How much is my restaurant worth?
A quick discussion of factors at play within restaurant valuation.
There are many different possible answers to that question. One of the most popular answers is some multiple of earnings plus the value of the furniture, fixtures and equipment (FF&E). That sounds easy enough, unfortunately there are several problems with this “easy answer”.
What multiple of earnings is appropriate? That could vary anywhere from one-half of earnings to three times or more. How is this “earnings stream” to be calculated? Is it net income? Is it earnings before interest, taxes, depreciation, and amortization (EBITDA)? What about the value of the FF&E? Should we use the original cost, the current book value listed on our balance sheet, or should we use the liquidation value provided by an auction house?
There really is a simple answer to the question posed above. It just takes some effort to get to it.
First, one needs to figure out how the restaurant performs as compared to its industry. A restaurant that outperforms the industry average should be worth more than one that is under performing, right?
Next, one should determine what the expected future earnings of the restaurant might be, because the value of an operating, profitable business is based on what a buyer could expect the business to generate for him as the new owner. A buyer can’t pay his bills with the income you earned last year.
Next, one needs to look at the restaurant from several different angles. We call these “valuation approaches”. We look at the value of the restaurant’s assets, both the FF&E and the Goodwill of the business, and we’ll also see how your restaurant compares with other restaurants that have sold. Finally, we’ll analyze the expected future income that is anticipated to be generated by the business. Each of these valuation approaches will lead to an indicated value, which will have to be resolved into that final number we need to answer that question.
It is important to report all income received on your restaurant operation, otherwise, the value of the business will decrease.