One of the questions asked by so many buyers searching restaurants for sale is, “Is the inventory included in the price of a restaurant for sale?” A buyer will always say they want the inventory included in the sale price. However, the answer to the question is, “No”. So why isn’t the inventory included in the sale price when almost everything else is? Although the furniture, fixtures, and equipment and the concept menus or recipes are included in the restaurant valuation, the inventory is not.
What IS Included in the Restaurant Valuation
Before we dive into why the inventory isn't included in the restaurant valuation, let's outline what it is included in the sale price. A strong restaurant broker will employ an income valuation method to price a restaurant business. This means that the restaurant's value depends on the current owner's discretionary earnings. The income valuation determines future benefit to a buyer, so a higher income will usually translate to a higher restaurant valuation. Then, the proper multiple will be determined based on the concept or brand. Understanding basic valuation methods when a restaurant broker values a restaurant business will help us understand why the inventory becomes an additional cost.
Inventory Costs When Buying a Restaurant
A restaurant typically keeps about one percent of their gross sales in inventory. Let’s say the current restaurant owner does $1,000,000 in sales per year, you must look beyond what is delivered on the truck twice a week in terms of inventory. What is the base inventory? What is needed weekly, monthly, etc.? Which are the higher cost inventory items, such as paper goods and alcohol? Aside from all of the furniture, fixtures, and equipment, there is typically another one percent in inventory, on top of the sale price, to be paid at closing. In a store that is doing $1,000,000, that is another $10,000 to be added. Again, that will be a value on top of the restaurant's valuation and sale price. A seller will not leave that type of money on the table. Inventory is a regular cost to the seller, and something they will leave with you to operate when the deal is done. Buying the current inventory on top of the sale price allows is part of what makes the business transaction turnkey. The buyer will buy out the inventory and be able to resume operations without needing to buy every plate, to-go container, napkin, ingredient, drink, and more to get started. The buyer can start making money on day one instead of waiting for the shipment truck to deliver essential inventory for the business.
Buying Restaurant Inventory
Prior to closing, the seller will give an estimate on the value of their inventory. This number is then sent to the closing attorney. Then, the buyer and seller will do an audit of the inventory and agree upon the inventory's value. Once the closing attorney receives this value, they will adjust the value on the Closing Settlement Statement for closing.
Negotiating Inventory Before Buying a Restaurant
In some cases, during the negotiation phase, a buyer and seller may agree that the buyer will purchase the restaurant for a certain sale price is the inventory is included. This is not very common, as a seller does not want to leave that type of money on the table but it happens from time to time. In some instances, a seller does not want 1% of inventory to kill the deal, so they concede to let the inventory go as part of the deal.
However, inventory in an asset sale scenario may look different for the buyer and seller. A buyer may keep or convert the existing concept. If a buyer changes or converts the concept from a Mexican Restaurant to a Seafood Restaurant, for instance, the buyer will not need the same inventory as the Mexican Restaurant. They can’t use it. For example, the seller may have some alcohol that the buyer could use for the bar in their seafood concept. The buyer and seller could negotiate on their own, the price of the alcohol and do a bill of sale amongst themselves for the alcohol outside of the actual closing. Or they may choose to add that cost to the Closing Settlement Statement and sale price of the deal.
Ultimately, if you are a buyer, anticipate the additional cost of inventory of top of the price of the restaurant. The inventory is critical to your ability to start operations sooner. Although it is not included in the initial restaurant valuation, nor advertised in the restaurant's sale price, it is cost to be expected when buying a restaurant. To learn more about buying a restaurant, download our free guide and follow We Sell Restaurants for more resources for your journey to restaurant ownership.
Jeff Heidt, Certified Restaurant Broker®, is the Franchise Partner in Marietta, GA. Jeff was introduced to Well Sell Restaurant through his wife, Kimberly Dart Heidt, who has worked with Eric and Robin Gagnon for 20 years through her boutique commercial real estate company, Dart Retail Advisors, specializing in shopping center brokerage. Jeff has completed industry-specific training and testing through We Sell Restaurants to earn the designation of Certified Restaurant Broker®. He is among a handful of restaurant brokerage experts nationwide with this title.