# restaurant valuation



## orange

As a foodie, in addition to my interest toward kitchen knives, I have always had a strong interest in running a Japanese restaurant someday. 
By pure coincidence, I happened to find a decently run restaurant on sale.
However, I have no prior experience in the business and don't know about how to value it.
This is a question for you guys who had purchased a restaurant before;
How do you value one? Is it based on average weekly/monthly sales or EBIT multiples?
If you price it based on multiples of something, what is the typical value of the multiples?

Your response will be much appreciated.

K


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## ecchef

K, I think you have a lot of homework to do before you ever take this out of the 'dream' stage. Sorry for being so blunt; nothing personal.


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## Von blewitt

ecchef said:


> K, I think you have a lot of homework to do before you ever take this out of the 'dream' stage. Sorry for being so blunt; nothing personal.



+1

As far as valuation goes the rule of thumb over here is fixtures and fittings plus 3 years operating profit.

But there is an enormous amount involved in running a restaurant, and unless you are running the floor or the kitchen you will have a hard time making it worthwhile. It's fun to dream though


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## wenus2

Some things to ponder/consider:

This is a complex question that requires intimate local market knowledge. One really needs to know relative success inputs to be accurate.
You want to use annual figures, not monthly/weekly, due to seasonal variation.
Use at least 3 years financial data if available. Current numbers are most important, but so are trends and potentials.
Don't use just one or two measures. Here are a few valuation methods.

1. Generalized: somewhere around 1/3 gross revenues
2. You should seek a payback period of 3-4 years, so Price/ACF<3 (or 4, depending on target)
3. ACF x 2 + FMV of assets would also be common

To calculate the adjusted cash flow (ACF):
Take the pretax income and add back: owners salary and benefits, depreciation & amortization expenses, interest expense, and unusual or infrequent expenses

Disclaimer: I'm not a professional in business valuation. I've never actually done this. I have an accounting degree - I work in IS. You should consult a local professional before any final purchasing decision.


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## Seth

I have appraised a few restaurants but I only get involved in the real estate not business value, good will, branding, fixtures and equipment so hopefully someone with hands experience will chime in. But a few general questions are appropriate:

Is the real estate owned or leased? Fixtures and equipment owned or leased?
Can you get tax returns from the owner? No one exaggerates income on a tax return.
Will you have the capital reserves to make required improvements?
Is the restaurant competitively positioned at this time?
What is the condition of RE and equipment? Will you have to replace anything in the near future?
What does cost of goods look like?
Is the staff reliable and skilled and work well together?

Investments, in general, are cash in/cash out. How much money goes in and comes out and is there enough left over to pay your salary plus a return on cash invested. So you need at least two years of cashflow statements from the owner.

It has been a while since I have done restaurant real estate and appraisers sometimes use income per seat and compare with other restaurants on a per seat basis but I believe these are just a rough estimate way to go. It is more important to see what the bottom line is and decide what changes might potentially improve things.

Just a few thoughts...


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## wenus2

Almost forgot, be sure to check the condition of any liabilities that may come due to the business. Loans, Leases, and otherwise.


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## mano

The best way to take home $1 million owning a restaurant is to invest $2 million.


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## knyfeknerd

A restaurant is a never-ending pit for you to throw $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ into.


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## cnochef

As a former owner/operator of both independent and franchise restaurants I can tell you that I would only purchase a franchise restaurant with ample time remaining on both the lease and franchise agreement. For me, there are just too many variables in the success of an independent restaurant to consider buying a used one. Furthermore, any restaurant worth buying is going to cost you a serious price premium.

With this economy, there are plenty of opportunities for a keen predator to take over an abandoned restaurant for nothing or very little cost. Seriously, talk to a real estate agent you trust. Landlords are out there willing to rent you a fully-fixtured restaurant just so they can continue getting rent from somebody. In many cases they have gained legal ownership over the equipment and other assets due to non-payment of rent and will use them as an incentive to get a new tenant or allow you to purchase them on a "rent to own" basis along with paying your rent.


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## ajhuff

I've always wanted to be a silent owner. Just own ths business, take a small percentage, and let an experienced restaurant manager and chef run the show. A dream I know.

-AJ


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## gic

If you do decide to proceed, buy the assets, not the "business =stock", i.e. if they are a corp don't buy the stock, buy the name, assets, lease etc... also, if you do it as an asset sale *consult an attorney to follow all the rules for your state* is very important. Assets sales are safer has been my experience as fewer things come back to haunt you.


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## cnochef

gic said:


> If you do decide to proceed, buy the assets, not the "business =stock", i.e. if they are a corp don't buy the stock, buy the name, assets, lease etc... also, if you do it as an asset sale *consult an attorney to follow all the rules for your state* is very important. Assets sales are safer has been my experience as fewer things come back to haunt you.



Good point! I would also add that there can also be different taxation consequences between an asset sale and share sale, depending on where you do business.


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## orange

Ok. Thanks a lot. I really appreciate it. 
I am going to meet with the owner of the business over the weekend to find out more.


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## orange

knyfeknerd said:


> A restaurant is a never-ending pit for you to throw $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ into.



You are scaring me ;-)


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## WildBoar

watch a few episodes of Restaurant Impossible (yeah, yeah, it's not all real). A common underlying theme is the owners bought the place for $$$$ even though the land is leased. The $$$ went for 'the recipes' and the 'stock'... Some very sound advice was given above -- pay only for the assets, and make sure the lease has a lot of years left. The recipes, management team, etc. add very little value.


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## Crothcipt

Not being in the business I would say walk away. And also listen to what Kny said. There is always something that needs bought, broken, on last legs in every restaurant out there. Most of the time the managers take care of that, but it is also your capital that they are working with. I would also recommend doing a follow of someone in the business and see how hands on you have to be, even as a owner.


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## BraisedorStewed

Read _Restaurant Succes by the Numbers: A Money Guys Guide To Owning Your Own Restaurant_. Hire EXPERIENCED professionals, accountant, GM, Chef. Go work in a well run restaurant for free for a few months, if you are still interested you might think about doing some homework and going through with it. But be very sure that you are willing to have no life other than work for a long time.


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## orange

Once again, thank you so much for your input!!
Some of the detailed checklist is really helpful.
I felt that this is a rare opport****y in that the owner has a personal matter forcing him to sell his business and wants to move to different state.
It is not that he has an issue of running the restaurant.
I don't know what I can find out when I meet the owner of the restaurant over the weekend but I will report back after and seek your advise again.


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## Johnny.B.Good

Watch all of the "Kitchen Nightmares" episodes on YouTube (the awesome BBC version, not the terrible US imitation) before you sign on the dotted line. You see these poor people who have invested everything they have into a business and just can't make it work. I would definitely want to get some experience working in a kitchen (or managing a restaurant) before buying one, and even then! Risky, risky business. I will be interested to hear what you decide to do. Good luck!


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## bikehunter

mano said:


> The best way to take home $1 million owning a restaurant is to invest $2 million.



This is an honest evaluation, with which I'm very familiar, having spent 25 years in the winery industry. As Elmer Fudd would say...Be afwaid, be vewy afwaid. ;-)


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## JohnnyChance

I would view it as a very very expensive hobby rather than an investment. Unless you want to spend all of your time there managing things, you should pay qualified people to do that. That might not leave anything left $ wise for yourself, but it also might mean the difference between the place staying open and paying the bills and closing. Then you will make your money back in the long term.


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## orange

I spent a few hours with the owner tonight and learned a lot to digest. 
I am going to find out more tomorrow.


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## orange

Ok...I had a very helpful meeting with the business owner.
In summary, asking is 1/3 of sale* - about 2x of current business EBIT, adjustable lease term, taking over all the equipments/brand(restaurant name) as well.
It is a decent size well structured restaurant and it appears to be at least a fair to a nice deal.
I will need to do a lot of home works for many different aspects regarding a competitive analysis.
No matter what the outcome is, this is a very interesting exercise for me.

Thanks again for your advise.

K


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## lechef

Interesting thread. Personally my dream is also to own a restaurant, but being a young chef I would still need many years more of experience before I want to pursue a head chef job and my own place. 
I think you should really listen to the advise given. And if you never worked in a restaurant you should try it out first I think, so you get an understanding of how it works, and it will be easier to communicate and understand the staff/guest etc. The restaurant business is fantastic, but its not for everyone. 
But I guess that depends on whether you want to work there full time, or just be the guy that puts in the money and pays the costs(and if its the last one, as other said, its hard for you to get $ from it, but I guess its possible in the long term, and if you have a good job you can still have a income).

Good luck, everything is possible as long as you work for it!


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## orange

Ok...they say location is one of the most important thing for a restaurant; Having said that, I have a little issue about the location of the restaurant of interest.
It is located in a somewhat busy complex where other restaurants/shopping centers(on the other side from the restaurant)/and gas stations are located . However, the entrance to it is not easily accessible from the road that passes through the complex in that, from one direction of the road, you can't make direct (left) turn to the side of the complex where it is located; You have to take an u-turn first to enter the side.
And the restaurant is not visible from the intersection either. I know I know it is difficult for you to picture the location.
Two previous restaurants from the same location bellied up.
The current restaurant on sale is the third and the brand of it is somewhat known to the town though. 
So, my question to you is that based on your experiences in the business how important should I treat the location considering the brand power of it??


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## JohnnyChance

What is the not just immediate location like? Block, neighborhood, etc? Foot traffic? Nearby housing? Busy fast moving roads at that intersection?

If a successful restaurateur is not making the location work, why will you? Why are they selling? Too many of the same type of place in that area? Mismanagement? Poor sales?


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## chinacats

orange said:


> Ok...they say location is one of the most important thing for a restaurant; Having said that, I have a little issue about the location of the restaurant of interest.
> It is located in a somewhat busy complex where other restaurants/shopping centers(on the other side from the restaurant)/and gas stations are located . However, the entrance to it is not easily accessible from the road that passes through the complex in that, from one direction of the road, you can't make direct (left) turn to the side of the complex where it is located; You have to take an u-turn first to enter the side.
> And the restaurant is not visible from the intersection either. I know I know it is difficult for you to picture the location.
> Two previous restaurants from the same location bellied up.
> The current restaurant on sale is the third and the brand of it is somewhat known to the town though.
> So, my question to you is that based on your experiences in the business how important should I treat the location considering the brand power of it??



Restaurants and Real Estate=Location, Location, Location

Cheers


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## WildBoar

Can signage be added? Including signs directing drivers where to turn to reach the restaurant?


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## Salty dog

If you'd like to PM me with some numbers I might be able to give you an opinion.

(I'm not just a pretty face)


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## orange

WildBoar said:


> Can signage be added? Including signs directing drivers where to turn to reach the restaurant?



I think so...but it should be done with an agreement with gas station owners.




JohnnyChance said:


> What is the not just immediate location like? Block, neighborhood, etc? Foot traffic? Nearby housing? Busy fast moving roads at that intersection?
> 
> If a successful restaurateur is not making the location work, why will you? Why are they selling? Too many of the same type of place in that area? Mismanagement? Poor sales?



The intersection with a traffic signal is a little weird in that from one direction a car can't make a left turn so that a driver needs to u-turn first to get on the opposite side of the traffic and make right at the intersection. That is how the road is designed.

The current owner is selling it to leave the town after divorce, which I can appreciate the owner's intention.
The place had been managed without the presence of owner (did I mention that they have multiple restaurants with the same brand in the same state??) until this year. Apparently, sales had been gradually down but it appears that it has stabilized at this point (from year over year monthly sales comparison)
In the same town, for the past few years, smaller Japanese restaurants have popped up here and there, but for the same market segment (far east asian food), the place of interest is the biggest in the town.


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## orange

Thank you all for your input. 
After much agonizing (as I was very tempted for the opportunity) considerations (talking to folks including some of you), I'd better let it pass by this time.
Maybe some other time when I am willing to lose money for the joy of running a restaurant, I will explore the possibility again.
It was a pretty informative educational experience though. 

Karl


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## Crothcipt

Orange, If you still want to someday own one, I would recommend you take a part time job in one. It will do one of 2 things, strengthen your resolve in owning one, or make you so glad you didn't go forward with this endeavor.


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## orange

Crothcipt said:


> Orange, If you still want to someday own one, I would recommend you take a part time job in one. It will do one of 2 things, strengthen your resolve in owning one, or make you so glad you didn't go forward with this endeavor.



You are right...I plan to do so as soon as I find time.


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