A Quick Look at How to Value a Restaurant Business

By December 17, 2019 News
CHI Blog

A Quick Look at How to Value a Restaurant Business

Appraising the cost of a restaurant is a very difficult task when there are so many complex pieces that make up a location. How do you put a dollar figure on a business? It’s not a property with fixed market value—it’s an operation with many aspects from the physical assets to the customer base it relies on.

Whether you’re a potential investor or business owner, it’s important to understand how restaurants are valued so you can make more informed business decisions.

Some of the most common factors that go into pricing a restaurant include things like its location, the economy, the length of the business’s operation, and other factors. One of the simplest ways to value a restaurant is to look at the resources the restaurant relies on for its success.

In this post, we’re going to explore several areas that you can assess to try and determine what a restaurant is really worth.

Factors That Determine a Restaurant’s Worth

Determining the value of a restaurant depends on many factors—some more easily quantified than others. Here are just a few key things an investor must look at when determining the value of a restaurant.

Profit and Loss of the Restaurant

The profit and loss of a business takes into account every cost of the establishment and weighs it against profits made. Expenses include the cost of the property’s lease, employee wages, food costs, and more.

The profit is the net amount of money the business earns. The profit and loss of a restaurant is a key factor when appraising the cost of the business.

A successful restaurant should be able to show healthy profits. However, a restaurant with high expenses may point to bloated overhead costs or other areas where effective cost cutting could make a big difference.

Location and Lease

The location of the restaurant is a crucial aspect of its value. Is it located at a downtown hub or a rural area? Location strongly impacts the number of customers the business receives and how attractive it is to investors.

Another thing is the lease of the establishment. A lot of what you are buying is the lease. If it’s a short lease or there is a sale/demolition or other termination clause, the value tanks. Essentially the longer the lease, the more value the business has. If the lease is under market value, and rates are locked in, there is a lot more value than a place with a short lease.

Cost of Equipment

Equipment is an extremely important part of the appraisal of a restaurant. A restaurant can be sold with or without its equipment, drastically affecting its price.

Equipment can add tens of thousands of dollars to the valuation of a restaurant, or even more. For example, a single commercial quality espresso machine can cost at least $10,000 or more.

The status of said equipment is also an important valuation factor. Is the equipment leased by the owner? Is it owned?

Equipment, alongside the real estate location of the business, has guaranteed worth. That is, the price of equipment will not change and is easy to liquidate, whereas estimating the value of other factors is more difficult.

Leasehold Improvement

At first glance, you might not like the look of the existing washroom but if all the plumbing is there you can save a lot of money. Renovating a space that has good bones and infrastructure has a lot of benefits.

The Restaurant’s Age

The age of a business is a key factor in evaluating its worth. Is the restaurant new and successful, or is it old and well-established?

Is the restaurant capitalizing on a current food trend that may fade in several years, are there any other similar—and new—restaurants that offer similar products in the area? Or has the restaurant been around for many years and has an established consumer base?

The age of a restaurant—when combined with other factors—is something different investors will see differently. Perhaps an investor is enticed with the trendiness of your establishment and sees it as an added value to their appraisal.

On the other hand, an investor may see the youth and trendiness of a restaurant as a potential negative—who knows how long it’ll last—or if it will remain profitable for years to come? A longstanding business with an established, proven method may be more desirable for some.

An Established Customer Base

Everyone knows that one restaurant in their neighborhood that has had generations of people visit it. Businesses with such loyalty show an investor that the restaurant will have a continued and consistent stream of income and not fall to fads or trends.

Some restaurants have a well-established rapport between the community and staff – a chef who defines the restaurant whose face everyone knows. An acquisition by new management will likely mean that old restaurant staff will be let go.

It is important to know whether returning customers are loyal to the brand of the restaurant or the people who run it. We’ve all heard the stories of successful businesses who went under after a change of management – attachment and familiarity are very powerful tools in a restaurant’s success.

Methods of Appraising a Restaurant

There are many methods of valuing a restaurant business that incorporate some or all of the factors listed above. Investors may choose to value a restaurant differently depending on the objectives they seek when purchasing a business.

A restaurant may be valued in relation to the value of other restaurants in the area. Investors look at the market price of similar businesses in the area and formulate a figure based on that.

Sometimes this market valuation is not ideal. A restaurant may have a bad reputation and is in decline. In instances like this, a restaurant may be valued solely for its assets—the equipment, real estate, furnishings, and other physical items.

Determining a restaurant’s value is a difficult task that must be done on a case-by-case basis that takes into account the restaurant’s status and the investor’s goals. There is no single tried and true method for assessment that works for all cases.

Investors and business owners alike should wisely consider the value of an offer. It is easy to propose a figure that either underestimates or overestimates a restaurant’s true worth. Keep in mind that a business is only worth what someone is willing to pay for it.

Need Help Valuing a Restaurant? Trust the CHI Team

Are you looking to appraise the value of a restaurant? The CHI Real Estate team is known for their expertise in structuring commercial real estate deals for restaurants.

We can help you appraise a restaurant, determine the value of intangible items like a restaurant’s lease, location, customer base, and much more.

Please contact our team today if you’re interested in learning more. We are known as Toronto’s best restaurant brokers for a reason!

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