What is a Restaurant or Bar Worth? How to Estimate Value.

Updated July 1, 2016

By William Bruce

As a business broker and appraiser, I’m often asked what a restaurant or bar is worth.  The appraisal of these businesses is not an exact science but there are guidelines and rules-of-thumb that can be used for a close approximation of value.

Certain situations require a formal business appraisal including the larger merger-acquisition transactions, SBA loan applications, management performance tracking, estate planning, divorce — or the most dreaded of all — IRS issues.  After all, a professional, fully documented appraisal certainly takes the guesswork out of the situation.

However, what we’re talking about here is not a formal appraisal but rather the informal methods of quickly approximating the value of the restaurant or bar.  All of the guidelines we’ll quote are averages derived from hundreds of completed transactions reported to regional and national databases.

There are two methods of quickly approximating the value of a business: (1) applying a multiple to the discretionary cash flow of the business and (2) applying a percentage to the annual gross revenue of the business.

The most accurate of the two methods seeks to approximate the value of a business by applying a multiple to the company’s discretionary cash flow.

What is discretionary cash flow? It is NOT the profit or loss that you show Uncle Sam on your tax return. To put it delicately, almost all business owners run some expenses through the business that are not — a’hem – absolutely necessary to the operation of the business.

Discretionary cash flow is the total cash that the business generates in a year that is available to the owner after deductions for only the necessary operating expenses. Another way to define discretionary cash flow is that it is the “total owner’s benefit” derived from owning the business, regardless of how the owner takes the money out of the business. It is the amount of cash left over after only the necessary expenses that is available for (1) owner’s remuneration, (2) return on investment and (3) debt service, if any.

Here’s an article that explains the term: What is a Business Owner’s Discretionary Cash Flow.   If you’re not sure of how to calculate discretionary cash flow, an accountant or professional business broker can compute it for you.

Almost all restaurants and bars will appraise for somewhere between 1.5 to 2.5 times discretionary cash flow.  Exactly where in this range that a specific operation will fall depends on what type of bar or restaurant and the size of the operation.

The second method of estimating the value of a business is less accurate.  This method applies a percentage to the operation’s annual gross revenue to approximate value.  This method of appraisal assumes the bar or restaurant is earning the average bottom line profit for its peer group.  That’s a big assumption!

But making that assumption, we know that a full service restaurant with liquor license will appraise for somewhere between 30 and 35 percent of gross annual revenue.  Bars will average between 35 and 40 percent of annual revenue in appraised value.  Coffee houses will appraise for about 40 percent of revenue.

A quick check of a few popular food franchises reveals the following average appraisal guidelines expressed as a percentage of gross annual revenue: Beef O’Brady’s 22%, Chick-Fil-A 65%, Dairy Queen 45%, Domino’s Pizza 52%, Kentucky Fried Chicken 33%, Panera Bread 37% and Subway at 65%.  For a more complete list of franchise valuation formulas, including many restaurants, please see our article “What is a Franchise Really Worth.”

None of these appraisal guidelines include the value of any inventory on hand or real estate.  If the business owns real estate, the value of the realty should be added to the guideline result.  And inventory, at cost (food and liquor only), should also be added to obtain the total estimated value of the business.

However, you as the owner, seller or buyer of the business are the final arbiter of what the business is worth to you.  Remember, these guidelines are only averages. And the guidelines certainly don’t take into account any special considerations or any future plans that an owner might have for the business. What a particular business might be worth to you may be more or less than it’s worth to the next person who looks at it.

Here are additional related articles that might be of interest:

What is a Franchise Really Worth (includes valuation of most food service franchises)

How to Analyze a Business You’re Considering Buying

How to Make a Written Offer to Buy a Business

How to Handle the Due Diligence Investigation When Buying a Business

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William Bruce currently serves as president of the American Business Brokers Association.  He is available nationally as a consultant on restaurant and bar valuation and the issues involved in the transfer of ownership.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.

If you found this information useful, share it using the links below.

About William Bruce

President, American Business Brokers Association / Business Broker and Accredited Business Intermediary assisting business buyers and sellers with the transfer of ownership since 1986 / Author: How to Buy a Business.
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20 Responses to What is a Restaurant or Bar Worth? How to Estimate Value.

  1. Pingback: Latest Survey of American Attitudes Toward Restaurants | William Bruce on Business: A Discussion

  2. Jonathan says:

    Hi,

    These appraisal guidelines do not mention fixed assets and leasehold improvements. Should these be added price?

    • Jonathan, thanks for stopping by. For an existing business with a track record, the formulas include all furniture, fixtures, equipment and leasehold improvements. The only items that should be added to the formula results are inventory for resale, at cost, and real estate if any. Start-ups, of course, are a different situation.

      • Jonathan says:

        Very interesting. I’m in the process of appraising my first ever prospective restaurant purchase. I guess a lot depends on whether a business is profitable. If it is, then the 2 system formulas above make a lot of sense. If not, I guess the best approach is an asset based appraisal.

      • Yes, if the business is consistently unprofitable, then it’s worth only the depreciated value of its tangible assets. The is no “goodwill” value.

  3. Chuck Gambone says:

    I assume that the multiple (1.5 to 2.5) does include the liquor license or should that be valued separately like the real estate

  4. patricia says:

    Hi,
    I am a part owner of a very successful restaurant in a privately owned restaurant group and I am looking to retire. Would I use these formula’s to get the value of my place?

    • Hi Patricia, thanks for visiting. Yes, you can rely on these rules-of-thumb guidelines to establish an estimated value of your restaurant, exclusive of any real estate that might be involved. If you need a written, fully documented valuation, we can provide that. WilliamBruceOnline@gmail.com or (251) 990-5934.

  5. Adams says:

    Great guidelines.

  6. Pingback: Second Blog Post | Susan Morgan

    • Susan, thanks for dropping in.

      • Wade says:

        What about all of the cash that went home with the owner in a brown paper bag? My wife and I have been trying to purchase a bar for awhile now and what keeps blowing the deal is the cash that the owner took home in a brown bag that he wants to have recognized as earnings. It’s nuts, but that is what’s happening out there…

      • Wade, this is a real problem. Valuations can be based on ONLY documented revenue. The seller has already benefitted from unreported cash by not paying income tax on it. He can’t get paid for it twice by including it in a valuation. Perhaps most important is the fact that business acquisition lenders will not ever include undocumented cash in their calculations.

  7. Rita says:

    Hi, the biz I’m selling is closed. How does that change the formula?

  8. John McCormick says:

    William, thanks for this excellent and concise summary. Does a restaurant that has more than one location in a region follow the same rule?

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