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Determining a restaurant's value

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Question:

How do you arrive at a sale price for a restaurant that is in a leased space?

– Pat and Jerry’s Restaurant, Auburn, Mich.

Answer:

Valuing a restaurant is always tricky because you need to separate the real assets and liabilities of the company from the value of the brand. For example, a pizza shop in a strip mall has valuable assets like its equipment and perhaps a favorable location and good lease that could interest a buyer. But guests may not care that they are buying a slice of pizza from John’s Pizza or Joe’s Pizza as long as the quality is reasonable. In that case, the brand adds limited value. Conversely, a restaurant known for signature items, a franchise, or an operation with a strong following and good marketing list will have value beyond its tangible assets.

Harris Eckstut, a Philadelphia-based restaurant consultant, says, “The simplistic [answer] is ‘the value of the business is what a person is willing to pay’—but a really bad response.”

In a way, it’s a great response. An attractive operation with a good brand may attract buyers who will pay more than market rate. A buyer may see operational inefficiencies and have confidence that they can do better. Hubris can be a good thing for a seller.

But to put some real numbers on the value of the restaurant, here is what Eckstut recommends: “Some buyers/brokers will base [the value] on a percentage of last three years of sales—oftentimes 10%—assuming a 10% profit. Others will base it on net profit for the past three to five years. Either way, the seller has to produce the documentation to prove the sales and profits. A good business broker who has experience in selling restaurants is a reliable resource. He/she can review the tax returns and lease and from knowledge of the market and experience can establish a ‘saleable’ price.”

Other factors that can add value to the sale price, Eckstut says, include:
• Goodwill.
• Equipment, furniture and fixtures, which he cautions lose value dramatically after use.
• Liquor license—in some municipalities, the most valuable asset.
• Lease terms—if assignable, with favorable terms and with a good length of time remaining.

This is an area where a good broker with restaurant expertise will be well worth the fee. As always, consult with your attorney and restaurant association to get location-specific resources and insight.
 

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