Valuing a restaurant properly is the most important step in selling a restaurant. A poor valuation will most certainly lead to either a restaurant that doesn't sell or one where the seller doesn't realize the full value of the restaurant.
Case in point - SellingRestaurants was approached by a Seller whose restaurant was just appraised by another restaurant brokers at $250,000. In fact the same broker brought a full price offer to the Seller. The Seller thought the restaurant was worth more and called SellingRestaurants to perform a valuation analysis.
One of our agents spent the time to listen to the Seller and perform a detailed and through analysis of the tax returns and income statements. The other restaurant broker had found about $90,000 of owner discretionary cash flow while our analysis revealed closer to $120,000 of owner discretionary cash flow. SellingRestaurants valued the restaurant at $330,000, or $80,000 higher than the other restaurant broker. The store sold in a matter of weeks at $330,000.
In another similar case, a restaurant owner's business was valued at $625,000 by a local business broker. The owner called SellingRestaurants to have a valuation completed. Our analysis revealed a value of $795,000. We listed the restaurant and had it sold in a matter of weeks at near full price. Again, the Seller netted far more than the cost of our services.
These are typical examples of how our expertise can make the difference.
There is several value techniques used to determine the price of a restaurant. First, there is the income valuation technique. This is the most favorable and trusted method used to value a restaurant by nearly all buyers. If the restaurant has solid profits, it is likely a buyer can purchase the restaurant with 20% down and obtain an SBA loan. This significantly increases the number of potential buyers for a restaurant and; hence commands the highest possible price. A SellingRestaurants agent will take the time to dig into the tax returns and fined the entire hidden owner's discretionary cash flow that most brokers will over look. Restaurants with good tax returns will command a multiple of 2.5 to 3.0 times owner's discretionary cash flow depending on the condition of the restaurant, location, lease, revenue growth and earning growth.
Second, the annual gross sales valuation technique, although not relied upon by most buyers, uses a percentage of annual gross sales to determine the value. The percentage used depends on the lease, location, condition of restaurant, and validity of the annual revenue number. The better these traits, the higher the percentage commanded. Restaurants with poor records and in poor shape will only command perhaps 15-20% of the gross sales. One with a good lease, location and verifiable numbers could command up to 40% of gross sales.
Finally, the replacement value technique assumes a buyer pays the seller a large premium over the income value and annual gross revenue techniques in order to benefit from the existing investment in the restaurant facility, the lease and the location of the restaurant. In other words, a buyer will pay for the right to avoid spending hundreds of thousands and even possibly a million+ dollars and to avoid all the city regulations and delays in building a new restaurant. These are rare cases and don't happen very often. Perhaps 5% of our sales account for these type of sales.
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