Whether you are someone who is looking to buy a restaurant or someone who is looking to sell one, a major consideration will be the price. How does a seller determine a listing price and how is a buyer to evaluate that price before making an offer? In many cases, the only information considered when estimating the value of a restaurant is the past three years of tax returns and a current P&L (Profit & Loss Statement). Unfortunately, these documents don’t have all of the information necessary to truly determine where the price of a restaurant should be.
Here are some better ways to estimate what a restaurant (or bar) is worth:
In any given industry there is a numerical value placed on the average price businesses in that industry sold for compared to what the business earned (more on multiples here – “What are Multiples? How to Value a Business”). This is a commonly used system for determining the value of a restaurant, and is similar to using the price comparable businesses actually sold for as a determination of what a restaurant is worth. The problem here is multiples are easy to use because they are a gross oversimplification of a restaurant’s numbers. Restaurants are complex businesses, so to estimate value you need to look at more than just multiples, you need to look at Owner Benefit.
What is Owner Benefit?
Owner Benefit is the amount you make as an owner and the amount a buyer can also expect to make if they purchase the business. Owner Benefit does not just mean the amount of money an owner took in terms of salary, it is a number determined by looking at all of the benefits an owner receives as the owner of the business, like health insurance and a business related vehicle, for example. By using the Owner Benefit and multiples/comparables you can find an estimate of what a particular restaurant is worth (see “How much is my business worth?” for more information).
One aspect of business financials that is unique to the restaurant industry is food cost, and whether you are a buyer or a seller you will need to know and understand this percentage. A very basic definition of food cost is the cost to the restaurant to produce a menu item divided by what the restaurant charges for that item. A restaurant can live or die based solely on the food cost. Even if the food is amazing, the service is top-notch, and the location brings in huge numbers of patrons a restaurant with an out of control food cost will have a hard time turning a profit (How do you determine food cost? Read “Restaurant Accounting: Manage Your Food Cost”.). If you are a seller, you need to know and control your food cost to bring more value and profitability to your business. If you are a buyer, finding out the food cost of a particular restaurant will tell you a lot about how the business is run and what kind of profitability you can expect as the owner.
The restaurant industry is complex, so if you are in the market or buy or sell a restaurant you need to look at more than just the basic three years of tax returns and a P&L. By taking into account the multiples, the Owner Benefit, and the food costs you can come to a better understanding of what you are willing to sell or buy a restaurant for.
Are you a restaurant owner who has questions about your food costs or what your listing price should be? Are you a buyer who wants to know how to determine what an acceptable offer would be for a particular restaurant? Please leave us a question or comment here and we will be happy to help you.