Whether you are an operator of a small family restaurant or looking to buy a multi-unit restaurant business, it is important to understand how to value your restaurant or group of restaurants. The rule of thumb is that a small independent restaurant may be worth 3x – 4x EBITDA while a multi-unit restaurant chain may be worth 6x EBITDA or more. In example, for an average restaurant that does $1M in sales and has a 10% EBITDA margin ($100,000 of EBITDA), the value would range from $300k – $600k+ per location.
Like any other asset that is being sold, the value will be determined by supply and demand. The number of willing buyers will ultimately determine the size of the buyer pool.
For a small 1-2 unit independent operator, the EBITDA will be fairly low. With a few hundred thousand of EBITDA, this will not be enough to attract financial buyers that live outside the area. Therefore, the logical buying pool would be other local restaurant owners or business owners. The limited buying pool allows buyers to demand larger returns.
For a large restaurant chain (think 10+ units of a large National Brand like Taco Bell or KFC), multiples will usually be in the range of 6x EBITDA +. Once again, the multiple will be determined somewhat by the buying pool. Factors that could influence this include number of nearby franchisees looking to grow, strength of the brand and size of the overall package. Packages with $2-5M of EBITDA will attract many financial buyers such as family offices or small private equity firms. $10M+ in EBITDA will attract even more Private Equity companies and could drive multiples higher during a competitive bidding process.
Restaurant Valuation Multiplier
So what is the right restaurant valuation multiplier? For most restaurant transactions, this is a multiple of post-G&A EBITDA. That is Earnings before interest, taxes, depreciation and amortization. Post-G&A means the profits after paying both employees that work inside the store as well as administrative staff and expenses outside of the four walls.
Restaurant Value Allocation
During a sales or acquisition process, there are four major areas where value can be allocated. Even if the value of these assets have been depreciated over the life of the business, the IRS looks for an allocation of purchase price.
- Leasehold improvements: This includes value of the improvements to the store.
- Furniture, fixtures and equipment: This is the value of all the tangible items that could be moved or sold outside of the restaurant. Items may include things like tables, chairs, mixers and ovens.
- Building / Land: Value of the real estate if you own and are selling it
- Goodwill: Any value in a purchase price that is not allocated to 1-3 above
Fast Food Restaurant Multiples
Fast food (or QSR, Quick Service Restaurants as the industry likes to call it) boast some of the strongest multiples in the multi-unit restaurant space. Many times values are 6x+ EBITDA multiples. The reason is multi-fold:
- Strong national brands: The larger the system, the more franchisees and logical buyers
- Easy lending: Both national and regional banks are comfortable with lending for both ongoing business, new store development and acquisitions. Ease of lending and availability of debt makes buyers put up less equity and offer higher prices.
- Recession Proof: Many fast casual and casual dining brands have come and gone. That said, fast food has been around for a long time and is successful in both good and bad markets.
Restaurant Equity vs. Debt in Valuation
Not unlike real estate, restaurant acquisitions can use a large percentage of debt to finance growth and acquisitions. Banks typically look for 3-4x leverage at restaurants. If your business does $1M in EBITDA, that means you typically could get $3-4M of debt against the business.
If you are buying that same company for 6x EBITDA, or $6,000,000, you would only need to come up with $2-3M of equity capital to secure the deal.