The time has come for you to move on. Maybe you are ready for a new challenge, maybe you just need a change, or maybe now is the time you could sell for top dollar but the reason why you would like to sell your restaurant is a very important decision and will directly impact the value you receive. Here are a few valuation methods to help you decide what your restaurant is worth.
1. EBITDA Multiple Valuation
One of the most common methods of valuing a business is using a multiple of the EBITDA – Earnings before Interest, Taxes, Depreciation and Amortization. In plain language, it’s roughly the amount of cash your business generates in a year through operations. To find the value of your restaurant using this method, you need good accounting records to demonstrate your EBITDA. The multiple that you would apply to your restaurant is typically based on the risk, the likelihood of the business to grow, and the desirability of the restaurant itself. A small, independent concept on a side street may only garner a 1 or 2 times multiple if relatively unknown whereas a large, busy Franchised concept in a high traffic location may get into the 4 to 6 times multiple or more.
2. Replacement Cost
This method is often used when the restaurant will become a new concept or perhaps is best sold just for its asset value as there is little or no revenue. It is an important consideration in your valuation though because if you invested a great deal of investment in the facility, perhaps it will garner a larger sale price even if the customer sales are not there. One of the critical factors of this method is to know what it would cost to rebuild at today’s prices. Add up how much it would be to replace all of the equipment and furnishings and then consider a reduction for how many years it has been used. Since there will be some wear and tear, it is normally is not valued at the same price as brand new equipment and facilities because a buyer will ask themselves is it a better deal to buy it as is or should I just build my own restaurant? If you price at full value as though new, the answer to that question may not result in a sale for you.
3. Cash Flow or Seller’s Discretionary Earnings (SDE)
The businesses that calculate their value using this method are typically small operations that perhaps have less than ideal accounting records and the owner’s salary makes up a large part of the business profits. To calculate, add up all of the profit and benefits that are received by the owner (salary, phone, travel, entertainment, meals in the restaurant) and add any business loan interest paid. This amount represents the Sellers Discretionary Earnings (SDE), which is multiplied by a factor that indicates risk and is typically 1.5-3+ times to determine the purchase price. A lower number indicates higher risk and less desirability, the higher number indicates growth potential and higher desirability. Decide on a multiple that is suitable for your business. Sellers typically like this method because they are able to sell for a larger number because it considers all the income or income-like benefits they take from the business thus making the sales price higher. Buyers often don’t like this method because whether every item is discretionary is questionable and they can feel “nickel and dimed” by a laundry list of income-like items.
An important consideration when choosing which valuation method to use is evaluating your urgency to sell. Your timeline to complete a sale will affect the valuations used. Like selling anything, if you can wait for the right buyer, you can test the market to see if you can get a higher price. Be careful though, overpricing your restaurant is a common mistake made by owners who are emotionally attached and like in real estate, a restaurant on the market that doesn’t sell can get stigmatized. However, if you must sell in the next few months, you may want to market your restaurant at the price you’d be willing to accept. This will bring out the serious buyers who are willing to realize the benefit of your need to sell quickly.
The reality is that the true value of your restaurant is only what someone will pay for it on any given day. However, finding qualified prospects can greatly affect your ability to optimize your sales price. To optimize the exposure of your restaurant opportunity, promote your sale on restaurantsforsaleglobal.com and help qualified prospects find your restaurant opportunity easily.