Understanding how much your restaurant is worth starts with having the right person perform the valuation. This means an expert with access to comparable sales information, experience with transfers and knowledge of the current market conditions. Selling your restaurant is one of the most significant business decisions a restaurant owner can make, and the process starts with an accurate and fair valuation.

Frequently, franchise restaurant owners turn to their franchise business consultant (FBC), for this crucial step. They assume that an FBC’s operational insights into the business are enough to determine the value of an individual location. However, franchise consultants, while invaluable for managing the operations of a restaurant within a franchise, lack the specialized knowledge required to assess the market value of a restaurant for sale. Their expertise lies in optimizing business performance within a franchise system rather than analyzing the complex and localized factors that influence a restaurant's worth. They work with benchmarks and can tell you that your food costs are higher than others in similar markets or that your labor costs are lower than another part of the state. However, they won’t have access to critical information about what your restaurant business valuation should be as they don’t have financial models gauging comparable listings, market conditions, selling prices, lending feasibility, and other variables that impact pricing. Those are only some of the reasons why entrusting your franchise business consultant with this responsibility can lead to a misinformed valuation, which might hurt your chances of selling at the right price or delay the sale process.

Read: Mastering Restaurant Valuation: Methods and Tips for Accurate Assessment

Restaurant Business Valuations and Inherent Conflicts of Interest

In addition, the franchise business consultant, while working to provide an outstanding customer service experience for the franchisee, may unwittingly, set up a conflict of interest between the seller, the buyer, and the franchise. The FBC is paid by the brand. An external valuation expert is removed from any conflicts and their only loyalty is to arriving at the correct mathematical result based on data. Here are just a few scenarios where the FBC may be either compromised or at least faced with the appearance of being compromised in a situation where they are providing restaurant business valuation results.

• The FBC is getting “pressure” from the brand to get a new operator in an underperforming store. The results of this store affect his or her financial compensation or bonus.
• The FBC is aware that the seller is facing default by the brand, meaning he or she could be pressured “accept” a lower valuation in return for exiting quickly.
• The FBC is aware of the selling prices of other operators in these scenarios which resulted in lower than ideal selling prices those he doesn’t have access to all the comparable selling prices for similar concepts.
• The FBC is aware of other franchisees with high profiles in the brand who are willing to acquire at certain pricing.

These are only a few of the countless scenarios where the FBC would not be an truly independent third party arbiter arriving at the restaurant business valuation. That is why valuing a restaurant business is more nuanced than many owners realize. It requires an in-depth understanding of various market dynamics, real estate conditions, and financial trends.

Franchise consultants, while they understand franchise operations and growth strategies, typically focus on increasing overall franchise profitability, often prioritizing the franchisor’s interests over those of individual franchisees. In contrast, Certified Restaurant Brokers bring a focused expertise to the table. They work exclusively within the restaurant industry, assisting with the sale and purchase of restaurants, and are deeply familiar with factors such as local buyer demand, the competitive landscape, and changes in real estate values. This allows brokers to offer an objective, data-driven valuation based on what buyers are currently willing to pay in the market. Additionally, brokers often have established relationships with potential buyers, which is a crucial advantage for anyone looking to sell efficiently. That’s why the best franchise restaurant brands establish third-party independent resources for their franchisees to rely on for exit strategies.

Learn more about the We Sell Restaurants Resale Program

What drives Restaurant Business Valuations Upward or Downward?

Several key components contribute to a restaurant's overall valuation, and these extend beyond just its revenue. While profitability is an obvious factor—buyers want to see strong, consistent financial performance—other elements such as lease agreements and location are equally significant. A restaurant located in a high-traffic area with favorable long-term lease terms will generally command a higher price than one in a less desirable location or with an expiring lease. In addition to location, tangible assets like kitchen equipment, furniture, and fixtures add to the value of the sale, as do intangible assets like brand reputation, customer loyalty, and goodwill. Buyers are also drawn to businesses with well-established reputations, strong customer relationships, and brand visibility, which are harder to quantify but often provide the competitive edge a seller needs to close a deal at a higher price. Relying on a franchise consultant to assess these factors is risky, as they may lack the localized knowledge or experience in evaluating these critical components. In addition, while they may have in depth knowledge of the single brand, they will have less experience and knowledge of the full competitive landscape and all brands operating within it.

Challenges in Arriving at Accurate Restaurant Business Valuations

A significant challenge that sellers face is avoiding common valuation mistakes that can derail the sale of their restaurant. One frequent error is letting emotions drive the pricing decision. Restaurant owners who have poured years of hard work into their business can often overestimate its value because of their emotional attachment, rather than focusing on the financial reality. Buyers, however, are purely interested in the financial returns and future growth potential of the business. Ignoring this and placing a sentimental price on the restaurant could lead to prolonged time on the market, driving away potential buyers. A Franchise Business Consultant with a longstanding relationship with the seller, may be overly sympathetic to these emotional concerns in setting prices, rather than being a disinterested independent third party.

Another common mistake is overlooking the cost of deferred maintenance or necessary upgrades. Buyers will factor in these future costs and adjust their offers accordingly. Your FBC has knowledge of any required upgrades and must communicate this to would-be buyers. Buyers look at this as an offset to the selling price since they must then turn around and invest capital to improve the experience. Failure to disclose these upgrades up front results in deals that blow up on the back end. Additionally, FBC’s an rely too heavily on industry multiples and assumptions gleaned from the internet without considering the unique factors influencing your specific business.

Preparing for the Restaurant Business Valuation

When seeking an accurate restaurant business valuation, thorough preparation is critical. One of the first steps is to ensure that all financial records are in order. Buyers will want to see a clear financial history, including profit and loss statements, tax returns, and balance sheets from the past two to three years. These documents not only help buyers understand the financial health of the restaurant but also establish trust between buyer and seller. Beyond financials, understanding the terms of your lease is crucial. A favorable long-term lease can be a significant selling point, while an expiring or unfavorable lease could reduce the value of your restaurant. If necessary, negotiate better lease terms with your landlord before listing the restaurant for sale. Additionally, timing plays a pivotal role in selling a restaurant. Market conditions, seasonal trends, and economic factors all influence buyer interest, so working with a broker to assess the optimal time to list your restaurant can help ensure a faster sale and higher price.

Professional Representation for Restaurant Business Valuations

Finally, the choice of professional representation can make or break the success of a restaurant sale. While it may be tempting to handle the sale yourself or rely on a franchise consultant to save on broker fees, these options come with significant risks. Restaurant brokers have a deep understanding of the restaurant sales process, from accurately valuing the business to effectively marketing it to the right buyers. Brokers also help sellers navigate complex negotiations and legal issues, ensuring that all contractual details, licenses, and permits are handled appropriately. Attempting to sell a restaurant without this level of expertise can lead to errors that delay or even derail the sale. Additionally, brokers bring value in vetting buyers—ensuring that interested parties are financially qualified and serious about making a purchase. This helps to streamline the process and reduce the risk of deals falling through at the last minute.

Some brands attempt to handle franchise resales or restaurant business valuations outside of the FBC’s and instead move this role over to the franchise development team. There are a number of reasons why this approach is not the best either. These include:

Read: 5 Reasons Franchise Resales Should Not Be Handled by Your Development Team

In conclusion, selling a restaurant is a multi-faceted process that requires a specialized approach, particularly when it comes to accurately valuing the business. While franchise consultants are valuable partners in managing operations, they are not equipped to handle restaurant valuations or the sale process. Certified restaurant brokers, on the other hand, offer the market knowledge, buyer networks, and negotiation skills needed to sell your restaurant for a fair price and in a timely manner. By working with the right professionals and preparing your restaurant for sale with careful attention to financials, lease terms, and market timing, you can ensure a smooth transaction that maximizes the value of your business. In the competitive world of restaurant sales, expertise makes all the difference, and trusting the valuation and sale to an experienced restaurant broker is the best way to achieve your goals.

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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.