How is a Restaurant/Bar Business Valued During this Post Covid Period

How is a Restaurant, Bar, Club or Other Food Service Business Valued During this Post Covid Period and How Have Business Values Been Impacted by Covid? 

Businesses have been impacted to varying degrees based on how well they pivoted during this challenging period.  Those businesses that shifted to take out and delivery and outdoor seating performed better than those that did not adjust accordingly.

Overall, most food service businesses that were not modeled so that the majority of their sales were takeout and delivery with large outdoor seating areas pre-Covid suffered dramatically.

How do we adjust for the negative impact Covid has had on a business’s financial performance between March 2020 and today?  Each business is handled independently subject to the impact Covid had on its individual performance.

There are two basic methods for valuing a restaurant, bar, club or other food service-related business which are discussed below – the Assets in Place Method and the Going Concern Method. These two methods don’t include saleable inventory which include food, non-alcoholic and alcoholic beverages, paper supplies and cleaning supplies which the buyer pays for in addition to the purchase price should the buyer desire to purchase these items.

Assets in Place Method of Valuation – If the business is not making money or is marginally profitable this is called the Assets in Place sale.

With these types of sales, the buyer is usually interested in the fixtures and equipment, lease, leasehold improvements and any licenses that go with the business and they are not usually interested in the name and menu of the business. The buyers for this type of business have their own menu and concept in mind. The criteria for pricing the Assets in Place business is the ratio between the sales price and sales and have come from the over 1,000 sales comps that we have completed in the past twenty six years.  Businesses generating $300,000 or less in yearly sales are selling on an average of twenty-six-point four percent (26.4%) of yearly sales. For example, if a business is doing $300,000 in yearly sales the average sales price is approximately $79,200 ($300,000 yearly sales x 26.4% = $79,200 sales price). Businesses generating between $300,000 to $1 million in yearly sales are selling on an average of twenty-three-point three percent (23.3%) of yearly sales. For example, if a business is generating $500,000 in yearly sales and the sales price is $116,500 – the sales price is approximately twenty-three-point three percent (23.3%) of the yearly sales ($500,000 yearly sales x 23.3% = $116,500 sales price). Businesses generating over $1 million of yearly sales are selling on an average of fifteen-point eight percent (15.8%) of yearly sales. For example, if a business is doing $1.5 Million in yearly sales it will sell for approximately $237,000 ($1.5 Million yearly sales x 15.8% = $237,000 sales price).  Remember the above metrics are averages and there are usually extenuating circumstances in each deal which result in the above metrics being either higher or lower than the averages indicated above.  We have found over the years that the metrics for the assets in place sales have declined.  We believe this is the result of the accelerated number of independent non franchised non chain restaurants that have opened in recent years ending up failing quicker than in previous years due to the increased costs (primarily food, labor and occupancy costs) of doing business in California.

Going Concern Method of Valuation

The Going Concern Method normally means that the business is profitable and when the buyer purchases a going concern business, they usually want to operate the business the same way the seller did and maintain the name, menu, operating systems and personnel in place. With this method the lease, leasehold improvements, fixtures and equipment, name, menu, concept, goodwill and cash flow are all included as part of the sale. The primary valuation method used for a Going Concern Valuation is the Seller’s Discretionary Earnings (SDE).  This means that the net profit on the tax return or on the year-to-date income and expense statement is adjusted by adding back the following items to the net income: one working owners salary and payroll taxes, any personal expenses the owner is charging the business (food for consumption at home, life, health and disability insurance premiums, auto expense, entertainment and vacation expense, etc.), depreciation, interest and amortization expense on any loans the buyer will not be assuming and net operating loss carry forward charges if any. Additionally, any extraordinary expense and or non-reoccurring expenses such as extra-legal or accounting bills related to a particular lawsuit or unusual situation would be added back to the net income too.

Once the SDE is determined a sales price multiplier will be used to determine the value of the business. The sales price multiplier for independently owned, non-chain, non-franchised food service operations will vary from one to three times yearly SDE depending on the risk factors and other factors listed below. From Covid to current multipliers have dropped from an average of 2.2 pre Covid to 2.03 post covid.

Multipliers have been reduced even prior to Covid and Covid accelerated multipliers to drop further. I think this is a result of generally most operators’ profit margins dropping over the years as costs have risen far greater than the operator’s ability to offset them by increased menu prices.

The risk factor is determined by the following criteria: 1) the degree of difficulty in operating the business, i.e. an espresso operation has a low degree of difficulty as it is an easy operation to run but an upscale dinner house operation has a high degree of difficulty because it requires a high degree of expertise and sophistication to run this type of business successfully and 2) how long the business has been in operation and the past history of the business in terms of profitability and sales growth. A business with an easy to operate format coupled with a well-seasoned profitable earnings history will utilize a higher sales price multiplier versus a business with a high degree of difficulty without a track record.