Restaurant Prices on the Open Market: Why Are They All Over the Place?
Generally, you’ll find restaurants listed for sale on a handful of business websites like BizBuySell or BizBen, and the range of these listings can be surprisingly broad. They can be anywhere from $45K to up in the millions. For the most part, these prices do not include the real property. I’m often asked the question, why are these prices so all over the place?
Currently on my website, the listing prices range from $55K to $1.25M. There are several reasons for this wide range in pricing. It has to do with how the list prices were determined, and it’s usually one of these three things.
- The restaurant is profitable, and the listing price is based off of a multiple of adjusted net earnings. (I’ll explain more about this concept later)
- The restaurant isn’t profitable, and the restaurant is listed as an asset sale.
- The seller has determined the list price to be based on debt that needs to be paid off by proceeds from the sale, or the seller has an amount of money he or she would like to earn from the sale. (I’m not going to discuss this situation much today except to say these types of listings are difficult to sell because they don’t have the financial history to defend the list price. However, there are exceptions. For instance, a restaurant may operate in a highly sought-after location, or it may have incredible lease terms.)
In general, for anything listed for sale around or under $100K is an asset sale. Anything above this amount is the sale of a restaurant with a stronger cash flow. The price for a profitable restaurant is determined by a multiple of the cash flow, and it is generally two times a three-year weighted average of cashflow. Again, I’ll explain this in more detail, but a quick rule of thumb looks at it in the reverse:
If I see a restaurant listed online for $500K, I’m going to assume the cash flow, adjusted net adjusted earnings, or Seller’s Discretionary Earnings, to be half the price or $250K.
**One quick thing about list prices online. They usually include the commission to the brokers, and they usually do not include inventory, meaning food and beverage inventory and items like to-go containers.**
You’ll often hear terms referenced including cash flow, or adjusted net, adjusted earnings or Seller’s Discretionary Earnings (also referred to as SDE).
But what do these interchangeable terms really mean?
The way to think about this is adjusting the net income shown on the tax return to reflect the amount of money the next operator should reasonably anticipate making. This recast is similar to EBITDA, but it includes a bit more.
***The recast includes other add backs, which can vary depending on the entity (sole prop, S-Corporation or LLC) ***
-Compensation for one operator
-Depreciation and amortization
-Buyers will not take on seller’s liabilities (all of seller’s debt is paid off in escrow) interest is always added back as the buyer won’t be paying interest
-Non-essential business expenses including owner’s health insurance, car/auto expense, meals, and/or travel
When a client comes to a broker to sell their business, the first thing we do is determine the list price. We can’t put a listing agreement together without it.
We collect 3 years of tax returns and P&Ls, and a copy of the lease. Surprisingly, a tour of the premises is less important than a thorough review of the financials and lease.
I will always do a comparison of the last three years of operations for the business. Then I determine the list price based on a weighted average of the seller’s discretionary earnings.
The weighted average will adjust the average cash flow to account for the profitability trend. Has the business been trending up or trending down? The weighted average will adjust for that information.
And then this number is what is multiplied by two (the multiple can be higher or lower) to get the list price.
If the weighted average of seller’s discretionary earnings is low, the listing is more than likely an asset sale. If the SDE is $50k or above, it’s a going concern. For the most part, a multiple of two will determine the most probable selling price. So, if the SDE is $85K, the recommended list price would be $170K + inventory.
What are going concerns? These are the successful businesses that have a strong cash flow. These restaurants generally sell between $150K and $350K, but can go up into the millions. These restaurants have a good brand, operating procedures in place, and a menu and recipes that are in demand. They are priced based on cash flow, and the analysis is derived almost strictly from the business’ Profit and Loss statement. For the most part, the buyer will operate these restaurants with the current concept.
What are assets-in-place? Assets-in-place refers to the items that a company already owns, such as real estate and securities. These sites usually have fixed assets like hoods, a grease trap, and a walk-in, as well as trade fixtures, such as stoves and prep tables, dining room tables, espresso machines, etc. As I mentioned, prices for an asset sale are below or around $100K. These restaurants have not been cash flow positive or may have hit on hard times, for example, extended closures. Or perhaps the seller is very ready to walk away.
In the case of assets in place, the buyer is purchasing a facility that has been permitted by the health department and licensed to serve alcohol by the ABC. There is a lease in place, and the general public knows that the location hosts a restaurant (goodwill).
Pricing these restaurants is subjective and is based on the broker’s knowledge of the market in general, the market in which the restaurant operates, and buyer demand.
I hope this blog gives you a better idea of why there are such discrepancies in restaurant prices. Feel free to contact me with any specific questions!
Ryn Longmaid is a restaurant broker and consultant at Santa Rosa Business & Commercial in the San Francisco NorthBay and the host and founder of the Facebook Live Series, Deep Dish: discussions on the business of restaurants for restaurateurs, restaurant buyers and sellers and the restaurant curious.
As well as being a licensed real estate broker, Ryn is a CBB with the California Association of Business Brokers (CABB), a CBI with the IBBA and she holds an MBA in Sustainable Business Management. In addition to being a proficient business broker, Ryn has over 20 years’ experience in the restaurant, hospitality, and food industries. She has served as the executive chef for Amy’s Kitchen, personal chef to actor Don Johnson, she founded and operated a successful and longstanding restaurant. She has also held teaching posts in restaurant management at the Art Institute-San Francisco and The Culinary Institute of America-Greystone.