How to Value a Restaurant: Step by Step

How to Value a Restaurant: A Step-by-Step Guide

Are you considering selling your restaurant or just curious about its market value? Whether you own a quick-service eatery or a full-service dining establishment, determining the value of your restaurant is crucial for financial planning, investment decisions, and successful business transitions. At CENTURY 21 Keim Realtors and CENTURY 21 Country Lake, we have specialists in commercial real estate and business acquisitions, helping restaurant owners maximize their return.

Why Restaurant Valuation Matters

Understanding the value of your restaurant is essential for multiple reasons, including:

Selling the Business: Setting a realistic asking price attracts serious buyers.
Financial Planning: Knowing your business’s worth helps with estate and retirement planning.
Raising Capital: Investors and lenders will assess your restaurant’s value before providing funding.
Partnership Buyouts: A clear valuation ensures fair transactions when buying out or selling to a business partner.

Key Steps in Valuing a Restaurant

Step 1: Calculate Seller’s Discretionary Earnings (SDE)

For small to mid-sized restaurants, valuation is typically based on Seller’s Discretionary Earnings (SDE) rather than EBITDA. SDE provides a clearer picture of the income potential for a future owner-operator.

To calculate SDE, start with:

Net Income (as reported on tax returns)
Owner’s Salary (including benefits like retirement plans and health insurance)
Interest, Depreciation, and Amortization
One-Time and Non-Recurring Expenses (such as equipment purchases or renovations)
Personal Expenses (any discretionary expenses run through the business, like a personal vehicle or club memberships)

Once adjusted, SDE reflects the true profitability of the restaurant for a potential buyer.

Step 2: Determine the Appropriate Valuation Multiple

Restaurants are typically valued at 1.5x to 3x SDE, depending on various factors. Key considerations include:

Type of Restaurant: Quick-service restaurants (QSRs) tend to have higher multiples due to their scalability and demand.
Location: Prime locations with high foot traffic command better valuation.
Owner Involvement: Less owner dependence often leads to a higher valuation.
Lease Terms: A long-term, transferable lease is a major asset.
Licensing: A liquor license, particularly in states with restrictions, can increase the business’s value.
Financial Transparency: Clean, verifiable financial records result in stronger valuations and easier financing options.

Step 3: Factor in Real Estate Value (if applicable)

If you own the restaurant’s real estate, it must be valued separately. The property’s worth is determined based on:

Market comparables for commercial properties
Rental income potential
Location and zoning restrictions

Many restaurant buyers prefer to lease rather than purchase property, so structuring a fair long-term lease agreement can increase the appeal of your business.

What Can Drive Up Your Restaurant’s Value?

Maximizing your restaurant’s value before listing it for sale can lead to a higher selling price. Consider these enhancements:

Upgraded Equipment: Well-maintained kitchen equipment reduces buyer concerns.
Stable Workforce: A trained and experienced team adds operational stability.
Strong Brand & Customer Base: A loyal following and solid online reputation boost buyer interest.
Efficient Cost Management: Demonstrating strong cost control (food, labor, and overhead) enhances perceived profitability.

Conclusion

Valuing a restaurant requires a strategic approach, combining financial analysis with industry expertise. At CENTURY 21 Keim Realtors, we have specialists in restaurant sales and commercial real estate, ensuring our clients get the best possible outcome.

Thinking of selling your restaurant? Contact us today for a professional valuation and expert guidance through the selling process. Call us at 800-648-4421 or email c21keim@gmail.com