I think Eric has made some very good comments here, and I'd like to add just a bit more advice, which could apply to a restaurant or almost any other business.
When valuing any "main street" business (less than $10M in revenue), the most accepted and useful method is based upon available profit. This "adjusted profit" is known by many names, including Seller's Discretionary Earnings (SDE), Adjusted Net, Adjusted Cash Flow, Discretionary Cash Flow. Like EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization), SDE includes adjustments to the net profit of a company for non-cash expenses such as taxes and depreciation, but unlike traditional EBITDA, it also includes adjustments for other expenses such as interest and owner's compensation - in various forms. Such personal, non-essential expenses might be seen as salary, insurance, and personal vehicle use. Upon calculating SDE, a industry multiplier is applied to approximate the company's value. Multiples are designed to incorporate the "typical" assets of a company within the industry of interest. Most commonly, those multiples are in the 1.5 to 3.5 range.
However, those multiples are only rules of thumb, and because no company is "typical," these methods are only so helpful. Unfortunately, many business buyers are led to believe a price for a company is fair because it is based upon standard multiples. This is dangerous. First, SDE itself is subject to misstatement and manipulation, and the consequences can be severe. As an example, if a single adjustment for $5000 is erroneously made (and it happens all the time in the small business world of unaudited financials) and the valuation multiple being used is 3, that business is now over priced by $15,000. Alternately, if the subject company has outdated equipment, declining revenues, figures below benchmarks, or any variety of intangibles, the selected multiple of 3 could be twice what it should be - and so follows the value.
Sadly, the practice of caveat emptor or "buyer beware" is alive and thriving in the business buying/business brokering world. So it's not surprising when some estimate as much as two-thirds of all small business buyers regret their purchase. Get the facts before you buy - before it's too late. Buying a business can be very exciting and rewarding, but it must be done right.
For additional business buying advice, I encourage you to download our free list of Top 10 Business Buying Mistakes, found at:
Good luck in your search!
P. Cory Hogan
p.c. hogan & associates
Helping the Business Buyer