The Biz blog» Business Valuation

Keys to Selling Your Business

Kendric Foultz — Tue, 24 Jan 2012 23:23:51 +0000

Knowing what a business buyer wants is the key to selling your business and getting the best price for it. In this market climate, most buyers are looking for two things, a cash flowing business and a deal. Here are a few things that a business buyer is gong to want to know that will allow the buyer to asses the situation and determine if yours is the right business for them.

• Is the business currently producing an income for the owner?
• Is the business seller retiring and fully funded his or her retirement plans? • Does the sale of the business only represent a small part of the retirement portfolio?
• Is the business debt free?
• Do the financials show that the depreciation schedules are completely exhausted?

Affirmative answers to these questions tell the business buyer that the business is making enough money for their needs and you are indeed in a financial position to sell your business and sell it within the constraints of the marketplace.

Another thing that a buyer is going to want to know about is your plan for the future. Nobody wants to get to the closing table only to have the owner decide that he or she wants to keep the business. Equally, nobody wants to buy a business only to find out that you’re going to open a competing business. This is why buyers like sellers that are clearly of retirement age and means. If your business is complex or highly personal in nature, a buyer may require that you stay involved in the business for a period of time to provide a seamless transition. If you have dreams of selling your business and moving to the Caribbean, this might be achievable. You may only have to adjust your time line a bit.

Now that you know some of the keys to attracting a buyer for your business, the next step is to find the right buyer for your business. To do that you’re going to want someone to help you who understands business buyers.

Kendric Foultz is a certified business broker with decades of experience in deal making and working with business buyers and sellers. Feel free to give him a call regarding your business related issues at 310-968-2369.

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Selling a Small Business as a Short Sale

Shelli Margolin — Tue, 06 Dec 2011 01:23:35 +0000

Drowning in business debt!?! Even when a company’s sales start increasing, debt can eat away at the profits…

More and more small business owners are finding that profits are going to servicing their debt and keeping their business operational. In such cases, an option is to sell the business through a short sale. Especially if a business owner is burnt-out, looking at shuttering the business and declaring bankruptcy.

Declaring bankruptcy is different as a small business owner. It’s not just an anonymous bank or bureaucratic phone company that is owed money; it’s often suppliers and vendors with whom there are long-term personal relationships. And often, friends and family have invested in the business or lent large sums of money to help keep the business afloat.

A short sale can provide creditors at least a portion of the funds owed to them, while alleviating the small business owner of having a bankruptcy tied to their name and credit. It can also save the jobs of the employees.

Special note for franchise owners – If the business is under a franchise agreement and the franchise payments are grossly in arrears, there is a chance the franchisor can take back the business, leaving the owner without a business and still holding all the debt. It is in the interest of the franchisor for the business to sell and bring in a new owner who will start paying royalties.

How it works –

An experienced and competent business broker will package the business based upon its net profit and assets. The debt and other non-operational expenses will be added back to the net profit and an industry appropriate multiple will be determined. If the business sells for less than what is owed, it is a Short Sale. If it sells for more than what is owed, the owner will receive whatever is left over after all the debt is paid.

In a normal sale, an escrow is used primarily to protect the buyer from successor liability – any debt attached to the business. In a short sale, the escrow process also aids the seller in settling the business’s debt.

Once all the debt is established, the escrow officer will prepare a seller’s estimated statement reflecting all secured and unsecured debt. Secured debt includes tax liabilities, private liens, judgments, etc. Unsecured debt includes private loans. If the sale price covers all the secured debt, the remaining funds are distributed pro rata to the unsecured creditors. If the sale price doesn’t cover all the secured debt, remaining funds are distributed pro rata to the secured creditors.

All creditors will need to agree on the payout in order to close the deal. Since the alternative is usually bankruptcy for a small business owner, creditors would prefer to receive something rather than nothing. Thus, they generally will agree to the pro rata payout.

Although short sales are messier than regular business transfers, they are a win-win for the buyer, the seller and the creditors. The buyer gets a good deal on the business; the seller avoids bankruptcy and is alleviated of their debt while their creditors get something rather than nothing.

Enlist an experienced business broker. They can help you overcome most obstacles and discreetly bring you qualified buyers. We currently have over 3,000 buyers in our database alone. For a free consultation, please don’t hesitate to call me. Shelli Margolin-Mayer, Business Broker: (310) 882-2200 ext. 128. I’m happy to help.

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How to Value a Restaurant or Bar that is not Showing Profit

Mina Singson — Thu, 03 Nov 2011 21:37:37 +0000

How much money is a restaurant worth? Does it have any value if the restaurant is not turning a profit or barely breaking even?

Restaurants, coffee shops or bars are valuable even if they are not showing a profit. These kinds of businesses are valued through the replacement value technique which assumes a buyer pays the seller a price that is not dependent on the income value to benefit from the existing investment in the restaurant facility, the lease and the location. In other words, the buyer is starting a restaurant business at a discount and will pay for the right to avoid spending hundreds of thousands or even millions and avoid all the delays and city regulations in building a new restaurant

Here is what a restaurant –seller has to say when he received an offer on his business.
“…they see that the only valuable asset of a restaurant is the equipment such as freezer, refrigerator, oven, ice maker and the espresso machine. Sure this equipment can easily be bought at discounted price from restaurant equipment liquidators. I bought some of them myself.
But to open this restaurant, I spent more than the cost of these machines. I paid an architect to draw the layout so this will pass the permit requirement. I had to present these plans to the city’s planning committee for their approval and that was not a stroll in the park. And then the contractor, oh boy… Our target was 3 months. It took us 9 months to finish building this 1000sf restaurant! My landlord gave me 2 months TI (tenant improvement) period but after that I had to pay rent month after month until the construction was completed. I had a great location in Santa Monica but it sure was not cheap, $250,000. I won’t get into the details but it is hard to put a value on the time, sweat, and near-breakdowns I put into this business… And then I get an offer for $10,000 because the buyer thinks my used equipment is only worth that much. I know I won’t get back the money I invested but come on.”
****
When valuing a Restaurant using the replacement value technique, you need to take into consideration the costs of the following Assets:
- Tenant Improvements (electrical rewiring, plumbing, heating and air conditioning. cosmetic changes, build outs)
- Fixtures (hood system/ventilation, grease trap, walk-ins, shelving units, lighting)
- Permits and licenses (health permit, ABC license, entertainment permit, extended hours to operate)
- Location, location, location (Is this even replaceable?)
- Lease
- Goodwill
- Equipments
- Furniture
- Clientele/Database
- **Alcohol license (ABC License Type 41, Type 47 or Type 48)

Mina Singson is an experienced Restaurant/Bar Broker. She has listed and sold different types of restaurant businesses. For a free consultation, please contact Mina Singson at 310-882-2200 ext. 125 or email: msingson@bizex.net

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How to Sell a Restaurant in 90 Days

Shelli Margolin — Mon, 31 Oct 2011 21:46:22 +0000

How to Sell a Restaurant in 90 Days

A True Story

Restaurants are not necessarily an easy sell. However, if they are priced at their proper value and positioned to sell in the right forums, they can be sold in a timely manner to the satisfaction of both the buyer and seller. Preparing the restaurant’s books and records for sale is as important as bringing in the right buyer. The following is a true story of a restaurant that recently sold through an experienced restaurant business broker.

When the Johnston’s[1] bought their pizza deli in Los Angeles five years ago, the plan was to build a business for their children to takeover. Both Mr. & Mrs. Johnston had fulltime careers that they wanted to keep. With the help of their son, the restaurant was able to sustain a positive cash-flow for several years.

However, both of their children started pursuing college educations in an unrelated field. Thus, the Johnston’s dream of passing the business on to their children vanished. Mr. Johnston began spending more and more time running the restaurant while his son was in school. Working at a full-time career and working in the restaurant soon became extremely stressful.

The stress and loss of motivation, along with a family illness, spurred the Johnstons to sell. At the listing meeting, two pertinent questions were asked, 1) is your hood, floor drains and refrigeration exhaust in working order with valid permits and 2) what are your gross sales & net sales? These are the two most import issues regarding readiness for sale and determining price.

All the equipment and permits where in order. Thus, replacement costs were determined for the furniture, fixtures and equipment (FF&E).

Unfortunately, they didn’t have organized books and records. Plus, a fair amount of sales where in unrecorded cash. Once they reviewed the documentation they had and came up with annual totals for sales and expenditures, a legitimate profit and loss statement was created that a buyer could understand.

Because they hired staff to work the hours the family couldn’t, their net profits were negatively affected. The profit and loss statement was then adjusted to show what the restaurant would earn if the restaurant was owner-operated.

There was still the problem of the cash revenue. Some of the cash was pocketed as profit and some was used to pay employees and for inventory purchases. It was expressly explained that onus was on the seller to prove the cash sales to a buyer.

Once there was a legitimate the profit and loss statement and the FF&E replacement cost was established, an asking price was determined based upon a multiple for restaurants selling in Los Angeles.

Twenty-one days after the listing was launched, an acceptable offer was presented. The buyer was not exactly a good match, as he was looking for an investment and not a hands-on owner-operated restaurant. However, the buyer was enthusiastic and he wanted to pursue the sale. The Johnstons agreed. During the due-diligence period, the buyer wasn’t convinced of the cash sales. He made a formal request and was released from the offer.

Within two weeks another acceptable offer was presented. This time the buyers were a family, the Garcias[2], who wanted to run the restaurant as onsite owner-operators. They understood the concept of cash sales, however they needed proof. Thus, the Garcias spent more time with the Johnstons during the due-diligence period. Through an on-site visit, they gained confidence in some of the cash amounts that were stated. However, it was not enough to justify the full asking price. Together a price was negotiated with which everyone was comfortable. The deal closed within 90 days from the time the listing was launched.

If a restaurant is marketed to the correct audience and can prove its net income, the right buyer is out there. There is a lot that goes into selling a restaurant, much more than many other types of businesses. The above story is just one example of restaurants I’ve sold. We currently have over 3,000 buyers in our database alone. For a free consultation, please don’t hesitate to call me. Shelli Margolin-Mayer, Restaurant Broker: (310) 882-2200 ext. 128. http://www.bizex.net/business-broker/shelli-margolin I’m happy to help.

[1] The real names have been changed to protect privacy.

[2] The real names have been changed to protect privacy.

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Selling a business in the media, entertainment, creative, film and TV industries? 10 Things to Consider

Stuart Gross — Tue, 06 Sep 2011 20:03:52 +0000

Are you the owner of a small or medium-size
business in the creative of media industry who dreams of “getting
out” and retiring, writing a memoir, or simply getting away
from it all? Thinking about selling your business? In today’s economic
climate, selling your media or creative business can be a
complicated and daunting experience.
The skills and knowledge you acquired by running a successful
business are not necessarily the same skills you will need to sell it.
Here are 10 things to consider:
1. Am I REALLY ready to sell my business? One of the most
important questions a buyer has is, “Why are you selling?”
Selling your company is a life-changing event, with both
positive and negative effects on your financial condition.
Your mental and physical health may also be affected. You
need to know if you will have enough money, moving forward,
to live the way you choose. It is a very big decision. …And you
need to be able to answer the question for potential buyers as
well as for yourself.
2. Can I sell my business to a new owner? Is it transferable?
If I go, can someone else take my place? It’s not just your
creative skills that may need to be transferred; it is also the
relationships that mean business for your business. Can a
new buyer do what you do and maintain and attract business?
You may need to stay on board for a while to make a transition
work properly. Sometimes the choice to stay on helps you to
build the financial base you will eventually need to retire.
3. What effect will the process have on my clients, my employees,
and my daily operations? There are some real challenges
in the process of selling a business. It is important to keep
your confidential information from the public. You must make
sure that the impending sale does not create concern and
problems with your employees and your clients. Your relationship
with your landlord, if you have one, needs to be
handled with care. During the process of meeting, qualifying
and negotiating with buyers and the complexities of a sale,
you must still be able to keep your focus on the continuing
operation of running your business.
4. What is my business really worth? Valuation of a creative/
media/entertainment business is based on several key factors:
A. How much money can a buyer expect to earn after
taking over?
B. What are the barriers to entry that might stop the buyer
from starting his own similar company?
C. What is the value of your assets, equipment, inventory,
improvements etc.?
D. What are the risks and growth opportunities of
the business?
For businesses under $10 million, the multiple of earnings
method is the most common basis. The adjusted earnings of
the business is multiplied by a general index for that industry
and type of business, and then adjusted by financing issues,
growth potential, inventory, asset value, etc. A well-priced
business is critical to buyer attraction and critical for the
seller in getting the value he has built.
5. Should I use a broker? Once you decide to sell the business,
whether or not you use a business broker should be a priority
consideration. In the media related and creative businesses,
any representative you choose must have industry experience.
A great deal of knowledge, work and time goes into valuing,
promoting, marketing, qualifying buyers, negotiating, financing,
completing a transaction and effectively transferring the
operation of a business.
A broker who understands, or has been in your industry will
realize that they are seeking a truly special kind of buyer.
He should have the ability to find and attract that buyer. A
broker who is active in the industry will already be working
with active buyers and can identify potential strategic buyers
for the business.
Well marketed, priced and negotiated deals may often net
the seller more than if he pursued and arranged for the company’s
sale by himself.
6. What kind of buyer is capable of taking over this business?
Ideally, you want a buyer who is genuinely interested in this
business, one who has the skills necessary to run it, and the
financial wherewithal to make this purchase.
Because the “right buyer” at the right price will sometimes be
a one of a kind find, you must be prepared with all of the information
that a qualified buyer will demand. The good buyer
will be asking lots of questions – this is perfectly normal and
necessary. The “right buyer” will respect your confidentiality,
and will agree to sign a “Non-Disclosure Agreement.” However,
the “unqualified buyer” can become a very expensive waste
of time.
7. How do I market the business? The first thing to be done
is to compile a complete information package, which should
include the history of the business, description of the industry,
competition, clientele, marketing, opportunities/threats, products
and services, etc. It should also include at least three
years of financial information and analysis of discretionary
earnings, equipment and inventory.
The normal process for marketing a business is to post it for
sale on the plethora of listing sites on the Internet, to contact
known buyers interested in this kind of business, or to go
directly to targeted strategic buyers who may include competitors,
related businesses or aggregators in that industry.
8. How do I make a deal? These negotiations are based on a
balance between the buyer’s perceived value of the business,
(his or her potential, earnings, ROI, future value, the ability to
pay for the business or operate the business, earning a living
wage and paying off financing if any) and the seller’s perceived
value (does the purchase price replace my salary, is it
enough to give up a business I have built, is it worth more to
the buyer than it is to me?)
Negotiations require objectivity, an understanding of your own
valuation and a willingness to structure a win/win situation.
Often third parties such as business brokers can take the
emotional spin out of the deal making.
9. What about financing? A business acquisition can be done
in any combination of cash, seller financing, bank financing,
earn outs, etc. Earn outs are typical in deals where the seller
and buyer need to cooperate to make the future earnings
happen.
10. Structuring the ACTUAL SALE. How does the seller go about
with the transfer of the business assets, including inventory,
equipment, goodwill, intellectual property, brand equity, customer
data bases, etc., into a new or existing entity for the
buyer? There are many ways to accomplish the actual sale,
but for most small and medium sized businesses the process
can be done in California through an Asset Purchase Agreement.
As such, all of the assets are transferred to the buyer
in an escrow process, which is usually as manageable as the
sale of a home. If you need to sell the actual entity as in a
stock sale, you will need quite a bit more guidance.
The sale of your business, especially one that you have built and
run for a long time, is a life-changing event. The business is
usually the most valuable thing the seller owns. The purchaser
is often using his life savings or leveraging his possessions to
make this happen. This is serious business and should be given
its due care and consideration. You need to be guided by your
trusted advisors and be prepared for all of the exigencies of the
process. At best, it can be the financial realization of a life’s work.
____
Stuart Gross is a media business sales
& acquisitions expert with more than 30
years of experience in business, film and
television production, entertainment, and
media. As founder of Harmony Pictures,
Gross executed one of the industry’s
first IPOs for a television commercial
production company.
He can be contacted at sgross@bizex.net. 310 882 2200 Ext.118

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HOW TO SELL YOUR BUSINESS WHEN YOU ARE THE KEY TO YOUR BUSINESS

Dan Munter — Thu, 11 Aug 2011 17:24:03 +0000

In a perfect world, when owners decide to sell their business, a buyer will come forward and write a check for the full asking price. In the real world, this rarely happens. There are so many reasons why this rarely occurs. In this blog, I want to focus on one of the most important issues.

One of the biggest risks for a buyer is whether the business will survive without the seller’s presence, knowledge and relationships. I want to give you some actual examples of businesses I have both recently sold and am in the process of selling.

I have a client who wants to sell his insurance business. He has done a wonderful job creating and running his one man business. However, when selling his business he has a big problem. The only asset that he is selling is the relationships he has with his clients. You would think that very few buyers would be willing to take that risk. However, after listing the business for less than 2 months, I have already had over 300 inquiries. The challenge has been to bridge the gap between the business opportunities and the inherent risks of this type of transaction.

The key to selling the business is the Earn-Out structure. An Earn-Out is a contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain future goals. In the insurance example, the buyer would pay 50% up front to the seller of the agreed offering price. After the 1^st year, he would pay an additional 25% based on how much business is generated from his book of business during that year. After the 2^nd year, he would pay the final 25% based on the business generated from his book of business for that year.

This arrangement gives the seller a vested interest in making sure that his clients stay with the new owner. It also takes away some of the risk to the buyer. If some of the clients do not transfer over, then the buyer will end up paying less for the business.

I recently sold 2 businesses where the buyers saw a great opportunity to make money but were buying businesses that they did not have any experience in. Once again, we structured the sales with an Earn-Out. This time the purpose was to make sure that the seller had a stake in the business while training the buyer. The seller realized that the better he trained the buyer, the more upside he had in the final price. The buyer liked the arrangement for that reason and also because it he could retain some of his capital and use for other purposes. The Earn-Out in both of these cases was structured with equity. The buyers bought 80% of their respective businesses with a contract to buy the remaining 20% over a 2 year period. The final result was a win for the buyer and a win for the seller.

Please feel free to contact Dan Munter at dmunter@bizex.net if you would like to discuss this further.

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Preparing a Restaurant for Sale

Shelli Margolin — Mon, 08 Aug 2011 21:14:09 +0000

If you are considering selling your restaurant, preparation is essential in order to make the sale easier, faster and more profitable. Buyers will usually estimate the value of a restaurant beyond a wonderful menu and steady clientele. Their assessment will determine what they are willing to pay. Having all aspects of your restaurant in order is the key to a successful sale.

Many of the steps below may seem like no brainers. However, often restaurant owners are so engrossed in their day to day operation that they over look simple things that can drastically effect how buyers will perceive their restaurant.

It is crucial to look at your restaurant through the eyes of a buyer and ask yourself some key questions:

Are your books & records organized?
- Can a buyer clearly understand how much profit you make?
  - Is your profit provable on paper?
  - Do you have cash sales? Can you easily prove those sales to a buyer?
  - Can you show on paper what your costs are (food, labor, waste, etc)?
When the restaurant is closed to the public, what does it look like?
- Is it clean?
- Are the chairs, tables and décor in good shape?
- Is the kitchen spotless and free of clutter?
- Are the bathrooms spotless?
- Is all your equipment operational?
When the restaurant is open, how well does it function?
- Is your staff friendly & knowledgeable?
- Is the environment pleasant to customers?
Are all your permits and licenses valid?
- Is the restaurant in compliance with the County of Los Angeles’ new food handler’s regulations?
- Do you have any outstanding violations?

If you answered no or wavered on any of these questions, then you need to take corrective measures before you place your business on the market. In order to sell your restaurant for the best price, all of the aforementioned elements need to be in place.

Coherent financial data is vital. There are ways to mitigate messy books and records. However, if buyers can’t determine your revenue, costs and profit, then selling your restaurant becomes extremely difficult and you most certainly won’t get the price you want.

Buyers will want to tour the restaurant when guests and staff aren’t around in order to ask questions and assess the furniture, fixtures and equipment (FF&E). You’ll want to take whatever steps are feasible to make the restaurant as presentable as possible. Buyers need to have a positive emotional response on first sight. The cleanliness of a restaurant affects the overall desirability and thus the ultimate price.

While you are cleaning, take a second look at your staff and overall operations. Buyers will be scrutinizing how your restaurant runs. If they are sophisticated buyers, they will not only come in to get the costumer experience, they will send others to check out the service and environment too.

During due diligence, the potential buyer will want to see your permits and licenses. You’ll want to make sure they are all valid and any violations are corrected well before the due diligence period. If they aren’t in order, your risk losing the sale.

There is a lot that goes into selling a restaurant, much more than many other types of business. For a free consultation, please don’t hesitate to call Restaurant Broker, Shelli Margolin at (310) 882-2200 ext. 128. I’m happy to help.

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What Is a Typical Restaurant Business Worth?

Shelli Margolin — Tue, 12 Jul 2011 18:39:26 +0000

As written for ehow.com…

What Is a Typical Restaurant Business Worth?

The worth of a restaurant is predicated on what someone will pay to buy that restaurant. As restaurants come in as many shapes and sizes as do their owners, determining worth is complex. In the most general terms, value can be established through either a multiple of annual sales or by its assets.

Restaurant Categories

Restaurants fall into two major categories: full-service and limited-service (or quick service). Then there are many subcategories such as, fine dining, casual dining, dinner house, bar & grill, deli’s, fast food, pizza take-out and the list goes on. Within those categories are independently owned, franchises, corporate owned, single location to international multi-location. Thus, “typical restaurant” cannot be rationally defined.

Profit vs. Assets

Let’s look at individually owned and operated restaurants. In the most simplistic terms… there are two ways in which a restaurant can be valued, whether they are full-service or limited-service. The first is by a multiplier of annual profits for successful operations. For a restaurant that is not making a profit, its worth is determined by its fixed assets, known as Furniture, Fixtures and Equipment (FF&E) or an asset sale. Whether or not a restaurant is making a profit, the fact is that the market is going to be the ultimate determination of what any restaurant is worth.

Multiplier for Restaurants Earning a Profit

Prior to the current recession, profitable restaurants were valued at two to three times their annual profits (or Discretionary Earnings) plus inventory. However, currently in the Los Angeles area, it appears that profitable restaurants are generally worth a 1.5 to 2 multiple of Discretionary Earnings plus inventory. The more successful the restaurant is at making a profit for the current owner, the more valuable it is for a buyer. This is typical for any business.

No Profit, No Problem

If a restaurant is not turning a profit, there still is value to a buyer. The biggest barrier to entry in the restaurant industry is the initial build-out costs. If a restaurant has a permitted and functioning hood, flood drains, three-part sink and a permitted refrigerator unit, and it’s in a good location, then the restaurant will generally sell. If it has a liquor license, the restaurant will sell for more! This is true also for a profitable restaurant also.

At Cost Equipment Value

The value or worth of a restaurant that is not making much of a profit is in its working-permitted equipment and other assets. The owner must determine the at cost value of each piece of functioning equipment and other asset. Then put it all together in a list to ascertain the current worth of the restaurant.

Enlist a Professional

Whether trying to determine the worth of your own restaurant for financing purposes or to put it on the market to sell, your opinion of value will most likely be tainted by emotions and the price you want vs. the actual market worth. For financing intentions, talk to a commercial lender before you start the loan process. When contemplating selling your restaurant, enlist an experienced business broker. They can help you determine market value and discreetly bring you qualified buyers, so you can your spend your time and money running your restaurant and living your life.

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How to Appraise a Restaurant Business

Shelli Margolin — Tue, 12 Jul 2011 01:31:28 +0000

As written for ehow.com…

There are several reasons for appraising a restaurant, along with many nuances to the appraisal itself. Let’s review how a prospective buyer can appraise a restaurant for purchase. There are three general ways that restaurants’ sale prices are established: based on profits, assets, or “key costs,” referring to its location value. The buyer should be aware of whether the restaurant is making a profit and what furniture, fixtures and equipment (FF&E) are included in the sale. If a restaurant is profitable, a buyer can take a financial approach to the appraisal. If the restaurant is not turning a profit, it still has value in its equipment. In some cases, a restaurant is sold for key costs: its location, property/lease value and entitlements.

Instructions:

Profitable Restaurants

1 Review all the financial data available. This includes a minimum of the past three years’ tax returns, profit and loss statements, and any additional records of cash sales (cash sales often are not reported on tax returns or elsewhere). Note that cost of goods sold (COG) is usually around 20 to 40 percent of revenues depending on the type of restaurant.

2 Obtain a list of all FF&E that will be included in the sale price. Although the sale will be predicated on the annual profits, the restaurant can’t operate without equipment that has the required permits.

3 Review the entire lease thoroughly before signing it. Understand the monthly rate and any common area maintenance (CAM) fees, along with any other charges and fees. Also, review the term and option to extend.

4 Use a multiplier of the annual profits to determine the restaurant’s value. In a good economy, the rule of thumb for profitable restaurant value is two to three times the restaurant’s annual profits (or discretionary earnings) plus inventory. In a bad economy, it is more likely a 1.5 to 2 multiple of discretionary earnings plus inventory.

Unprofitable Restaurants

1 Examine the hood, floor drains, three-part sink and permitted refrigerator units to make sure they are functioning. The restaurant industry is probably one of the few industries where you can sell a business that isn’t making a profit, as the biggest barrier to entry is the initial build-out cost. A restaurant will sell for its permitted and functioning equipment or sometimes for its location and entitlement to operate at that location.

2 Determine what, if any, FF&E are included in the sale, as the restaurant build-out and obtaining the permits for equipment is expensive. Appraise the hood, floor drains, three-part sink and permitted refrigerator units. Ranges, ovens and other equipment are valuable, too, but they are easier to replace without requiring permits. The FF&E should be appraised upon replacement costs in order to determine the value. Don’t overlook the employees; they are often an important asset to consider too. Get a good understanding of their salary and benefit structure

3 Make a thorough review of the lease or the real estate purchase agreement. Make sure the zoning and alcoholic beverage licenses are all in order, before you sign any binding agreements.

Tips & Warnings

It is always a good idea to enlist the aid of a professional. An experienced business broker will provide well-rounded guidance in the appraisal and purchase process. A buyer can engage attorneys and accountants, but a business broker is much more cost-effective. Also, consult your local Small Business Development Center (SBDC). SBDCs are funded by the U.S. Small Business Administration and offer free and low-cost business assistance.

References

“CNNMoney”: What’s My Restaurant Worth?; Ingrid Tharasook; December 2007
Quantified Marketing Group: Restaurant Financial Analysis
The Appraisal Foundation
QSR: Valuing Your Store

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What Is a Typical Restaurant Business Worth?

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