Mel Jones, blogging for Restaurant Hospitality, makes understanding the worth of your restaurant easy. There are several benchmarks, which Jones breaks down step by step. One important thing to know is that unlike other real estate, a restaurant’s value is determined by multiplying the annual income it by a factor of usually two to three.
- Income: The important number to look at is what Jones refers to as “working owner cash flow, sometimes called seller’s discretionary cash flow (SDCF). In a nutshell, this is the amount of money a working owner puts in his pocket before paying himself a dime. A tax return with a detailed profit statement next to it is the best source for this number. A good accountant ought to be able to identify the “add-backs” to obtain the true SDCF.”
- Multiple: Determining this number requires thought, and while not an exact science, it gives a useful insight as to the factors that will illustrate your restaurant’s viability.
In coming up with the numbers, multiples range from 1 to 3. Five factors affect your multiple. Scoring each factor between 1 and 6 gives a range to make some basic assessments.
- Lease and location: The longer the lease, the higher the score. The higher the rent in terms of percentage of sales, the lower the factor. The stronger the location the higher the factor. Long lease with rent factor in the 6% range, score it a 6.
- Condition of facility and equipment: The better the condition the higher the factor. A restaurant in great condition gets a 6.
- Revenue growth: Flat revenue growth scores a 3, while declining scores a 1. Revenue increasing year-over-year at a good growth rate of 10 percent or more scores a 6.
- Cost management: If the restaurant is keeping its costs in line with industry standards year after year, give it a 6. If costs are significantly higher, give it a 1.
- Regional risks and desirability: This factor tends to fluctuate around the nation. Rural states tend to get lower scores, while larger popular metro areas get higher numbers. California tends to have the highest factors in the nation, driving multiples closer to 3 on most of the business sales. Add the results of the factors together and divide this result by 6. See the chart in the article for additional assistance.
For more information as to how to to complete your own assessment, take a closer look at the article here.