How to Value a Restaurant: 4 Simple and Efficient Methods

Are you planning on selling your restaurant? Or maybe you want to attract more financing? No matter the reason, learning how to value a restaurant can be a useful skill for a business owner.

Knowing how much your restaurant is worth from different points of view gives you a better understanding of your business, of the things you’re doing right, of aspects you could improve on, and of opportunities you could take.

In this article, we’ll show you how to calculate the value of a restaurant business:

Why you should value your restaurant

There are many reasons why you must learn how to value a restaurant and it is better to do it sooner rather than later. If you are faced with an unexpected situation, it will be helpful to have your calculated restaurant value on hand and not have to scramble to do it at the last moment.

• To sell your restaurant: if you want to leave the restaurant industry, you need a current evaluation to attract buyers;
• To seek additional financing or investors: you need to accurately value your restaurant if you want to expand your restaurant to new locations to show interested people it will be a good investment;
• To prepare tax returns: when you calculate your taxes, knowing your exact restaurant value will ensure you don’t underpay or overpay;
• In case of divorce or estate proceedings: this is the type of unexpected situation where it is a must to already know your restaurant value.

How to value a restaurant: the four most common methods

There are a variety of methods that can be used when you want to learn how to value a restaurant. Each of them has a different outcome and they use different pieces of information. Therefore, choose the one that best fits your end goal:

The income valuation

This is the most common and simplest method of valuation for restaurants. Ideally, you should use it in combination with other methods for a more reliable outcome.

It is based only on your annual income, so you should only use it if you had a steady income in the previous years, with no big variations.

Without further ado, you can sell your restaurant for about 25 to 40 percent of your annual income. These are the factors that can influence the chosen percentage:

• Financial performance: how profitable is your restaurant? Do you have an efficient financial plan and a budget to prove it?
• Competition: how many direct competitors do you have in your area? What have you done to differentiate your restaurant from the competition and has it worked?
• Quality control: is your restaurant known for its food quality and excellent customer service? Do you have online reviews to show clients appreciate your business?
• Location: is your restaurant near key markets that would increase your profitability?

The market valuation

If you’re wondering how to value a restaurant for selling, this is the best method. To discover your business’s value, you will have to look at your competitors.

How much are buyers paying for restaurants around your area? Look for competitors that are very similar to you, from location size, number of clients, cuisine, etc.

After you have an estimated value, look for selling points. What do you have to offer on top of your competitors? Maybe state-of-the-art technology or constantly bigger profit margins? All of them will increase your value and get you a bigger selling price.

The asset valuation

This type of method is best suited when a restaurant runs out of business because it results in the lowest possible evaluation. It only takes into account physical assets, considering the restaurant more like a piece of real estate, than a valuable business that could be kept profitable.

The formula for asset valuation is simple:

Restaurant value = The total value of assets – the total value of liabilities

By assets, we mean everything the business owns such as the building, equipment, inventory, etc. And by liabilities, we are referring to remaining costs such as loans or rent costs.

The seller’s discretionary earnings method

This method is one the most common answers for “how to value a restaurant” because it gives buyers a better view of what return they should expect on their investment. It also helps sellers maximize the value for which they sell their restaurant.

The seller's discretionary earnings refer to the income a restaurant owner gets from the business, such as salary, benefits, personal expenses, bonuses, and many other perks. These are some examples of funds that will add up to the valuation:

• Life and health insurance
• Personal meals and entertainment
• Personal vehicles
• Vacations

A profitable business that will attract many buyers should have the seller’s discretionary earnings be equivalent to about 15-20% of the revenue.

What factors can influence the value of a restaurant

Your interest as a restaurant owner is to get a pretty big number when you answer the question "How to value a restaurant". You want to get the most out of selling or expanding your restaurant. Therefore, you must know what factors can help you increase your restaurant's value:

• A well-documented operation: if the restaurant can just be bought and run smoothly by the next owner without extra effort, you increase your chances of getting an offer. Therefore, it can be helpful to have written procedures for all operations that anyone can refer to when they need help;
• An optimized menu with profitable menu items: will prove your business is a money-generator to future buyers or investors. Our menu creator will help you make an easily browsable online menu that is intuitively categorized and extremely easy to use for ordering;
• An efficient online ordering system: having an online ordering process already set up that is appreciated by both employees and customers is a big selling point. Any buyer will appreciate that they can make extra money by selling online;
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• Unique concept: look into branding your restaurant so you make it stand out from the competition. The easier it is to remember your business, the bigger your restaurant value gets;
• Professional staff: productive employees who are willing to continue working for the restaurant can be a big bonus because it helps the buyer forget about the complicated and often very long hiring process.

Final Words

Learning how to value a restaurant can be a valuable skill in this competitive and ever-changing industry. You can choose a method or a combination of them to determine how much your restaurant is worth.

Don’t get to constantly take measures to increase your restaurant’s value, such as branding and using an efficient online ordering system. It will help you increase your profit and will be very useful if and when you want to sell.