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Permalink Reply by John Owens on July 6, 2008 at 3:59am

Ray:

There are various ways to value a restaurant. If you go to an investment professional (investment banker, accountant, valuation company), they will use some valuation model to determine the value of your business. Investment bankers will have no interest in helping you because your company is too small. Valuation companies will likely charge $15K+ to perform the valuation. Your best option would be to get the advice of a CPA and/or calculate it yourself. For larger companies, valuation analysis is easier because experts look at things like comparable companies and what they sold for (often times these are public companies that must disclose financial information to the public). For example, if Starbucks buys Caribou then the financial details will be public information and investment bankers will analyze the financial transaction and use it as a "comparable" when they are doing a valuation model on another potential merger say between two other coffeehouses. Yours is tricky in that your revenues and profitability are on the low side, your payroll expenses are high, you've expensed some personal items, and you would like to think that a team running the place could generate $60K (hypothetical). Two very common ways to value a restaurant are to look at a multiple of cash flow or a multiple of gross sales. There are other ways so I'm not endorsing these two as being the end-all. They are both very simple calculations. For the Cash Flow Multiple, you simply take your yearly cash flow and multiple it by a multiple of (1.5 to 3.5 is fairly typical). The other is to use a Gross Sales Multiple where you take gross sales and multiply it by some multiple (.5 to .6 is fairly typical - probably trending on .5 or lower). This is a tricky process because whoever is buying the business has to appreciate how you value the business. Perhaps the business is next door to a new condo building that will be opening in 6 months, giving you instant exposure to 250 potential customers; all of these are factors that are difficult to put a value on. Also, does your name (the "brand") have a value? This isn't an easy calculation. I would go to a CPA and have him/her look at the details and come up with a price. Have the CPA agree to a flat fee for the valuation service.

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Permalink Reply by Andi C. Trindle on July 7, 2008 at 8:30am

Thanks for the detailed reply to the question, John. I'm contemplating a bit on the other side of the picture and it's very helpful information. Sorry I don't have anything to contribute to your question, Ray.

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