The decision to sell your restaurant can be scary a prospect, especially when you don’t have the right expertise to facilitate a successful exit. In the process of selling your restaurant, the listing price can make or break the future of your business and your role in it. In this cautionary tale, we share an insightful experience that underscores the significance of a correct valuation and the potentially horrifying consequences of an inaccurate restaurant valuation.
When we received a seller referral two years ago for a restaurant, we happily provided a free, no obligation restaurant evaluation of the business. We presented a valuation of $125,000 based on the financial data provided and current market conditions. To the seller, this was grim news, as they insisted the business was worth much more than that. This accurate valuation, grounded in industry expertise and careful financial analysis, aimed to reflect the restaurant’s worth on the market today.
As a result of the disagreement on listing price, this seller chose to move forward with the second opinion of another broker. We wished them luck and parted ways, but this is where the story really gets scary.
Unfortunately, this new broker made a crucial error. They included Employee Retention Tax Credits (ERTC) as part of the restaurant's income, inaccurately inflating the price to $250,000. ERTC Credits, a one-time benefit to the seller, should not have been considered as recurring income, leading to a misinformed valuation. As result of this new inaccurate valuation, the listing became a ghost town. The price was then dropped to $195,000—still a spooky $70,000 overpriced.
After several months of minimal interest from potential buyers, the seller’s franchisor reached out to We Sell Restaurants asking us to help the seller out of this nightmare.
The Wrong Restaurant Valuation Will Haunt Your Business
Now, the seller faces a daunting reality. The restaurant, on the market for over a year, is struggling. Financial strain has forced the seller to make the heartbreaking decision to close the doors come December. The incorrect valuation and subsequent overpricing kept potential buyers away, draining resources and pushing business to the brink. That’s why our word of caution to restaurant owners is to be leery of listing with another broker simply because they calculated a higher “list price.” Interviewing brokers before enlisting their services is one way to avoid the wrong valuation.
Avoid the Ghouls of an Inaccurate Restaurant Valuation
This cautionary tale doesn’t need to be the reality for restaurant owners, though. Employing the expertise of a specialized restaurant broker who understands restaurant valuation is critical to selling a restaurant successfully. Preparing your restaurant for the market can be a monster of a task, so here are a few key reminders about how to accurately value a restaurant for sale:
- Earnings dictate restaurant’s value, not revenue
- Employee Retention Tax Credits can NOT be counted as income
- The multiple applied depends on details such as the geography, saturation of concept, comparable sales data, competition, seasonality, and whether it’s a franchise or independent concept
The most important reminder is to be leery of listing with another broker simply because they calculated a higher “list price.” A strong restaurant broker knows that pricing, listing, and marketing a restaurant for sale is different from any other business. Be picky about who you trust to sell your business and interview brokers to gauge their understanding of restaurant valuation and the industry overall. Our Free Seller Cheat Sheet is a great place for restaurant owners to start.
In the restaurant industry, an accurate valuation could mean the difference between selling in 6 months and closing the doors for good. As we've seen from our tale, one wrong move can cascade into a series of unfortunate events that could spell doom for a thriving business. That’s why restaurant owners have looked to We Sell Restaurants for more than 20 years to provide an accurate opinion of value for their businesses.
Don't let the wrong restaurant valuation haunt your business. Get in touch with a Certified Restaurant Broker® today.
Tabby Hemphill is a Multi-State Licensed Real Estate Broker and Certified Restaurant Broker® licensed in eight states. As the Franchise Business Consultant for We Sell Restaurants, Tabby guides and coaches We Sell Restaurants Franchisees so that they become and remain successful in their individual practice. She has nearly 20 years of experience as a licensed broker. Tabby also serves as the Broker of Record for several Certified Restaurant Brokers within the We Sell Restaurants brand.