What is Your Restaurant Worth?
An instantly appealing, smoky aroma announces the arrival of a roasted chicken breast set atop a medley of artichokes, fennel, and asparagus. Waiters charismatically engage customers while attentively replenishing wine and bread, always making way for the next course. Moments after sated customers leave, crumbs are wiped, linens swapped, and the next party is led from the bar. These are the sights, sounds, and smells that drive a restaurant’s value.
While restaurant owners are intimately familiar with their restaurant’s ambience, they seldom ask, “What is my business worth?” Many seek an answer only when required by their attorney or accountant in connection with a divorce, business sale, or an estate plan. Yet by asking this question on an annual or semi-annual basis, restaurateurs can take concrete steps to increase the value of their business.
Measuring Value and Setting Goals
A restaurant’s business is many things-a culmination of hard work, a home away from home, and a source of income, to name a few. But most important, the restaurant in often an owner’s largest asset. It logically follows that restaurant owners should know how to maximize the value of their enterprise.
Periodic valuations tell you where you are and help chart the road to where you want to be. The valuation process can be divided into two steps; one, determining your restaurant’s profits; and two, determining how much a buyer will pay for your restaurant. The process of answering both questions can help enhance profitability and value.
To analyze a business’s profitability, appraisers ask, “How efficiently does this restaurant generate profits from its people and equipment?” They will then determine the level of profits a buyer can expect from your restaurant, compare it to industry norms, and determine the most profitable activities. In this process, the appraiser can help improve profits by identifying:
-Expenses that are high relative to industry norms
-Assets (equipment, cash, etc.) that are not utilized efficiently
-Activities (catering, promotional specials) that may not maximize profits
-Additional revenue sources
For example, appraisers can identify the most efficient mix of bar and dining space based on profitability of each activity or the optimal level of advertising necessary for growth.
What Will Buyers Pay?
While the first step reveals the profits a buyer will see in your business, the second step determines the amount a buyer will pay. Just as a customer will pay more for the same sandwich at one restaurant than another, buyers will pay more for one business than another, even if both businesses have the same profits. For example, how well your restaurant’s style, menu, and services reflect current consumer tastes can have a significant impact on the price a buyer will pay for your business.
Today’s “hot” restaurant, whose success comes from both a menu that resonates with current tastes and a lack of local competition, can quickly become tomorrow’s “space for lease”. Likewise, restaurant buyers’ appetites (i.e., the price they will pay) for certain restaurant concepts can change dramatically from year to year. In one year, casual tapas restaurants may command higher sale prices than molecular cuisine restaurants, while a few years later the converse may be true. A restaurateur who stays abreast of the shifting business climate can spot new trends early and ensure that efforts are not wasted.
Another factor influencing value is perceived investment risk. Risk can be reduced by the existence of a trained workforce, standard operating procedures, established supplier relationships, and a diversified customer base. An appraiser can identify and suggest changes that minimize risk.
A periodic valuation is a powerful management tool. By identifying factors that increase revenues and profits and by determining industry trends, a periodic appraisal can provide you with the information necessary to effectively grow your restaurant’s value.