How to Price Restaurants Correctly

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“Price is what you pay and value is what you get.” (Warren Buffett)

Selling A Restaurant in South Florida

Restaurants are bought and sold in South Florida all the time. Other than salons, they are by far the most popular type of ‘listing’ that one sees in the market. Only hire an expert business broker for the sale of your restaurant. An experienced business broker will anticipate a buyer’s questions and concerns and ultimately get you as the seller the best price possible.

Avoid Underpricing or Overpricing Your Restaurant for Sale

Martin has also seen many overpriced restaurants on the market by misinformed sellers (and brokers), only for the restaurants to never and eventually fail.  In general, restaurants sell for a multiple of 1.5 to 3 times the net owner benefit (or net adjusted profit) and the goal should be to get the best possible price possible.

Three Keys When Determine Purchase Price of Restaurants:

  • Longevity and past track record of success for the restaurant
  • The rent/lease
  • Level of the owner’s involvement in the success of the restaurant.

Historical Financials of Restaurant Sales in South Florida

The first key factor to consider when evaluating the value of a restaurant is its track record of success. Five Star Business Brokers of Palm Beach County has always looked at historical financials (such as profit and loss reports or tax returns) to tell this tale. Has the restaurant been consistently turning out healthy free cash flow? Has sales and profits been on an upward path lately? With restaurants, troublesome times can snowball into larger and more sustained problems, so a careful consideration must be given to the financial history.

Capital Expenditures of Restaurant Sales in South Florida

Moreover, looking at the financials can show whether the restaurant had to incur large capital expenditures. This usually means that more capital expenditures (such as for remodeling the dining room or kitchen renovations) can be expected in the future. A growing and healthy track record of financial prosperity for a restaurant generally means a higher multiple of restaurant earnings when determining the purchase price.

Rent and Lease of Restaurant Critical to Restaurant Sales

A general rule of thumb for most restaurants is that the total rent (including CAM and, if applicable, property taxes) should be less than 10 percent of total sales. If it is above this amount, then the restaurant will have a hard time turning a profit. This is because most restaurants also spend, on average, about 33% of sales on the cost of goods sold (such as food and beverage) and spend another 33% (on average) on payroll. So if rent is 10 percent of sales that means your left with 24% operating margins after rent, COGS, and payroll. This is not a lot of room for error, and there are many expenses associated with running a restaurant!

A Long Term Lease Very Important to Most Purchases of Restaurants

Further, many buyers will want a long term lease to ensure they have plenty of time to own their restaurant and are not thrown out by the current landlord (or a subsequent landlord).  Having about 4-5 years left on a lease is a minimum requirement for many buyers.

Level of Owner Involvement A Big Factor In Restaurant Sales

Lastly, the level of the owner’s involvement in the restaurant greatly affects the multiple level on the owner benefit.  Some owner-operators of pizzerias stand next to the ovens for up to 80 or more hours per week. Many buyers will not want to put forth the same level of work, or simply can not do so. They must then pay for extra salary for employees who will replace the owner’s productivity. This situation generally results in a lower valuation on such restaurants.

The More Absentee the Owner, the Higher the Restaurant’s Valuation

Conversely, if the owner-operator has created a restaurant where he or she only has to generally oversee the operations, pay the bills, and has proven management in place, then the valuation will be much higher.

Restaurant Sales Where Owner is the Chef

Another not so uncommon situation is where the owner himself or herself is the main chef, and no buyer can really replace him or her. Then the restaurant has to be sold strictly to other chefs or restauranteurs who are confident enough that their menu will be received warmly by the customers. In such a situation though, the valuation multiple is lowered because, in essence, what is the seller really selling? The seller can’t sell his or her own skills because those skills will not remain with the buyer! In general, buyers of restaurants will pay more of a premium where the owner-operator is more hands-off and non-critical to the success of the restaurant.

Build-Out and Physical Assets Important to Purchase Price of Restaurant Sales

Of course, a restaurant’s equipment and build-out also plays a role in valuing restaurants. Some restaurants with over a million dollar worth of  equipment and leasehold improvements may be sold for a fraction of this asset value. Why? Because it is very difficult to re-sell used restaurant equipment, and a beautifully built-out restaurant that can not turn a profit is simply not attractive to most buyers. If the rent is too high or the competition too fierce or the location simply not right, then even a very low price may not attract a buyer to jump into the lease.

Keys to Success for Successful Restaurant Sale in South Florida

The key is healthy profits and a track record of success, good rent relative to sales, and a situation where new ownership can continue the success. This makes for a successful restaurant sale!

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a free evaluation for your restaurant.

 

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