As a foodie, in addition to my interest toward kitchen knives, I have always had a strong interest in running a Japanese restaurant someday.
By pure coincidence, I happened to find a decently run restaurant on sale.
However, I have no prior experience in the business and don't know about how to value it.
This is a question for you guys who had purchased a restaurant before;
How do you value one? Is it based on average weekly/monthly sales or EBIT multiples?
If you price it based on multiples of something, what is the typical value of the multiples?
Your response will be much appreciated.
K, I think you have a lot of homework to do before you ever take this out of the 'dream' stage. Sorry for being so blunt; nothing personal.
Originally Posted by ecchef
As far as valuation goes the rule of thumb over here is fixtures and fittings plus 3 years operating profit.
But there is an enormous amount involved in running a restaurant, and unless you are running the floor or the kitchen you will have a hard time making it worthwhile. It's fun to dream though
Some things to ponder/consider:
This is a complex question that requires intimate local market knowledge. One really needs to know relative success inputs to be accurate.
You want to use annual figures, not monthly/weekly, due to seasonal variation.
Use at least 3 years financial data if available. Current numbers are most important, but so are trends and potentials.
Don't use just one or two measures. Here are a few valuation methods.
1. Generalized: somewhere around 1/3 gross revenues
2. You should seek a payback period of 3-4 years, so Price/ACF<3 (or 4, depending on target)
3. ACF x 2 + FMV of assets would also be common
To calculate the adjusted cash flow (ACF):
Take the pretax income and add back: owners salary and benefits, depreciation & amortization expenses, interest expense, and unusual or infrequent expenses
Disclaimer: I'm not a professional in business valuation. I've never actually done this. I have an accounting degree - I work in IS. You should consult a local professional before any final purchasing decision.
I have appraised a few restaurants but I only get involved in the real estate not business value, good will, branding, fixtures and equipment so hopefully someone with hands experience will chime in. But a few general questions are appropriate:
Is the real estate owned or leased? Fixtures and equipment owned or leased?
Can you get tax returns from the owner? No one exaggerates income on a tax return.
Will you have the capital reserves to make required improvements?
Is the restaurant competitively positioned at this time?
What is the condition of RE and equipment? Will you have to replace anything in the near future?
What does cost of goods look like?
Is the staff reliable and skilled and work well together?
Investments, in general, are cash in/cash out. How much money goes in and comes out and is there enough left over to pay your salary plus a return on cash invested. So you need at least two years of cashflow statements from the owner.
It has been a while since I have done restaurant real estate and appraisers sometimes use income per seat and compare with other restaurants on a per seat basis but I believe these are just a rough estimate way to go. It is more important to see what the bottom line is and decide what changes might potentially improve things.
Just a few thoughts...
Almost forgot, be sure to check the condition of any liabilities that may come due to the business. Loans, Leases, and otherwise.
The best way to take home $1 million owning a restaurant is to invest $2 million.
A restaurant is a never-ending pit for you to throw $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ into.
As a former owner/operator of both independent and franchise restaurants I can tell you that I would only purchase a franchise restaurant with ample time remaining on both the lease and franchise agreement. For me, there are just too many variables in the success of an independent restaurant to consider buying a used one. Furthermore, any restaurant worth buying is going to cost you a serious price premium.
With this economy, there are plenty of opportunities for a keen predator to take over an abandoned restaurant for nothing or very little cost. Seriously, talk to a real estate agent you trust. Landlords are out there willing to rent you a fully-fixtured restaurant just so they can continue getting rent from somebody. In many cases they have gained legal ownership over the equipment and other assets due to non-payment of rent and will use them as an incentive to get a new tenant or allow you to purchase them on a "rent to own" basis along with paying your rent.
I've always wanted to be a silent owner. Just own ths business, take a small percentage, and let an experienced restaurant manager and chef run the show. A dream I know.