How To Conduct A Restaurant Appraisal (2024 Guide)
How To Conduct A Restaurant Appraisal (2024 Guide)
By - Jeremiah Grant
Last Updated - March 15th, 2023 1:09 AM
Mar 15
As a restaurant owner, it’s essential to understand the value of your business through various appraisal methods. After all, the day might come when you want to sell it.
Just as you’d appraise your home or a valuable piece of jewelry, getting a clear understanding of your restaurant’s worth is a smart business move.
However, with numerous restaurant valuationmethods readily available, determining the best approach can be a difficult task.
But you can rest easy, as we’re here to guide you through the process! We at Arrowfish Consulting carry over a decade of experience in restaurant appraisal. And with a team of seasoned professionals, we have successfully performed appraisals for 250+ restaurants.
In this article, we’ll look at the nitty-gritty of restaurant appraisal and how you can calculate the value of your restaurant business. We’ll cover the key factors that business valuation firms consider while determining the value of your restaurant, explore different methods for calculating your restaurant’s worth, and discuss alternative approaches to valuation.
And to help you choose a company valuation method, we’ve also mentioned the critical methods that have helped us determine the value of multiple restaurant businesses. But before we start, let’s see what restaurant appraisal exactly is.
Restaurant appraisal is the process of determining the worth of your establishment, and it’s a crucial step in making informed decisions about your business’s future.
Whether you’re planning to sell your restaurant, secure financing, or simply want to know its worth for tax purposes, a comprehensive appraisal can provide you with invaluable insights.
The appraisal process considers various factors that impact the value of your restaurant, such as its location, size, menu offerings, equipment, financial performance, and present market conditions.
Considering these elements, an appraiser can estimate the restaurant’s worth and provide a report that can guide your future business decisions. In short, a restaurant appraisal is necessary for any restaurant owner looking to grow, sell, or manage their business.
Why is restaurant appraisal essential?
Restaurant owners are always keen on knowing the real-time market worth of their business. And rightly so, as the best of opportunities can come out of the blue and at the most unexpected times.
When the time comes, you should be prepared to deal with potential buyers or investors. And you might lose the opportunity if you are unaware of the worth of your restaurant.
The restaurant industry is already booming nationwide, with more people dining out at their local restaurants or cafes. So much so that Business Insider estimates suggest an average family spends 43 percent of their food budget on eating out.
Meaning if you’re looking to identify the value of your restaurant, now is the right time to do that. In fact, a lot of potential buyers may already be interested in buying your restaurant.
By taking the time to understand how to appraise a restaurant, and ultimately appraising your business, you’ll be well-equipped to make intelligent decisions that drive success for years.
But before you start valuing your restaurant, it’s important that you know how to calculate it. So read on to learn more about how to calculate the value of a restaurant business.
Discover Your Restaurant’s Value Now!
Be it expansion, investment, or sale, our expertise in restaurant valuations brings you insights tailored to the culinary industry.
You might be on the lookout for a restaurant to invest in, and wondering how you can determine an establishment’s value.
Well, to find out the actual value of a restaurant, you should take a closer look at the financial information provided in the listing. That includes the annual revenue/gross income and the SDE/cash flow/net income. Also, you can conduct a detailed analysis of the business’s financial report.
With these numbers handy, you can calculate an approximate value for a restaurant using industry multiples.
A standard method is to consider the revenue multiple cost estimate, calculated by multiplying the annual revenue by a percentage, typically ranging from 30-40%.
Another popular method is the SDE multiple cost estimate, which considers the business’s discretionary earnings. This estimate is determined by multiplying the SDE by a multiplier, typically ranging from 1.5 to 2.5.
When valuing a restaurant business, it’s important to remember that the actual value lies between these two estimates. Now, before we jump into methods of evaluating your restaurant value, let’s first talk about the essential elements that increase or decrease the value of your business.
5 Key Factors That Decide The Value of Your Restaurant
There are five essential factors that make your restaurant a valuable asset, namely revenue, location, lease, reputation, and asset. Let’s have a look at each of the factors in detail.
1. Revenue
One of the most important factors in determining the value of your restaurant is the revenue it generates.
The higher the revenue, the more valuable your restaurant is likely to be. But you shouldn’t just get amazed by looking at the revenue itself. Rather, you should check whether or not the restaurant is actually profitable.
Here’s an example to understand better:
Suppose a restaurant is generating $200,000 in annual revenue and spending almost the same amount on marketing alone. In this case, it won’t take long for the restaurant to go bankrupt.
On the contrary, a restaurant that is consistently generating strong revenue and profits is a good indicator that it has a solid customer base and is financially stable.
2. Location
The location of your restaurant is another critical element that affects its value.
For instance, restaurants located in high-footfall areas, such as shopping malls, city centers, movie theaters, sports arenas, etc., are typically more valuable than those in less-footfall areas.
3. Lease
The terms of your restaurant’s lease can also affect its value.
A long-term lease with favorable terms, such as reasonable rent and renewal options, can make your restaurant more valuable.
At the same time, a short-term lease or one with unfavorable terms, such as high rent or strict renewal options, can negatively impact the value of your restaurant.
4. Reputation
A restaurant’s reputation can have a significant impact on its value.
While positive reviews and a loyal customer base can increase the value of a restaurant, negative reviews, and poor customer service can decrease its value.
5. Assets
The assets that come with your restaurant, such as equipment, furniture, and supplies, are key determinants of its value.
While well-maintained, high-quality assets can make a restaurant more valuable, outdated or damaged assets can decrease their value.
As you can see, there’s an extensive range of factors that go into establishing the worth of your restaurant.
Now that you know about the elements that can make or break your restaurant, let’s dig into the approaches that you can use to evaluate your business.
This is a billion-dollar question for most restaurant owners.
Thankfully, there are a lot of reliable methods and approaches to calculating an accurate, fair market value for just about any business, including restaurants.
Here are some key methods you can follow to identify your restaurant business’s value:
Method 1: Asset Valuation or Construction Cost Valuation
Starting a new restaurant is an exciting venture, but it can also be challenging to determine its value, especially if it has been in business for a while.
So, you might wonder how to value a restaurant business for sale.
The question gets more complicated if revenue figures and historical data are unavailable since determining the value of your business using traditional methods calls for such data.
Nevertheless, there’s still a way to calculate the worth of your restaurant.
We are talking about the construction cost valuation method. Also called asset valuation, this method is specifically designed for restaurants that are just starting and need a sales history to rely on.
To use this method, it’s essential to gather all of the quotes from your contractors and calculate the cost per square meter of construction.
This cost will vary for different states, but the standard baseline percentage used in this method is 50% of your construction cost.
For instance, Beth’s Diner is a brand-new restaurant built from the ground up in 2019. And despite its recent completion, the COVID-19 pandemic forced the owners to keep the business closed and the money tied up.
However, with the need for cash, the owners have now decided to put Beth’s Diner on the market.
But how do they determine the value of their new restaurant?
This is where the construction cost valuation method comes into play.
The cost of building Beth’s Diner was $700,000, and the standard baseline percentage used in this method is 50% of the construction cost.
That’s because the restaurant is newly constructed and has a favorable commercial construction inspection report about its overall condition.
So, dividing $700,000 by 2 gives us the baseline value of $350,000 for Beth’s Diner.
As such, the construction cost valuation method provides a straightforward and reliable way to determine the value of a brand-new restaurant like Beth’s Diner.
Method 2: Market Valuation
The market valuation method provides a valuable perspective on the worth of your restaurant by considering its potential, among other relevant factors.
Let’s take Brian’s Burger Joint, for example, a small restaurant located serving delicious food for the past year and a half.
Despite their hard work, the owners of Brian’s Burger Joint feel that their profits need to reflect their efforts.
But how can they determine the true worth of their business?
That’s where the market valuation method comes in.
The method focuses on a restaurant’s potential and considers various factors such as its current popularity, location, and even the value of nearby establishments. For instance, the owners of Brian’s Burger Joint learned that a smaller restaurant nearby was sold for $75,000, which made them consider their value.
With a more extensive customer base and a better location, Brian’s Burger Joint believed their restaurant was worth more than that nearby establishment. And after considering all factors, they determined the value of their business to be $90,000. So, with this information, the owners of Brian’s Burger Joint can make informed decisions and see their hard work reflected in their restaurant appraisal outcome.
Method 3: Gross Revenue Valuation Model
Are you looking for a restaurant appraisal method that is simple yet reliable?
If yes, then the Gross Revenue Valuation (GRV) method is something you should definitely consider.
In this approach, business valuators use a standard percentage of your restaurant’s annual gross sales to give you an idea of its worth. And the restaurant industry standard for this method ranges between 30 and 40 percent on average.
For example, full-service restaurants typically have an appraisal rate of 30%, while bars and specialty coffee shops can go up to 40%.
However, you should know that this method is more of an estimation than a precise valuation.
Nonetheless, it’s a great starting point in determining the value of your restaurant.
For example, let’s look at Sam’s Bakery, which registered $500,000 in total revenue for 2024.
We’ll use both the minimum and maximum standard baseline percentages to get a rough estimate of Sam’s Bakery’s value.
For a full-service restaurant, the minimum is usually 30%, so by multiplying $500,000 by 30%, we get a baseline of $150,000.
On the other hand, the maximum is 40% for specialty coffee shops and bars, so if we multiply $500,000 by 40%, we get a baseline of $200,000.
Based on these restaurant appraisal calculations, we can say that the value of Sam’s Bakery is somewhere between $150,000 and $200,000.
Method 4: Profit & Loss Valuation Process
When valuing your restaurant, the P&L valuation is a critical tool in your arsenal.
Whether you’re a seller looking to maximize your profits or a buyer eyeing a potential return on investment, this method provides deep insights into the financial performance of your business.
You’ll want to focus on the EBITDA or discretionary earnings to get the most out of this restaurant appraisal method. That’s because your P&L statement has some line items, like depreciation and amortization, that don’t necessarily affect the actual cash flow of your restaurant.
The goal here is to determine your operational net Profit, which is the foundation for your restaurant’s valuation.
P&L valuation example:
To get started, you’ll need to compute your Gross Profit, which is your Sales minus the Cost of Goods Sold, to conduct the restaurant appraisal calculation.
Next, add up your fixed and variable expenses, such as labor costs, rent, third-party delivery fees, pest control, utilities, and retainers, to get your operating costs.
Then, subtract your operating expenses from your gross Profit to get your earnings before interest and taxes.
Finally, apply the Multiple Discretionary Earnings method to get your final valuation. This can vary depending on various factors, but it typically ranges from 1.25 to 2.25.
For example, let’s say China Wok has been operating for seven years and wants to check the value of its restaurant. So they’ll use the previous year’s numbers as a baseline.
With a Gross Profit of $200,000 and total operating expenses of $150,000, China Wok has discretionary earnings of $50,000.
Considering its prime location and loyal customer base, China Wok used a multiplier of 1.75. And by multiplying their discretionary earnings by this multiplier, they arrived at a baseline selling price of $87,500.
In a nutshell, P&L valuation gives you a comprehensive look at your restaurant’s financial health, providing the necessary data to make informed decisions on your future restaurant appraisal strategies.
Note: the examples used to explain respective restaurant valuation methods are illustrative and don’t reflect any actual business/es’ valuation data.
The Benefits Of Understanding Your Restaurant’s Value
Here are a few benefits that will help you differentiate your restaurant from others and also give you a competitive edge within the market.
1. Planning For The Future
An accurate valuation of restaurant is essential if you’re planning to sell your diner, secure financing, or want to know its worth for personal or tax purposes.
It provides a clear picture of the value of your business and helps you make informed decisions about your plans.
2. Obtaining Financing
Having an accurate valuation is critical if you’re looking to secure financing for your restaurant.
Lenders typically want to see an appraisal before extending a loan, and a solid valuation can help you secure better terms and lower interest rates.
3. Maximizing Profitability
Understanding the value of your restaurant can also help you make informed decisions about investments and expenditures.
For example, if you know how to value a restaurant business for sale, you can make informed decisions about where to allocate your resources to maximize profitability.
4. Attracting Potential Buyers
A clear and accurate valuation can help attract potential buyers if you’re planning to sell your restaurant.
It demonstrates that you have a solid understanding of your business and helps establish a fair selling price.
So, valuing a restaurant business is not that simple. So you need to have a professional check it to know what it’s worth when it’s up for sale!
Evaluating the value of your restaurant is crucial for making informed decisions about the future of your business.
The right value data can not only help you understand the worth of your establishment but also determine the best course of action.
Whether you are looking to sell, expand, or plan for the future, knowing the value of your restaurant is a critical step in ensuring success.
And if you are looking for such expert services, then your search ends here!
At Arrowfish Consulting, we understand the importance of a thorough and accurate restaurant appraisal. Our team of experts has over two centuries of combined experience in the industry. Also, we are equipped with the latest tools and techniques to provide you with a comprehensive evaluation of your restaurant’s value.
We consider market trends, industry standards, and financial performance to arrive at an accurate and reliable estimate. So, if you want a better understanding of the actual value of your restaurant, get in touch with us today!
Jeremiah Grant
Jeremiah Grant is the Managing Partner of Arrowfish Consulting. In addition to acting as a primary liaison for many of the firm’s engagements, He primarily focuses on business valuation and economic damages expert witness assignments, in addition to forensic accounting and insurance claims analysis.
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