Selling a restaurant is unlike most other property transactions as the value to the buyer is invariably in the profit potential rather than in the bricks and mortar. This is because it is a sector dominated by leasehold properties, where demand comes from operators keen to service the strong eating-out market.
Buyers may look to operate the restaurant as it is, however, in most transactions the purchaser seeks to completely change the restaurant's name, menu, look and feel. Their appetite is generated by a type of cuisine, a passion for developing their own concept and ego to create something of their own. In such cases the sale price will represent little more than "opportunity value" to trade from the premises and in doing so the buyer naturally assumes that changing the restaurant will yield improved profits.
However according to the Restaurant Association, more than 1 in 2 new restaurants fail resulting in sale or closure, which whilst good for restaurant property agents selling in a strong market, this is less good for new comers to the restaurant sector and of course their financial investors. It will also be bad news for operators of profitable businesses who are looking to sell up as purchasers are reluctant to pay premiums for other peoples goodwill.
A restaurant's value will be derived from a multiple of potential yearly profits, and the purchaser will generally make a judgement as to price and pay back period. The multiple of profits will depend on many factors, but in essence will be influenced by; lease terms / rent, location, the attractiveness and configuration of the property, and will also reflect the risk to the buyer. All of these factors impact on potential profits and in our experience, leasehold restaurants can sell for anything from 1 - 4 times yearly profit, before depreciation costs, interest on borrowings and lease amortisation.
The restaurant's actual trading accounts will naturally assist the purchaser in assessing trading potential, and will provide a guide as to trading patterns and fixed costs, however at the "lower end" of the private restaurant market, accounts are often unreliable and provide little assistance; accordingly buyers will have to form their own opinion of profit potential.
A common mistake by restaurateurs is to associate value with the amount of money they have spent on the premises, and whilst a well fitted out restaurant will no doubt add value, if the purchaser is going to strip-out the restaurant, the cost will have little or no bearing on price. Only if the purchaser wishes to continue trading the restaurant unchanged, will the buyer consider the quality of fit out.
Owning a restaurant is a little like owning a second hand car; just as the car provides the owner with mobility, the restaurant enables the operator to generate income, but at the point of sale, the restaurateur, like the car owner, should not expect to recoup their capital investment.
Understanding trading potential is key to valuing restaurants and, as with many of Fleurets' Valuers, having worked for a licensed operator is a great help.
For more information please do not get