Pizza Restaurants Make Great Investments
In the world of business sales, a pizzeria is generally known as a small Italian restaurant that primarily serves pizza for both dine-in and carry out/delivery. As pizza is one of the most popular foods of all time, owning a pizzeria can be a very satisfying and financially rewarding endeavor. The low equipment costs and higher margins of pizzerias compared to other restaurants are also quite appealing attributes. Potential buyers of pizzerias must also be cognizant of the competitor nature of the industry, as well as the high amount of labor necessary to run a successful pizzeria. Nevertheless, a well located pizzeria with a strong owner-operator who is willing to work hard generally will typically do very well in South Florida.
Determine Owner Benefit of Pizzeria
The first step in determining the worth of a pizzeria is calculating the owner benefit of the pizzeria. Owner benefit may be defined as the true economic benefits of a business to the owner. This starts with the EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) of the pizzeria and then ‘adds back’ any personal expenses that the owner may have expensed through the business, unrecorded sales, and the owner’s salary (or salaries of the owners’ family members). Pizzerias often have financials (such as tax returns or profit and loss statements) that require adjustments to reflect the true owner benefit, and usually requires the assistance of a professional business broker.
Apply Multiple of Owner Benefit to Determine Valuation
Once the true owner benefit of a pizzeria is determined, a multiple between 1.5-3x is usually applied in order to determine the value of the pizzeria. For example, if a pizzeria has $100K of owner benefit, then the pizzeria will usually sell for about $150K-$300K. The equipment value is also taken into account so that the overall valuation should not be less than the equipment value plus one year’s worth of owner benefit. Thus, if a pizzeria’s annual owner benefit is $100K and the equipment value is $100K, then the overall valuation should not be less than $200K.
Factors Affecting Valuation of Pizzerias
- Many factors may affect a valuation range of a particular pizzeria in the South Florida market.
- First, the location of the pizzeria must be close enough to a large segment of the population for purposes of delivery, take-out, or dine-in.
- The location itself should have ample signage, parking, and plenty of drive-by traffic.
- The leasehold rights is also of paramount importance.
- In order to value a pizzeria at a premium, the lease should be of sufficient length and with no unreasonable restrictions.
- It should also have a fair market or below market rent throughout the term of the lease.
- A lease of a pizzeria should preferably have net rent that is no greater than 10 percent of the total sales of the pizzeria in an average year.
- Today, online reviews in social media will also play a large role in determining the goodwill or intangible value of the pizzeria.
- Additionally, a competent staff that will stay after the sale is of the utmost importance.
- Lastly, the trajectory of sales and profits over the last three years plays a major role in determining the valuation range for a pizzeria.
- If sales and profits are growing over the last three years, then the valuation should be in the high range. If sales and profits are stagnating or declining (especially because of something wrong with the location), then the valuation should be in the lower range.
- Many pizzerias have recently subcontracted their delivery services to third parties such as Uber or Doordash.
- Unfortunately, these third parties absorb a significant amount of a pizzeria’s profit margins, which will adversely affect the pizzeria’s valuation when it comes time to sell.
- Pizzeria owners may improve their valuation by adopting in-house delivery services.
Owner’s Role Important
In many pizzerias (especially the successful ones), the owner is ‘hands-on’ and helps with or closely supervises the making of the pizzas. After all, the quality of the pizza is ultimately the most important attribute of any pizzeria. In the restaurant industry, it is generally understood that relatively small pizzerias (unless chains) have working-owners (often with family members of the owner as additional workers). It is also understood that buyers of pizzerias may be expected to replace the seller as a working owner. The owner’s salary is properly added back when calculating the true ‘owner benefit’ of a pizzeria. Of course, the more absentee the seller (with less need by the buyer to replace the seller), then the higher the valuation of the pizzeria.
No License or Special Skills Needed
It does not take special skills to make pizzas, nor does one need a special license to do so. It only takes a reasonable knowledge of the restaurant industry along with a desire to learn and a strong work ethic. A working owner’s salary should therefore be counted when calculating the owner’s benefit (to the average pizzeria owner). If the seller has family members working in the pizzeria, however, then their salaries must be counted as regular expenses (and not be included in owner’s benefit).
Ensuring A Smooth Transition After the Sale
Most buyers of pizzerias will want the cooperation of the seller after the sale in order to ensure a smooth transition. If the seller’s role in the pizzeria is particularly active (including relationships with retail customers, wholesale accounts, suppliers, and employees), then the buyer will typically have provisions in the purchase contract regarding the seller’s training and assistance to the buyer after the sale. If the seller has family members that work in the pizzeria, then this must be disclosed to the buyer prior to the sale. Appropriate arrangements should be made in the transition process so that the family members may be properly replaced if necessary.
Owning and operating a successful pizzeria may build long-term wealth and value for many hard-working South Florida business owners. In order to effectuate a successful sale, sellers of pizzerias should be aware of the important factors involved in its valuation as well as in its proper transition to a buyer.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.