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Your restaurant's worth

Question:

My husband and I have built a successful business and are getting ready to open another location, with a possible third in the next year. The trouble is, we're really tired. Is there a rule of thumb for what a restaurant is worth on the open market?

– Joanna, Restaurant Owner

Answer:

Congratulations on your success! Building a restaurant business up and then selling individual units or the company is a good goal. For independent restaurateurs, however, the numbers can be sobering.

Yes, there are some formulas that can give you a ballpark and, as usual with these kinds of rules of thumb, a host of complicating factors. In my experience, restaurateurs who invest years of passion, huge sums of money and countless hours into building their business are disappointed or even furious when they see the results of a business valuation.   Some of the popular formulas include average cash flow multiplied by three, one-third of gross annual revenue plus inventory, and, of course, estimates based on comparable sales in the region.

The best these formulas can do is to give you an indication of whether selling is an option worth pursuing. Consider selling only along with other alternatives such as franchising or restructuring the business.

If you do put your business on the market, invest in an independent valuation. Look for a valuator who will not only look at the books, but will consider those many complicating factors I mentioned earlier: location, uniqueness and strength of concept, reputation both in the community and online, operations structure, condition of facility and fixtures, lease terms and other contracts, to name a few. It is also important to have a valuator who understands the local market. Is the neighborhood changing? Is there a new competitor? Will an anticipated policy or infrastructure change with regard to liquor licensing, traffic patterns, or zoning help or hurt revenues?

Ultimately, a business is worth what someone will pay. Even if you are discouraged by the valuation, list it for a price that you think is fair, and see if anyone bites. No one knows your business and its potential better than you do.

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