Updated July 5, 2022
As a business broker and appraiser, I’m often asked how to value a restaurant or bar business. The valuation of a restaurant or bar business is not an exact science but there are guidelines and rules-of-thumb that can be used for a close approximation of value.
If you have a restaurant or bar business for sale or maybe you’re considering buying one, these valuation formulas will get you in the ballpark.
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 earnings 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 earnings.
What are discretionary earnings? 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 — a’hem – not absolutely necessary to the operation of the business.
Discretionary earnings are 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 earnings 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 are a Business Owner’s Discretionary Earnings. If you’re not exactly sure of how to calculate, an accountant or professional business broker can compute it for you.
Almost all full-service restaurants will appraise for somewhere between 2 to 3.0 times discretionary earnings. Fast food restaurants will fall somewhere between 1.5 and 2.5 times discretionary earnings. Exactly where in these ranges a specific operation will fall depends on restaurant type, size, location, revenue trends, and other factors.
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 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 will appraise for somewhere between 30 and 40 percent of gross annual revenue. The value of fast-food restaurants will wind up somewhere between 30 and 35 percent of revenue.
Bars will average between 2.0 and 2.5 times discretionary earnings plus inventory at cost, or 35 and 45 percent of annual revenue plus inventory in appraised value.
Many popular bar and restaurant franchises have specific valuation formulas which can be checked for you by a business broker or valuation specialist.
None of these appraisal guidelines include the value of any real estate. If the business owns real estate, the value of the realty should be added to the above guideline result.
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.
Should you need advice on restaurant or bar valuation considerations, please don’t hesitate to call or email. Our firm offers written, fully documented valuations on restaurants and bar businesses.
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For further reading, here are additional related articles:
- How to Use Valuation Guidelines to Estimate the Value of a Business
- What are the “Discretionary Earnings” of a Business?
- How to Analyze a Business You’re Considering Buying
- How to Make a Written CONTINGENT Offer to Buy a Business
- Seven Negotiating Rules When Buying or Selling a Business
- How to Conduct Due Diligence When Buying a Business
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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.
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.
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
Yes, it includes the liquor license.
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.
Hey, thanks for dropping in. Best wishes. ~William
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Susan, thanks for dropping in.
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.
Hi, the biz I’m selling is closed. How does that change the formula?
If the business is closed, there is no goodwill as part of the valuation. It’s worth only the depreciated (deeply discounted) value of the furniture, fixtures and equipment.
William, thanks for this excellent and concise summary. Does a restaurant that has more than one location in a region follow the same rule?
John, I would value each restaurant separately and then add the two together to obtain a total value, as the earnings of the two could be significantly different.
Thanks for providing such valuable information. My question: Can the approximate gross receipts of a bar be calculated based on liquor purchases?
James, if you know the average markup for each category of beverage (liquor, wine, beer) you would be able to calculate. If the P&L breaks down the revenue and cost of goods by category, it would be simple arithmetic.
I have client in Miami who may want to have his restaurant appraised,
Do you do appraisals and if not,
Can you recommend one ?
Raul, we definitely perform restaurant appraisals. If fact, I just finished one this morning of a seafood restaurant in Connecticut. Give me a call at your convenience at (251) 990-5034. ~William
Hi, good afternoon, what would be the best method and valuation range for a Japanese food restaurant with a liquor license? Annual average sales of $ 2,420,500 with two years of operation.
Arturo, Asian restaurants will appraise around 30% of annual revenue if – big “if” – the discretionary earnings will support that valuation.
First of all thank you for your constant efforts and feedback – very interesting stuff indeed.
I am currently exploring buying a sandwich shop(baguette/pies/sausage rolls etc) with around 25 years of successful business and repeat clients, however my current concern is that on paper the business has slightly depreciated 15% for the last several years and the shop itself needs drastic work to bring it up to standard, the main reason for this is because the shareholder is in his late 60’s and basically lost the desire/hunger to expand the business of even address some real concerns, I have extensive information on the sales, the business will include the retail shop and flat (own).
I do have further concerns but would like to explore an official appraisal/valuation of the business, is this something you would entertain as the business is in the U.K and if so can you advise on how I can proceed with you.
Thanking you in advance.
How much should a restaurant increase in value, with 2 patios for dining, and off street parking, and private parking?
Josea, the added value would be appraised by how much the improvements added to discretionary earnings. A year or more operating with the improvements would be needed to make a judgment.
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Sir, the restaurant I am considering buying is marginally profitable, primarily because the owners run it as a hobby, more than a business. The keys to profitability lie in managing food cost and labor, both of which I believe are easily corrected. So, a multiple of earnings does yield much of a Purchase price, how do you feel about applying the gross revenue factor in this situation? Thanks in advance
Good morning and thanks for dropping in. I’m not a fan of appraising a business based solely on revenue. Using earnings is a much more meaningful method of obtaining an accurate valuation. Put another way in this particular situation that you describe, if you used a valuation based solely on revenue, you would be paying the seller in advance for any profitability improvement you think you might be able to make. Simply stated, you as the buyer should profit from the management decisions you make, not the seller.
Hello William, I am looking at buying a small pie place (has 4 tables for dine in, most is take out). They make pies and sandwiches. The seller will be taking the main pastry chef with her, and doesn’t know if the rest of the staff will stay (two cashiers). Premises are leased (month to month). They have a good location, good reviews, and (from the reviews) good pies. She works in the business full time, so I am practically buying a job. How many times SDE would you say this is worth, and should the removable assets (coffee maker, oven, etc) be included in this price? Thank you for taking the time to read my comment.
Hello, and thanks for stopping by. I would say with the facts that you have given me, about 2 times SDE would be max. With the pastry chef leaving, make sure you get all of the recipes in writing. All of the furniture, fixtures, and equipment should stay and would be included in the 2 times SDE valuation. Be careful.
Great article and excellent info in the Q&A!
I’m helping a friend try to sell her business. Less than a year operating and no bookkeeping. I’m urging her to do the bookkeeping so we can get a discretionary earnings figure, but she wants to sell fast. Based on your discussions, it looks like she’ll need to just use depreciated value of all assets. Would you agree?
You are correct. Unfortunately, she’s probably going to lose money on the transaction.
These formula’s do not mention the real estate. Are the valuations based solely on earnings?
Bob, thanks for dropping in. In the article I state, “None of these appraisal guidelines include the value of any real estate. If the business owns real estate, the value of the realty should be added to the above guideline result.” Real estate is not included because the variance in value from location to location would be so great that it would render a business-only average valuation formula useless.
How does the years left on the lease effect the value or formula?
Roland, thanks for visiting. The lease is essential to value. For instance, if the buyer is acquiring the business with an SBA-guaranteed loan, the SBA requires a lease with the same term as the loan, usually 10 years. It’s incumbent upon the buyer to secure an extension of the existing lease or to negotiate a new lease with acceptable terms and conditions. This usually takes place during the due diligence phase of the business buying process.