How to evaluate a restaurant

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January 14, 2021

by a searcher in Pepin, WI 54759, USA

I am trying to determine a price on restaurant. Real estate and business. There are no comps in area for real estate. Business Gross Revenue is $200K. They are asking $400K for Everything. To me that's very high asking price. Location is good but pandemic allows only drive threw. I would like to know someone's thoughts.

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Reply by a searcher
from Harvard University in Colorado Springs, CO, USA
You can get an estimate of what the RE is worth by trying to find out what the annual lease would be. The RE will be worth 10 to 20 times the annual lease (on the low side if not in a prime location, on the high side if in a prime location with high regional GDP growth).

For the rest of the business, you'll have to figure out what the profit would be if you were the owner.
Start with the profit as reported by the current owner. If the current owner is working in the business day-to-day, reduce the profit by what a GM would cost you ($50-75k is what I'd guess, but dependent on local labor market). You do this even if you are also going to work in the business otherwise you're not valuing your own time and will arrive an an incorrectly high value for the business operations. If the business owner isn't in the business, no adjustment.
Then, (assuming the seller owns the RE) take the annual lease number that you estimated earlier and reduce the profit by that as well since that reflects the ROI of the RE and not the business operations.
Now you can take whatever is left of the profit and multiply by 3-5 times (3 if you don't think growth prospect are good, 5 if you think they are quite good) and you have the value of the business operations, excluding the RE.

Finally, take the value of the RE and add it to the value of the business operations and you have the top line figure that you're looking for.

My guess: a business making $200k in revenue will be generating only $30-50k in profit, putting the business operations' value at less than $200k, meaning the biggest part of this transaction will be the real estate. Spend the bulk of your time trying to figure that out as getting that wrong will dramatically impact your ROI (or lack thereof).

Best of luck!
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Reply by a professional
from Oregon State University in Kuna, ID, USA
Hi David. BVR won't have a lot on the real estate side of valuing restaurants but we have plenty of data from restaurants transactions that you may find useful. I also recommend checking out one of our newest special reports, Valuing Full Service Restaurants.

https://www.bvresources.com/products/what-it-s-worth-valuing-full-service-restaurants

Guide to Restaurant Valuation: https://www.bvresources.com/products/bvr-guide-to-restaurant-valuation
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