How to Value a Restaurant Business

Are you thinking of putting your restaurant on the market soon? Or do you plan on passing it onto the next generation to run? Either way, it's always vital to know how much your restaurant is actually worth.

Valuing a restaurant business is an important step in buying or selling a restaurant or equity in a restaurant. If you don’t know how much the business is currently worth, you won’t know if you’re getting a worthwhile deal. As a restaurant owner, you need to know an estimated value that includes everything from cash flow to annual revenue to asset valuation.

In this article, you’ll learn how to value a restaurant and put it up for sale. I’ll describe two different methods of business valuation as well as the factors that contribute to the overall restaurant valuation. As always, when making major financial decisions, be sure to consult with an accountant, business broker, or legal professional as you explore your options.

What’s in This Guide?

• When Should You Value Your Restaurant Business?

• How Do You Determine the Value of a Restaurant?

• What Influences Restaurant Valuation?

• Use Restaurant Tech to Boost Your Value

• FAQs

Why You Should Know the Value of Your Restaurant Business

Restaurant owners should always have at least an idea of their establishment’s value. That said, there are specific situations where it’s absolutely crucial to know the value of your restaurant, restaurant franchises, and tangible assets.

 Selling a Restaurant or Restaurant Equity

For whatever reason, you may decide to sell your restaurant. Maybe you’re reaching retirement age, or you’ve experienced an injury and need to get into a less physically demanding industry. Perhaps inflation has just made it too challenging to hit those gross sales and net income targets needed to keep your business afloat.

Alternatively, you may want to offer up a share of restaurant ownership (or equity) to a new business partner who can bring in more capital and new skills. A new owner or co-owner could even turn your successful restaurant into a household name. And sometimes, the opportunity to sell your restaurant comes without you planning for it. Many potential buyers, like investors, real estate developers, and entrepreneurs, may approach you with an offer for your business.

For any of these situations to work out in your favor, it's imperative to understand exactly what your restaurant is worth and get a good selling price for your beloved establishment.

Buying a Restaurant or Restaurant Equity

Though economic conditions are still challenging, restaurant businesses have retained their appeal as exciting investment opportunities. 

For some people opening restaurants today, it’s a passion project that they feel called to do. Others simply have the capital and the years of experience necessary to manage it, plus a winning, innovative restaurant business plan that’s viable in spite of the economy. 

For example, Chef Anthony Strong went from a standard full-service restaurant to a COVID-era van-based restaurant to the restaurant-slash-retail store he successfully runs today. He explained his current model to the New York Times:

Despite the hurdles, the restaurant industry still booms. New and innovative restaurants continue to open all around the country and the world every day. If you don’t want to commit to a full restaurant purchase, you could instead buy equity in a successful restaurant.

But for any of the above opportunities to be truly fruitful and viable, you need to know the market valuation of the business you’re looking to buy or invest in.

Applying for a Loan

Sometimes, all a struggling restaurant needs is a business loan. When applying for certain types of loans, including government-funded SBA loans, restaurant businesses may need to be valued before the loan is approved.

You may need to provide certain details before you can receive a loan, such as a profit and loss statement, the owner’s salary, and any additional food costs and income valuation figures.

To learn more about restaurant loans, read our Complete Guide to Restaurant Financing and Loans, and consult with a legal professional and accountant to take you through the process.

How Do You Determine the Value of a Restaurant?

I’ll now explain the two most common business valuation methods that restaurateurs can use to find the value of their business. Remember: always work with an accountant or a third-party valuation service to make sure you have the numbers right before making any major moves.

The Valuation Multiples Method for Selling a Functional Restaurant

This approach gives you two different numbers that you can use a ballpark range for the value of your restaurant. You take two important financial metrics, seller’s discretionary earnings (SDE) and revenue, and multiply them by their respective industry benchmark multipliers.

Here’s how the valuation multiples method works using both SDE and revenue figures:

Step 1: Calculating SDE for a Valuation

This valuation approach looks at how much income a business could generate for its new owners based on the current earnings generated by the business. Here’s how you do it:

Find Your SDE: The first step is to determine your seller’s discretionary earnings. This metric is equivalent to a business’s yearly net income, which is its pre-tax income after operating costs are deducted. To find this information, dive into your metrics, profit and loss statements, and other financial statements.

Learn Your Industry’s Benchmark Valuation Multipliers: These help compare the business in question to other similar businesses in the restaurant industry. Investopedia reports that restaurant valuation SDE multipliers tend to sit between 1 and 3, and are often on the lower scale due to the industry’s volatility. You may need to talk to your accountant or commercial real estate agent to find out the current restaurant industry valuation multiplier for your type of business.

Once you have the above information, you can proceed with the estimated valuation calculation. This is the restaurant valuation formula you should use:

[SDE] x [Industry Benchmark SDE Valuation Multiplier] = Restaurant’s Estimated Value

As an example, let’s say your restaurant’s seller’s discretionary earnings total $150,000, and the benchmark valuation multiplier for your industry is 1.5. Using the formula above, you would get an estimated value of $225,000.

Step 2: Calculating Revenue for a Valuation

Once you have your estimate using SDE figures, you need to use another key financial metric - total annual revenue from restaurant sales - and multiply it by the correct industry benchmark valuation multiplier. Again, speak to your accountant or commercial real estate agent to find out the current revenue multiplier for your type of business.

Then, input the figures into this formula (similar to the one above):

[Restaurant Revenue] x [Industry Benchmark Revenue Valuation Multiplier] = Restaurant’s Estimated Value

Let’s assume the revenue for your restaurant is $450,000 and the benchmark valuation revenue multiplier 0.35, which would give you an estimated value of $157,500.

Step 3: Combine the SDE and Revenue Figures

Once you’ve worked out the estimated value of your restaurant using the SDE and revenue figures and multipliers, you should combine them together to get a value range for your restaurant.

If we take the example figures from above, you would get an estimated value range of between $157,500 and $225,000.

Pros & Cons of the Valuation Multiples Approach

Note: Some accountants prefer to use EBITDA (earnings before interest, taxes, depreciation and amortization) for this calculation instead of SDE. The key difference here is that SDE includes the manager's salary, assuming that the owner will end up in this role and take that salary, while EBITDA doesn’t.

You can learn more about restaurant metrics with our Restaurant Metrics Calculator.

Asset Valuation Method: Selling a Struggling Restaurant

Sometimes, it’s just time to move on from a business. If your restaurant is simply not generating the revenue needed to cover location costs, food costs, payroll, and the owner’s salary, it could be time to cut your losses. 

In this case, the restaurant business valuation itself is negligible — few people will want to buy the business as-is and take it over. However, the location and the assets within it can still bring in some money for the seller and can also be a valuable blank slate for a new business owner.

Asset valuation looks at the worth of a restaurant based on its assets minus its liabilities. For example, if all the tangible assets a business owns equate to $30,000, then that is the asset-based valuation for the business.

Pros & Cons of the Asset Valuation Approach

What Influences Restaurant Valuation?

The overall sales price and valuation of your restaurant depend on many factors, and these can change suddenly at any point. Here’s what you have to look out for when valuing your restaurant:

1. Cost of Assets or Equipment: Restaurant equipment is expensive, and the decision to include it in the purchase price will impact the valuation of the business. And if the location was bought and not rented, the cost of real estate is the biggest material asset of the business, making a huge impact on the restaurant business’ selling price.

2. The Economy: The state of the economy and the market can have an enormous impact on the valuation of a business. For example, a fine dining restaurant may take longer to sell in a suffering economy and will likely sell for less than it normally would. This is down to its poor potential ROI in financially insecure times, as consumers pull back on their expenditures. Business owners cannot control the economy, so any restaurant business investment can come down to luck and timing.

3. Age of the Business: If the restaurant is relatively new but has been performing well, this could entice an investor or a business buyer into getting in on the ground floor. Other investors may see a new business as riskier — could it be a flash in the pan? Older businesses can be more appealing but can also carry investment risks, such as a higher up-front investment to maintain older facilities.

4. Customer Base: If a business has a strong, loyal customer base, it can be very successful. However, this also comes with challenges. If the customers love the restaurant, the service, and the food, they’ll be very sensitive to changes in ownership if too much is changed too quickly.

5. Location: Many factors influence the impact of location on a business’s valuation. Is the business in a high-traffic location? Are the demographics of the area suited to the incoming restaurant concept? Is the restaurant visible and easy to access? Like any real estate investment, the cost will vary widely depending on the city or town it’s in. For example, a huge restaurant in a suburb of a mid-size city could be much cheaper than a tiny, 15-seat restaurant in Manhattan. If you’re renting, you also need to consider the affordability of the location.

Use Restaurant Tech to Boost Your Value

Whether you're buying or selling a restaurant business, it’s important to understand the price floor and ceiling you can expect when it comes to the restaurant's valuation. Every restaurant is different, so the valuation will vary enormously based on dozens of considerations.

Internal, business-specific factors such as sales history, profit margins, and customer loyalty will have an impact on the value of the restaurant, as will external factors like the economy. Always consult a business broker, legal professional, or accountant to make sure you’re getting the best possible deal — no matter which side of the equation you’re on.

Before selling your restaurant or buying a business, consider investing in restaurant technology. Innovative products like handheld point-of-sale systems and self-ordering kiosks can boost your restaurant’s value and make it more attractive to potential buyers or investors.

Sign up for a Toast Demo today if you’re interested in seeing for yourself the benefits of modern restaurant technology!

Related Restaurant Equipment Resources

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• How Much Does it Cost to Open a Restaurant

• Restaurant Floor Plan

FAQs

How Do You Value a Closed Restaurant?

If your restaurant business has failed and you can no longer afford the inventory, liquor license, or rent to pay yourself and your staff, then it’s time to shut up shop and sell. You can find the value of your closed restaurant by using the asset valuation method - simply add up all of the establishment’s assets and minus any liabilities.

What is an Example of a Restaurant Value?

Your restaurant may be worth more than you think. To find your restaurant’s estimated value, multiply your total seller’s discretionary earnings (SDE) by the industry benchmark value multiplier (consult your accountant for this figure), and do the same but with your total revenue and the industry benchmark value multiplier for that. For example, if your SDE figure comes to $250,000 and the multiplier is 2.0, your estimated restaurant value would be $500,000.

How Can You Calculate Total Sales in a Restaurant?

Calculating the total sales figures for your restaurant can be done in multiple ways. The easiest is to work out how much you earn per day and multiply it by 7 to get your weekly sales, then add any revenue from merchandise or other external revenue streams.