Valuation of Restaurants

1
Valuation of Restaurants

• Mgt 357 Summer, 07
• Galbraith

2
Valuing Restaurants

• Adjust sellers financial statement to account
  for a) personal expenses, b) managers salary, c)
  other extraordinary items
• Assess against industry standards
• Compute cashflow
• Select cashflow capitalization rate
• Determine value
• Check against rule of thumbs and comparables

3
Adjusting Financial Statements

• Fair market salary for owner/operator
• paid for work performed, usually not deducted
• Fair market salaries for family members
• paid for work performed, usually overpaid
• Fair market expenses
• non-arms length transaction (lease from father,
  loan from mother, etc.)
• Eliminate personal expenses written off as
  business expenses

• Adjust to GAAP
• Non-accelerated/expensed depr. accrual
  accounting
• Eliminate extraordinary revenues/expenses
• lawsuits, sales of assets, one-off contracts,
  etc.
• Adjust for non-declared cash revenues
• particularly cash businesses
• Check assumptions for any forecast
• Dramatic Revenue increase

4
Valuing RestaurantsKey Issues

• 10 year lease, or 5 year with option
• Rent between 6 to 10 of sales
• Determine causes of large variances with industry
  standards
• Can cashflow cover debt and taxes and still make
  profit?
• Are sales increasing
• Are assets in good shape

5
Valuing RestaurantsRules of Thumb

• New Restaurant should make 2 1/2 times investment
  first year.
• Value equals one times revenue (with real estate)
• Value equals 1 to 11/2 times adjusted earnings
  plus inventory and equipment
• Value equals 30 to 40 revenues (without real
  estate)

6
Valuing Restaurants Restaurant Comparables

• PrattStat and BizComp