Restaurant Valuation, How to Do It?
Restaurant Valuation = Goodwill + Value of FF&E + Stock + Lease Terms
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.
Goodwill: On The Basis of Revenue & Profit
A restaurant’s goodwill (goodwill refers to the brand value and reputation of a business) can be calculated on the basis of total revenue or net profit generated by the restaurant. Anything between 25-30% of the yearly revenue can be considered as the goodwill of a restaurant business. For example if a restaurant generates a yearly revenue of £500,000 (£9,615/week) it’s goodwill can be around £125,000 (on the basis of 25%) which is also the profit margin (25-30%) in restaurant industry.
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.
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.