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Is there a quick way to estimate a reasonable purchase price for a restaurant?

Is there like a multiplier for sales volume or guest volume, etc? I'm considering buying an ethnic restaurant situated in an area with a good size ethnic population; said restaurant has been opened at least 4 years and seems to be doing well. Thanks for your help!

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Answers (5)
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A restaurant is worth twice what its yearly varified net is and for a abscentee owner one and a half times its yearly net rember it must cover the rent in three days of sales

Jul 15, 2009
Steven St
World Business Partners, Inc
Los Angeles County, CA

The only time you want to consider a multiple is when you're glancing at different restaurants and its a quick check to make sure the Seller isn't completely out to lunch.

Once you actually focus on a business all the multiples should go out the window and focus on what the business is truly worth. If you are seriously considering buying a restaurant you don't even want to think about multiples. Because using multiples or any other quick valuation method is just a lazy way to value a business.

The best money you will spend is by hiring a competent valuation firm, small business accountant and experienced contract attorney.

May 14, 2009
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Cunningham & Company, Ltd.
CPA's - (Chicago Area)
Kane County, IL

Generally speaking a business is valued at some multiple of (net) cash flow (before any debt service). Typically, if you are a buyer, you desire to pay 3x cash flow....if you are a seller you desire 5x cash flow....those are the typical ranges - 3x to 5x cash flow....this applies to restaurants and any other business. Be careful how others calculate "cash flow". Do they deduct some fair value of owners compensation or ignore owners compensation? Multiples are good to know but you should also know how the cash flow is calculated - in order to apply the correct multiple and be able to compare business opportunities on an "apples to apples" basis.

Valuing a restaurant or any business on some multiple of gross SALES can be very dangerous. The cost structure of different businesses can vary significantly and therefore result in the same (incorrect) valuation (based on the same gross sales) when in fact one business may be much more profitable than another and therefore should be valued at a much higher amount.

Use "rules of thumb" cautiously and only when trying to determine a rough guesstimate of value.

May 13, 2009
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The BAF Group LLC
MD

I agree with Mr. Russel, but I would suggest that that are two (2) issues that might complicate the rules of thumb. The first is whether there is a franchise invovled. If so, franchises will yield a 10% to 20% added price, assuming it is a good and well regarded franchise. They have lower failure rates and larger support systems that suggest better profits on a more regular basis. The second issue is whether the Seller has historically, accurately reported all of this income - which is not normally the case with Restaurants. If he has however, (and this is more frequently the case with franchises as an example, where the Revenue is heavily overseen by the parent company,) then the deal is easier to gauge with Net Profits and Cash Flow, rather than Gross Revenue.

May 13, 2009
Gary Steven Russell
G. S. Russell Business Brokers and Advis
Prince William County, VA

There are 2 simple rules of thumb to follow with pricing or buying a Restaurant. One is a multiple of the owner's net, fair price range is between 2 to 3 times the net. The other is a percentage of the Gross Revenues, fair price range is between 30 to 40 percent of Gross Revenues.

May 13, 2009

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