Restaurants generally sell for approximately 2-3 times the SDE for the preceding 12 months plus inventory.
Other rules of thumb . . .
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3 - 4 times EBITDA -
30 to 35 percent gross sales plus inventory.
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Food costs should not exceed 33% and payroll costs should not exceed 30% with ideal combined costs being less than 60% of total revenues.
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Occupancy costs 6% - 10%
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Profit 6% - 10% after owners salary
Cash flow is king. Although location and reputation are important factors, they should be reflected in the cash flow. For example, a restaurant in a great location should have better cash flow than a similar operation in a less desirable location. If it doesn’t, then the current owner is not taking advantage of the location. Why should a new owner pay for something that needs to be corrected?
SDE (sellers discretionary earnings) can be calculated by adding back depreciation and amortization expenses to net profit/income plus any ownership benifits. If the owner’s compensation is too high or too low, adjust it to a reasonable level. If the restaurant is a corporation and it rents from the owner, check if the rent is fair and adjust accordingly. Add back any unnecessary (discretionary) expenses like excessive donations, auto expenses, or travel and entertainment.
Operations
Food costs, labor costs, and overhead should each run between 30 and 35 percent of sales. Net profit should be 3 to 10 percent. These percentages vary according to type of operation.
KPI’s - Key Performance Indicators
Customer traffic (number of customers served)
Average per-person check
Table turnover
Sales per seat
Sales per square foot
Within the coming 15 years, more than half of the country’s small business owners are expected to retire – but are they ready?
Sunday, October 7, 2007
Rules of Thumb for Restaurant Valuations
