How much is a restaurant worth? Unlike pricing a house or car, there's no easy way to put a dollars-and-cents valuation on an eating establishment.
Instead, assessing the worth of a business must take into account a variety of considerations – some tangible, others much less so. A restaurant business may certainly own assets like real estate, fixtures, and furnishings that it is relatively easy to put a price on, but the entity's true worth is often more about its reputation and the loyalty of its customer base. Accountants have a rather nebulous label with which they label such intangibles - they call them "goodwill."
Restaurant Hospitality, a trade journal for the dining out business, recently ran a feature on how one specialized business broker values restaurant properties. Mel Jones, principal of Paramount Restaurant Brokers, Inc., a Scottsdale, Arizona-based specialist in valuing restaurants, has developed a relatively simple strategy by which a restaurant's potential selling price can be estimated.
As is the case with valuing any going business concern, cash flow, the amount left over after all the bills are paid, is a primary consideration.
Cash flow, however, is only part of the equation. The second challenge in sound business valuation is to come up with some measure of the operation's viability, both current and future.
Jones does do by developing a multiplier he applies to that cash flow number; the product represents his judgment as to what a reasonable selling price should be. The multiplier, which ranges from 1 to 6, is developed from assessments of factors like the restaurant's pattern of revenue growth, the lease terms on the space out of which it operates, the condition of various owned furnishings and equipment, as well as general restaurant industry market trends in the community and/or region in which the restaurant is located.
Restaurants in California, Jones gives as an example of the location factor, tend to be worth higher "multiples" of cash flow because of that part of the country's great year-round weather.
For more information on Jones' pricing technique, go to restaurant-hospitality/management-tips; Jones' website is sellingrestaurants.com