Restaurant Valuation

How To Perform A Restaurant Valuation Using those 5 Powerful Strategies (2023)

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Knowing how to perform a restaurant valuation is crucial in 5 cases:

 

  • You Want to open a restaurant and need to evaluate competitors to position yourself
  • You are running a restaurant and want to expand and grow your operations
  • You want to invest in the restaurant industry and you need to choose the best ones
  • You want to sell your restaurant
  • You want to buy a restaurant

 

If any of those apply to you,

Then you are in the right place,

In this article we’ll cover 5 ways you can perform a restaurant valuation:

  1. Concept Valuation
  2. Profitability Valuation
  3. Liquidity Valuation
  4. Solvency Valuation
  5. Asset valuation

 

With this knowledge,

You could either evaluate a restaurant of them,

But I would highly suggest that you use those methods to get a better understanding of the business,

So without further due,

Let’s Rock!

Concept Valuation

 

Concept valuation is the simplest method to value a business,

As the name mentions,

It refers to the process of analyzing the internal structure of a restaurant,

Including its operations and its Unique Selling point,

When performing a concept-based valuation,

The main point to determine how the restaurant is positioning itself on the market,

Some of the areas that you should analyze and look for are the following:

 

Concept valuation Metrics

 

 

This method is great when you are first hearing about a restaurant,

And are thinking about analyzing it deeper,

This is your first layer approach that will determine whether or not you should go ahead with the next methods

 

Profitability Valuation

 

This valuation method is probably the most used one,

It refers to the analysis of profitability metrics relative to the industry,

Profitability analysis is crucial for any business valuation,

As gives you a great understanding of the following:

  • Financial Health
  • Sales performance
  • Cost management
  • Equity management

 

And there are three major areas that you evaluate the restaurant against:

 

Profitability valuation Metrics

 

 

A. Sales

Gross Profit Margin :

It is one of the most famous metrics when it comes to any business profitability valuation,

And it is simply a percentage of how much money is the restaurant earning out of the total revenue after having deducted operating expenses.

 

It is calculated this way:

 

(Total Revenue – Operating expenses) / Total revenue * 100

 

Example:

 

(1.200.000 – 320.000 ) / 1.200.00 = 0,73 * 100 = 73%

 

An industry standard says that you should not go below 67% gross margin.

 

NPAT Margin :

Net Profit after Tax Margin is the same as gross margin percentage,

The only difference is that NPAT is the bottom line,

Meaning that now we have deducted all the fixed and variable expenses that the restaurant has,

Including taxes,

This number should normally not be below 8-10%,

Here is the formula:

 

Total Revenue – Operating expenses – Fixed costs – Taxes – Interests – depreciation

= Net Profit After Taxes

 

Net Profit After taxe / Total Revenue * 100 % = NPAT Margin

 

Example:

 

1.200.000 – 320.000 – 300.000 – 50.000 – 7000 – 5000 = 518.000

518.000 / 1.200.000 = 0,43 * 100 = 43% (This example is not realistic as it is too high…)

 

 

Sales per available seat:

Sales per available seat is a valuation metric that is proper for the restaurant industry,

And as the name mentions,

It refers to the number of sales that each seat generated in a given period,

Let’s say your restaurant has the following:

  • 200.000 $ in sales
  • Capacity of 300 Tables
  • Occupancy of 80%

 

Then you would calculate it this way :

 

200.000 / (300 * 80%) = 833,33 $ per available seat

 

B. Equity:

ROE:

Return on equity is a metric that analyzes the earnings of a business concerning the capital invested into the restaurants,

It is expressed as a percentage of the earnings out of the total equity,

You need to get more information before making an assumption about the results,

It could be that during this operating year more capital was invested into the restaurant to grow,

Hence the return on equity will be lower,

 

Formula:

 

Net Income / Total Equity * 100

 

 

C. Costs:

Cost of sale ratio:

Cost of sales in a restaurant are the Costs related to the production of food and beverage,

It is the operating expense of the restaurant that will vary depending on the level of sales,

And to calculate the cost of sale ratio,

We simply divide this number against the total revenue and if we want it expressed into a percentage multiply it by 100.

Example:

COGS = 320.000

Sales = 1.200.000

Cost of sale ratio = 320.000 / 1.200.000 * 100 = 26,6%

This is a good number,

F&B costs together should not exceed 33%

 

Labor cost Ratio:

The labor costs ratio is the same as the cost of sale ratio however we are calculating here what labor costs represent against total sales

Example:

Sales = 1.200.000

Labor costs = 240.000

Labor cost ratio = 240.000 / 1.200.000 * 100 = 20%

This number should not exceed 22%

 

Liquidity Valuation

 

This restaurant valuation method is used to determine how liquid is a business,

In other terms,

How quickly can a restaurant liquidate its assets and turn them into cash,

The most liquid asset is cash,

But Long term assets such as property cannot be liquidated that fast thus if the business needs to cover any liability it might have some troubles

There are a couple of ways to determine how liquid is a business,

Here we will go through 3 metrics:

 

Liquidity valuation Metrics

 

 

A. Working Capital

The working capital is a simple calculation that involves the current assets and current liability of a business,

It is calculated by dividing the total current assets by the total current liabilities,

Example:

2.000.000 / 1.500.000 = 1.3

A working capital above 1 means that the restaurant has enough resources to cover its short-term obligations,

However, people tend to think that the higher the Working Capital Ratio the better,

And while you might feel safer with a higher working capital ratio,

It could also mean that the restaurant is sitting on unproductive assets and is not operating to its maximum potential,

 

B. Quick Ratio

The Quick ratio is similar in a way to the working capital ratio,

Yet,

It involves 2 more factors:

  • Inventory
  • Prepaid expenses

 

Formula:

 

Current assets – (Prepaid expenses + Inventory) / Current Liability

 

It gives a deeper idea of the real ability of a restaurant to meet its short-term obligations,

As Inventory and prepaid expenses are considered current assets,

But turning them into cash does not involve the same process,

A quick ratio should be above one, but not too high to stay productive,

 

C. Accounts receivable to charge sale ratio

This metric determines how much of the restaurant’s sales happen on credit,

As accounts receivable are also current assets,

We might think that they can be liquidated quite fast,

However as it is basically credit,

The restaurant might not meet its current obligation if it sits on too much receivable, hence too much credit,

Formula:

Account Receivable / Sales

 

Solvency Valuation

 

This valuation strategy is very similar to the liquidy valuation methods,

However in this case,

We will determine if a restaurant can meet its long-term liabilities,

It is crucial for determining a restaurant’s financial health regarding its future operations,

There 2 key metrics that we will go over:

 

Solvency Valuation Metrics

 

A. Debt to asset Ratio

As the name mentions,

This metric refers to the comparison between a restaurant’s debt against its asset,

 

The formula is the following:

 

Total Debts / Total Assets

 

If the ratio is greater than 1,

That means that the business has more liabilities than assets,

Which could mean trouble.

 

B. Debt to Equity Ratio

This metric involves the same process as the debt to assets ratio,

However in this one, we are comparing a restaurant’s liabilities to its owner’s equity,

 

Formula:

 

Total Debts / Total Equity

 

It shows leveraged is a restaurant,

And more leverage means that the risk is higher.

 

Asset Valuation

 

This last Restaurant Valuation Method uses assets-based metrics to determine its worth,

To determine its fair market value,

There are a couple of metrics we could go through with this valuation method:

 

Assets valuation Metrics

 

 

A. Return On Asset

Return on asset involves the restaurant’s earnings against its asset,

It allows us to determine the profitability of a restaurant regarding its assets

 

Formula:

 

Earnings / Total Assets * 100

 

The higher the ROA the more efficient the business is at generating profits using its assets in a productive way.

 

B. Inventory Turnover

Inventory turnover is a way for us to determine how many times the restaurant sold and renewed its inventory in a given period,

It gives us the rate at which the inventory is replaced,

 

Formula:

 

Total Sales / ((Beginning inventory + Ending inventory) / 2)

 

 

C. Asset Turnover

Asset turnover Measures again how efficient is the restaurant at generating sales,

By productively using its assets,

Usually, an asset turnover is referred to the number of sales generated per dollar of assets,

 

Formula:

 

Net sales / Average assets value

 

 

Summary

 

Using those 5 Restaurant valuation methods will give you great insights to make key decisions in your career,

Whether you want to buy, sell, expand, or invest in the restaurant industry,

Those 5 methods will be extremely valuable for you,

I hope you have enjoyed this article,

And if you have any doubts about any of the mentioned methods,

Feel free to drop us a couple of lines,

We would love to get in touch with you,

But what’s next?

After learning how to evaluate the restaurant industry,

You can go deeper into the Restaurant Financing to actually get started,

Or I would recommend you go ahead with this article that covers restaurant’s financial planning,

That being said,

Have a great one!

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