If you are wondering how the current economic downturn is affecting the restaurant values, there is no better way to find out than by studying the recent business sales. The food and drink industry, classified under the SIC code 5812, is huge and restaurants sell quite often.

Typical valuation multiples for restaurants

Restaurants for sale are most often priced using these valuation multiples:

• Business sale price to gross annual revenues.
• Business sale price to seller’s discretionary cash flow.

Asset based valuation multiples are rarely used in valuing a restaurant. The seller’s discretionary cash flow is the most common measure of owners’ benefit when valuing private restaurant businesses.

Restaurant values and recent valuation trends

We study restaurant selling prices very closely. Here are some interesting trends that have emerged recently:

• In 2008 the restaurant sales have generally been priced based on the seller’s discretionary cash flow.
• The business price to discretionary cash flow valuation multiples are down about 20% in 2008 compared to a year ago.

What are the business buyers doing? They value a restaurant based on its ability to generate cash flow rather than revenues. And they price in the additional risk right into their valuation multiples. The implications?

• Profitable restaurants still sell.
• Those that do sell tend to command lower prices as buyers factor in the earnings risk into their business valuations.

Example – effect of the valuation multiples decline on restaurant business values

To put things in perspective, let’s say that a restaurant generates $1,000,000 in annual gross sales and throws off $250,000 in discretionary cash flow.

A likely selling price for this business in 2007 would have been around $500,000. By the end of 2008, the same restaurant would be worth $400,000 – a $100,000 drop in business value in just 12 months!

Valuing a Restaurant based on Market Comps

This entry was posted on Wednesday, January 14th, 2009 at 11:09 am and is filed under Business Valuation Tips, Valuation in Your Industry. You can skip to the end and leave a comment.