How to Price Restaurants Correctly

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

Restaurants are bought and sold in South Florida all the time. Other than salons, they are by far the most popular type of business ‘listing’ that one sees in the market. Five Star Business Brokers of South Florida considers itself experts in the selling of restaurants. Martin has sold many types of restaurants from small pizzerias to a multi-million dollar chain of seafood restaurants. Martin has also seen many overpriced restaurants on the market by misinformed sellers (and brokers), only for the restaurants to never sell and eventually fail.  In general, restaurants sell for a multiple of 1.5 to 3 times the net owner benefit (or net adjusted profit).  Three keys to consider when applying this multiple are the longevity and past track record of success for the restaurant, the rent/lease, and the level of the owner’s involvement in the success of the restaurant.

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. 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.

The rent and lease of a restaurant is absolutely critical to determining the restaurant’s valuation. 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! So Five Star Business Brokers of Palm Beach County has encountered many buyers that will not want to buy a restaurant if the rent is too high for their tastes. 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.

Lastly, the level of the owner’s involvement in the restaurant greatly affects the multiple level on the owner’s earnings that a buyer is willing to pay.  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. 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. 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.

Of course, a restaurant’s equipment and build-out also plays a role in valuing restaurants. Martin at Five Star Business Brokers, however, has seen restaurants with over a million dollar worth of  equipment and leasehold improvements 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.  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.

Located in Palm Beach County, Florida, Five Star Business Brokers proudly transacts business sales throughout the areas of West Palm Beach, Lake Worth, Palm Beach Gardens, Boca Raton, Jupiter, Delray Beach, Boynton Beach, Wellington, Palm Beach, Royal Palm Beach, and Riviera Beach.

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