $80,000 as baselined figures. Thus, these could be the valuation figures of your restaurant. 

 

Asset valuation

The asset valuation method is used to fetch the value of those restaurants that have not been in business for a long time. In this case, the country you live in affects the cost of construction per square meter. Keeping this in mind, prepare a list of all the quotes made by your contractor. The standard baseline percentage for an asset valuation is 50% of the construction cost. For instance – Person A constructed the restaurant, and due to some unforeseen circumstances, he decided to sell it since he was in dire need of money. The total construction cost was 5,00,000 US Dollars. Divide this cost by 2 to get the baseline value, which is 2,50,000 US Dollars. 

 

Market valuation 

Market valuation is the cost that determines your restaurant’s potential. You need to find out if your restaurant is popular in your country/area/city. Does the location of your restaurant cater to business people, or is it situated where creating a new business district is a great opportunity? How much is the valuation cost of the restaurant beside you? Answering these questions helps you know the value of your restaurant. For instance – ABC restaurant has been located in the suburbs for two years. They got the news that a nearby restaurant was sold at a price of 100000 US Dollars. Compared to this restaurant, ABC has a big area and a better customer base. So, they decided to value their restaurant for 1,25,000 US Dollars. 

 

Factors Affecting the Value of Restaurant

Key factors affecting the value of the restaurant are -

 

Owner involvement 

If you are a passive owner, there are higher odds you will be able to sell your restaurant at a higher price. Passive owners are defined as people who can afford to buy a restaurant but don’t have time to run it by themselves. And most of the time, the number of passive potential buyers is more than the ones who can buy a restaurant and operate it themselves. Thus, you are likely to get a good price if there are more potential buyers. 

 

Family involvement 

Good and reputed restaurants have few family members involved in the business operations, serving as cashiers, bookkeepers, or any other restaurant management task. Fewer family members mean you don’t have to put a lot of thought into replacing employees on day one. Therefore, the less the involvement of family members the more the value of the restaurant. 

 

Equipment Quality

There is no denying the fact that restaurant equipment is costly. And these equipment impacts your business valuation. That means the better the quality of the kitchen equipment, the more is the worth of your restaurant. 

 

Economy

The business economy is ever-changing, and it greatly impacts the value of the restaurant. If the economy of your state is down, even a good restaurant will take longer to sell and might even sell for a lower price than in an economically fortuitous time. Commercial buyers like to buy a restaurant in the booming economic times. While, in the slower economy, fine dining restaurants are likely to suffer. 

 

Customer base

This is yet another factor determining the worth of the restaurant. If the business has a loyal customer base, it indicates that a restaurant is successful. But here comes the challenge: if the customers are in love with the services of the restaurants, its food, and everything, they will take a long time to adapt to changes in the ownership or will be very sensitive to these changes.  

 

Location

The cost of the restaurant also depends on its location. Find out whether the restaurant is located in a high-traffic location, easily visible and accessible. A prime location with high foot traffic increases the cost of the restaurant. 

 

To make a long story short 

Every restaurant has its own USP and is altogether different. Thus, the answer to how to value a restaurant business will be based on several considerations. If you are facing any challenges, you can always rely on the experts. Having said that, I, Michael Reyes, a commercial real estate agent in El Paso, can assist you with the valuation of your restaurant and can help you fulfill your purchasing or selling needs. Buying or selling a restaurant is not a challenge anymore with Michael Reyes by your side. Contact us for more information.

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