Understand Buy & Sell Restaurant – Advice on Buy Sell Restaurant

The Restaurant Valuation Ultimate Guide for 2024

Written by Robin Gagnon | Oct 1, 2024 2:00:00 PM

 

Restaurant valuation is the process of determining the business value using one or more valuation methods. Ideally, this leads to the FMV or fair market value of the restaurant. That is defined in the International Business Brokers Association glossary as, “The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”

There are important elements to this definition. First, a willing and able buyer and seller are acting at “arm’s length.” That means the parties are unrelated and acting independently. An example of someone who is not at “arm’s length” might be a buyer related to the seller. You can easily see the restaurant seller giving a “better” deal to his nephew or son than the market at large.

Secondly, the definition states that neither is under a compulsion to buy or sell. I once represented a seller who was being defaulted by the franchise brand. He was on a very tight timeline to transfer the business before he had nothing left to sell. Thus, he was under a compulsion to sell quickly. The last element of this definition is that both have reasonable knowledge of the relevant facts. This means that the buyer and seller are operating with eyes wide open as it relates to any knowledge of the business that could affect the restaurant valuation positively or negatively. For example, a seller aware that a road widening project is about to commence and does not disclose this to a buyer is not acting in good faith or providing full knowledge of the reasonable facts. On the other hand, a buyer, making an offer because he has insider knowledge of new growth or development near the restaurant and withholds that information, creates a situation where both parties do not have reasonable knowledge of the relevant facts.

In 2024, with the restaurant industry evolving post-pandemic, understanding the nuances of restaurant valuation is more important than ever. Rising costs, shifting consumer behaviors, and new operational models are just a few factors influencing the value of restaurants. Whether you’re a restaurant owner preparing to sell or a buyer looking to make an investment, this guide provides a comprehensive look at how to accurately determine a restaurant’s worth in 2024.

👉Key Factors Influencing Restaurant Valuation in 2024

Accurate valuation allows restaurant owners and buyers to set realistic expectations and negotiate deals based on the true value of the business. Valuation isn’t a one-size-fits-all process; it requires an understanding of the restaurant’s financials, assets, and market position.

  1. Financial Performance: The primary driver of a restaurant’s value is the financial performance. This includes its revenue, profit margins, and cash flow. Buyers are particularly interested in profitability, which gives them a clearer picture of the restaurant’s potential return on investment. In 2024, increasing food costs and labor challenges may reduce profit margins, impacting the valuation. On the other hand, these costs, often expressed as a rate to overall sales, may have already been offset by menu price increases.
  2. Location & Market Trends: Location is critical to restaurant valuation as it relates to the occupancy cost of the business. In 2024, we have seen occupancy costs on restaurants rise, trimming back earnings and affecting overall restaurant valuation. If a business is to be sold, it also requires a transferrable or assignable lease. A lease option with lower than market rates will increase the value, depending on the reaming term while lease rates at “market rate” introduce more uncertainty to the financial model. Additionally, the overall restaurant market in the area influences value—markets that have seen a recovery post-pandemic tend to drive higher valuations.
  3. Restaurant Type & Concept: The type of restaurant—whether it's fast food, fine dining, or casual dining—plays a major role in valuation. In 2024, quick-service and fast-casual models are thriving as consumers continue to seek convenience. Meanwhile, fine dining restaurants may face more challenges due to the higher costs associated with their business model.

👉Valuation Methods for Restaurants

  1. Income-Based Approach: One of the most common valuation methods is the income-based approach. It evaluates the restaurant’s worth based on its ability to generate future income, typically using a metric referred to as SDE or Seller’s Discretionary Income. This method is highly relevant in 2024, as restaurants with steady cash flow and profitability are seen as more valuable in an uncertain market and this is the method used by SBA lenders to perform internal valuations for underwriting purposes.
  2. Market-Based Approach: The market-based approach compares the restaurant to similar businesses that have been recently sold. By analyzing the sale prices of comparable restaurants, Certified Restaurant Brokers can estimate a fair value. In 2024, this method may see increased use, as more data from post-pandemic sales becomes available.
  3. Asset-Based Approach: The asset-based approach calculates the value of a restaurant based on its tangible and intangible assets, such as kitchen equipment, inventory, and branding. While not as commonly used for profitable businesses, this approach is still relevant in cases where a restaurant’s assets are a primary driver of its value.

Restaurant Valuation Calculator - Estimate Your Restaurant's Value

👉Industry Benchmarks and Multiples in 2024

A common valuation method involves applying industry benchmarks and multiples to a restaurant’s financials. Multiples of SDE for similar locations are used to gauge the value based on industry standards. In 2024, industry benchmarks may vary depending on the type of restaurant and location. Quick-service restaurants may command higher multiples due to their efficiency, while sit-down restaurants might see lower multiples due to rising operational costs. Overall, franchise locations will have a higher multiple than independent restaurants.

👉Impact of Post-Pandemic Trends on Restaurant Valuation

The restaurant industry has been fundamentally reshaped by the COVID-19 pandemic, and many of these trends continue to impact valuations in 2024.

  1. Labor Shortages and Increased Wages: Labor costs have increased across the industry, squeezing profit margins. Restaurants that have adapted through automation or streamlined operations are seeing better valuations.
  2. Rising Food Costs and Inflation: With inflation driving up the cost of ingredients, restaurants face tighter margins. Those with strong cost controls or local supply chains may fare better in valuation discussions.
  3. Shift to Delivery and Takeout Models: The demand for delivery and takeout services surged during the pandemic and remains a key factor in 2024. Restaurants that have embraced these models are often valued higher, as they demonstrate an ability to adapt to changing consumer behaviors.

👉The Role of Technology and Data in Valuation

Technology plays a growing role in restaurant valuation, especially as data becomes more integral to operations. Modern POS (point-of-sale) systems, customer analytics, and online reviews provide valuable insights into customer behavior and revenue patterns. Restaurants with advanced technological infrastructures often hold higher valuations due to their operational efficiency and ability to predict future trends. These systems are able to provide almost real time profit and loss statements, meaning current estimates of a store’s value the most up to date.

👉Valuing a Restaurant Franchise

Valuing a restaurant franchise is slightly different from valuing an independent establishment. In a franchise, factors like the brand’s strength, franchise agreement terms, and royalty structures come into play. For buyers, the appeal of a franchise often lies in brand recognition and established systems, which can lead to a higher valuation. However, franchises also come with obligations, such as ongoing royalties and adherence to corporate standards, which must be considered during the valuation.

👉Common Valuation Pitfalls to Avoid

While restaurant valuation is essential, many pitfalls can lead to inaccurate assessments. Here are a few common mistakes:

  • Overlooking Hidden Costs: Failing to account for potential liabilities like deferred maintenance or outdated equipment can skew the valuation.
  • Ignoring Lease or Property Issues: Not thoroughly reviewing the terms of the lease or property ownership can lead to surprises that affect value.
  • Emotional Valuation: Owners may have an emotional attachment to their restaurant, which can result in overvaluation. It’s important to remain objective and rely on data.

Expert Tips: Restaurant Valuation

👉How to Prepare for a Restaurant Valuation in 2024

For restaurant owners planning to sell in 2024, preparation is key to ensuring a fair valuation. Organize financial records, including profit and loss statements, tax returns, and any relevant contracts (such as leases or franchise agreements). The clearer your financial picture, the more accurate your valuation will be. Working with a professional appraiser or broker can also help you navigate the complexities of restaurant valuation.

👉The Importance of Working with a Certified Restaurant Broker for Accurate Valuation

A Certified restaurant broker brings expertise and market knowledge to the valuation process. They understand the intricacies of the restaurant industry and can help owners and buyers alike determine a fair value. Brokers also have access to industry data, helping ensure the valuation reflects current market conditions. Partnering with a broker ensures that both sellers and buyers can navigate the valuation process with confidence.

Mastering Restaurant Valuation: Methods and Tips for Accurate Assessment

Conclusion

In 2024, restaurant valuation remains a critical part of buying or selling a business. With rising costs, shifting consumer expectations, and post-pandemic recovery efforts, understanding the true value of a restaurant requires careful analysis. By considering financial performance, market trends, and industry-specific factors, restaurant owners and buyers can ensure they make informed decisions. Working with experts, such as restaurant brokers, can provide valuable insights and help both parties achieve their goals in the restaurant transaction process.

FAQs:

  1. What factors most impact restaurant valuation in 2024?
    Financial performance, location, lease terms, and industry trends like rising costs and the shift to takeout are key factors.
  2. What is the best valuation method for a small restaurant?
    The income-based approach, which evaluates profitability, is typically the most accurate for small restaurants.
  3. How does restaurant valuation differ for a franchise vs. an independent restaurant?
    Franchises often have higher valuations due to brand recognition, but come with obligations like royalties and strict operational standards.
  4. How has the restaurant industry recovery post-pandemic affected valuation?
    Labor shortages, increased wages, and the rise of delivery models have had a significant impact on valuations, with adaptable restaurants faring better.
  5. How can I increase the value of my restaurant before selling?
    Improving financial performance, updating equipment, and securing favorable lease terms are effective ways to boost your restaurant’s value.

Robin Gagnon, Certified Restaurant Broker®, MBA, CBI, CFE is the co-founder of We Sell Restaurants and industry expert in restaurant sales and valuation. Named by Nation’s Restaurant News as one of the “Most Influential Suppliers and Vendors” to the restaurant industry, her articles and expertise appear nationwide in QSR Magazine, Franchising World, Forbes, Yahoo Finance, and BizBuySell. She is the co-author of Appetite for Acquisition, an award-winning book on buying restaurants.