Restaurant Valuation, How to Do It?
*Restaurant Valuation = ODE + Value of FF&E + Stock + Lease Terms
(For independent restaurants only)
As a restaurateur, selling your business can be daunting especially if you do not know how much it is worth or how to value it. There are several methods of valuation but neither of them are considered as a standard process, because restaurant business valuation is defined by several factors and every owner has their own way of valuation.
Restaurant owners and potential buyers value restaurant to negotiate the sales price, gather business finance and/or to increase its worth. There are different methods of valuation available for restaurant businesses. However, as a specialist in selling restaurant and food businesses in the UK, we use our own valuation method. We consider the following aspects in restaurant valuation.
Owner’s Discretionary Earning (ODE), refers to the total income that an owner-operator receives from the business, including salary, benefits, and other perks such as bonuses or personal expenses that are paid for by the business.
ODE for a restaurant can vary widely depending on a number of factors, including the size of the restaurant, its location, type of cuisine, and operating expenses. However, in general, a healthy restaurant with good financials should have an ODE of at least 15-20% of revenue. For example if a restaurant generates a yearly gross revenue of £500,000 (£9,615/week) it’s ODE can be around £75,000 (on the basis of 15%).
Value of Asset, Fixtures & Fittings
While valuing a restaurant business, you must consider the value of fixtures and fittings too (FF&E). But depending upon the purchaser, it may or may not add value. For example, if you are selling a fish and chips business and a purchaser is an Indian restaurant entrepreneur, the value of FF&E may be limited. When calculating the price of these assets, the value of depreciation over time must also be taken into consideration.
Most of the restaurants for sale are listed without their stock value. Stocks are generally added at the end. As a seller, you must not forget to add stocks. Since you have the supplier accounts and receipts, it is fairly simple to get the stock value.
Lease Terms & Conditions
This is bit tricky aspect because it is difficult to quantify the value of lease terms however, if the remaining terms on the lease is above 10-15 years, it is always better. Is the lease secure and renewable? (is it protected by Landlord & Tenant Act 1954). How often the rent is reviewed? What are the terms of the Landlord? These questions may have an impact on restaurant valuation.
There is no specific way for Restaurant Valuation. Every restaurant is different so are the sellers and buyers. While selling a restaurant business there may be several unseen aspects which may affect the valuation. But your restaurant’s Goodwill + Value of FF&E + Stock + Lease Terms will more or less give you a rough estimate.