Why Your Restaurant Might Be Worth More (…Or Less) Than You Think

Why Your Restaurant Might Be Worth More (…Or Less) Than You Think

When a large, public companies or middle market business is considering an exit, they often use a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to determine a sale price for their business. But what about smaller, independent or multi-unit restaurants?

This brings us to SDE (Seller’s Discretionary Earnings), which can be defined as: (EBITDA + “Owner’s Compensation”). The chart below illustrates how “Owner’s Compensation” is further broken down:

Selling Restaurant


To arrive at SDE, the seller’s financial statements are adjusted to reflect overblown owner salaries, owners perks to include automobile leases, travel and entertainment, life insurance plans and housing allowances, to name a few. If properly documented, these personal and/or discretionary expenditures may be added back to SDE. The SDE adjustments should present the seller’s regular income statement and then shows each adjustment (with an explanation) to arrive at the adjusted SDE.

Other types of SDA adjustments include:

-Above/Below-market rent. If the business is overpaying or underpaying facility rent, the amount needs to be adjusted up or down to reflect the rent a prospective buyer of the business would expect to pay.

-Above/Below-market salaries. Some businesses employ multiple family members who may receive above-market compensation.

-Non-recurring expenses (i.e. litigation expenses due to a lawsuit).

-Non-recurring income (i.e. sale of a fixed asset at a large gain).

Independent Restaurant Valuations are based on multiples of SDA

When it comes to valuing a small business (under $5,000,000 in value), SDE is the most commonly applied metric. The multiples are driven by a range of factors including, financing formulas, the buyer’s target return on investment and the buyer’s need to receive reasonable compensation for the time and effort required to run the newly acquired business. Other factors may include the type of restaurant, i.e., independent, multi-unit, franchise, length of lease remaining, real estate included, opportunity for growth and brand identity that affect the selection of an appropriate multiple.

But one of the primary factors is the level of SDE itself. For financial reasons, buyers are willing to pay a higher multiple for higher SDE. But how does one value a restaurant if there is little or no SDE?

Valuing the Fee/Leasehold Interest

Oftentimes, the restaurant being sold generates little or no SDE. In some cases, the SDE can even become negative. In this instance, an analysis of the business assets together with the underlying fee or leasehold interest in the real estate is required in valuing the restaurant.
If a business leases a building, the rental rate and amount of time remaining on the lease is an important factor. For example, if the annual lease payments are $50,000 below market, a present value analysis using an appropriate range of discount rates should be used to determine the value of the leasehold interest.

In addition, assuming the furniture, fixtures and equipment (FF&E) and certain leasehold improvements are in good-to-excellent condition, the depreciated value of these components should be added to the present value of the leasehold interest.
Determining a market value becomes much more difficult if there is no real estate being conveyed and the leasehold value is minimal. Unfortunately, in this case, unless the landlord is willing to renegotiate and extend the lease, there is probably no value beyond the salvage value of the FF&E.

Reconciling the value conclusions and determining an appropriate multiple to apply to the SDE is generally more of an art than a science. However, an experienced advisor with a deep understanding of local market dynamics, is invaluable when establishing a realistic value for the independent single or multi-unit restaurant.

About SVN Restaurant Resource Group

The SVN Restaurant Resource Group provides first-in-class services to clients in the food service and hospitality industry. Landlords, restaurants, nightclubs, bakeries, caterers, hotels, food processors and manufacturers rely on the experience, local market knowledge, industry relationships and technology advantages possessed by this highly-specialized team of commercial real estate professionals. SVN has over 200 offices throughout the US, Mexico and Canada.

3 Steps You NEED To Read Before Selling A Restaurant

3 Steps You NEED To Read Before Selling A Restaurant

Every restaurant owner decides to sell the business at some point. These three strategies will help ensure top dollar.

Decided it’s time to sell your restaurant and move on? Just like selling a home, it’s important literally to get your house in order. Here are three ways to get started.


1. Keep accurate books and records, and prepare an accurate valuation analysis.

With today’s bookkeeping technologies such as Quickbooks, keeping good books and records has never been easier for restaurant owners. Spend the money for a good bookkeeper to help keep the financials in order.

Having good books and records spells the difference between selling your restaurant fast and for top dollar and having it sit on the market for months and never selling at all.

But having accurate books and records is only part of the process. A skilled restaurant broker with a deep understanding of financial statement analysis is just as important as the books and records. A broker will dig into the financials and recast them to determine the owner’s discretionary income and then apply the appropriate multiple to the owner’s discretionary income.

Buy Chicago Restaurants

2. Get your restaurant organized and staged.

In the real estate business, it is commonplace to stage a home to obtain top dollar as well as sell the home fast. These same principle applies to a business.

Start by having your property professionally cleaned—then maintain it. Be sure to turn the kitchen into a clean, organized, well-oiled facility. Finally, spiff up the dining and bar area by adding flair and class to it. Property stagers can help you do a makeover at a reasonable price. Find one in your area.

By the way, often making over the dining area will not only boost food sales by 10 percent or more, but spending just a few thousand dollars in the dining room can justify as much as a 10 percent jump in prices.

Sell Restaurants In Chicago

3. Work with a knowledgeable real estate professional.

Don’t underestimate the value a good restaurant broker brings to the table by packaging your restaurant for the market. This means:

• Preparing a thorough valuation analysis

• Reviewing the lease to understand the potential pitfalls in transferring it

• Researching the restaurant’s history to understand its strengths and weaknesses

• Viewing the operation subjectively and looking for ways to improve it

• Comparing your restaurant to other operations in the market

These three simple steps are the difference between having the restaurant quickly sell for top dollar or sitting on the market and never selling at all.

(H/T restaurant-hospitality.com)