How to calculate the Price of restaurant

Junior Burger
2005/11/14 00:26:53
I am looking to make an offer for an independent restaurant. I need some help in finding out the fair value I can offer. The following are some details required to arrive at the value.
1) Restaurant used to make 70 to 80 thousand revenue two years back.
2) Due to management change, cost cutting, and poor service etc, sales now is only about 40 to 50 thousand and going down everyday.
3) Don't think a competing new restaurant has been opened in the area recently. Whatever was there two years back is still there. Will investigate further on that.
4) The current infrastructure in the restaurant is total crap. Entirely has to be renovated from the floor to ceiling including all furniture and kitchen. Roughly estimated at 100,000. Did not get a firm estimate yet.
5) Owner asking 150,000.
6) Restaurant is in a very prime location with potential to win back customers if renovated and service levels improved.
7) No value for restaurant name. Have to change totally. Planning to go the franchise route.

What is the fair price I can offer?

RE: How to calculate the Price of restaurant 2005/11/14 07:29:28

I know nothing about the restaurant business, but plenty about real estate. Is this location owned or leased? will the property and/or the lease be included in the sale? what is its value? A lease can have value to the leasee (called leasehold value), or can be above- market. The remaining term of the lease and or options is also very important!

RE: How to calculate the Price of restaurant 2005/11/14 09:22:05
"70 to 80 thousand revenue" per what? Per week, hurry and write the check. Per month, might be a deal. Per year, just walk away now.
RE: How to calculate the Price of restaurant 2005/11/14 09:24:02
what's your connection here? i'm interested in real estate, and in the food business. currently own both.

email me, if you'd care to.

Junior Burger
RE: How to calculate the Price of restaurant 2005/11/14 11:22:46
Sorry, I should have been clear. The revenue which the restaurant used to make 2 years back is 70 to 80 thousand per month. The building is under lease. I think it is fair for the geographical area. Rent of $8500 is fixed for 5 years with an option to renew for 2 more. The restaurant has two floors and a patio at the back on both floors. In the first level the seating is for about 40 people and the second level is also for about 40 people. The two patios can hold 35 seats each.

So are you saying that 150,000 for a restaurant which is currently making 40 thousand per month may be OK? I can probably negotiate to about 135,000.

Basically what is a general formula I can use? Another restaurant which is making a revenue of 80,000 per month wants 325,000. Assuming the net as 8%, it will be 7400 per month. So in 3 1/2 years to 4 years, you get back your principal (assuming no loan to keep it simple)

So in my case, if I take the current 40,000 per month revenue and a net of 3200 (8%), to get back the 150,000 it will take 4 years which is similar, assuming the revenue does not drop any further. But that will not be the case unless it is renovated totally.

Going by the same simple formula, if I renovate, my cost will be close to 225,000. So to get back the investment in about 4 years, the monthly revenue has to be around 60,000 per month with a net of 4800(8%)

Am I correct in my assumptions?

I have kept the calculations simple just as a guideline.

Thanks for the input.
Double Cheeseburger
RE: How to calculate the Price of restaurant 2005/11/18 08:49:29
seems to me you have pretty good number computations. but, its the unexpected that will gitcha. your basing your return on 8%. can you see the past 12 months books, and verify that their not in to red each month? check their food costs, labor, supplies, and repairs. make sure they all add up properly .i would say you have a golden opportunity, provided there are no hidden troubles that cant be easily fixed. for a quicker return on your money, i would do the repairs, and face lifts, rebuild the crew from the management down, revamp the menu to make more appealing, get the sales up where they should be, and then sell, sell, sell! that should turn your money with a nice profit in two short years! of course, i would love to spearhead this project for you...hint hint...heehee
Junior Burger
RE: How to calculate the Price of restaurant 2005/11/18 09:34:16
Thanks BR

After looking into it a bit more closely, I have decided not to go for it. The owner wants 150K, but does not want to prove anyting. Says that the price is for the location. I said thank you very much and walked away. Also the renovation cost estimate was high. So back to the search of the golden goose :)
Double Cheeseburger
RE: How to calculate the Price of restaurant 2005/11/19 09:52:56
i dont blame you. that nugget lost its luster..
Junior Burger
RE: How to calculate the Price of restaurant 2005/11/29 13:53:35
Here is a general rule of thumb. A restaurant gets between 20-25% of annual gross. (pizza places can command 30%.)

A good lease is about 7-8% of gross, a great lease is 5% and under.

If you hit 10% you have to be in love with the area because thats a bit much.

If the place requires capital to fix up and update, the offer goes down.

Remember lease and gross% of sales is what is important. The seller could have a million dollars worth of equipment and IT AIN'T WORTH JACK SQUAT. If he closes, that all becomes USED EQUIPMENT AND SELLS FOR ABOUT 8-10c ON A DOLLAR.

So a 480,000 annual gross restarurant is worth between 96-110,000. Since you say it needs work, 80,000-85,000

Remember one thing. 99% of places that are selling are selling because the owner can't make ends meet. (There are exceptions,
death, retire, divorce, but that are very, very rare) I would
stand by and pay attention, you may get it for way, way less if you wait this guy out. If he goes under I can see you getting it for 10,000 to 20,000 G's.
Double Chili Cheeseburger
RE: How to calculate the Price of restaurant 2005/11/29 14:46:25
Walk and buy it off the auction block for teen cents on the dollar. World's a bitch isn't it?
Double Cheeseburger
RE: How to calculate the Price of restaurant 2005/11/29 16:11:21
I always wondered about greedy commercial landlords who raise the rent until they drive away the tenant, who cannot raise their prices enough to pay the huge lease increase and still make a living. I know many places, both restaurants and other kinds of stores that went out of business for this reason.

It really makes me wonder about the building owners intelligence when the building or storefront then sits empty for several years. You would think a lower but steady income from a business which was there for years was better than no income.
RE: How to calculate the Price of restaurant 2005/11/30 13:14:35
I don't know about "greedy" landlords. Last time I looked, this was a capitalist society, thank god, and sellers could ask what they wanted for their wares.

I've known a lot of restaurant owners, and a lot of landlords, and on the whole the landlords were much better businessmen, who could actually do the math to figure out what their best moves would be.

That being said, I hold no brief for landlords. A gentleman from whom I rented property killed me when I left, because there was a clause in the lease about security not being refundable if the rent had been in arrears for a certain period of time. So he held me to it, and it cost me about thirteen grand.

Now, given that he was an absolute lying piece of garbage all down the line, in the final analysis, whose fault was it? Mine. All mine. I even absolve my moronic ex-lawyer, who didn't pick this up. Why? Because I read the damn lease, and I didn't pick it up either. I was so anxious to get the space that I'm not sure I'd have noticed anything less glaring than a clause saying that my firstborn son would be held in escrow.

Never thought, old leftwinger that I am, that I'd be defending this. But as the ever-more-appealing HST said, "The buck stops here" and this is a sentiment that's almost extinct in our society.

You really gotta read what you sign, and understand what you read.

Sorry. I get carried away.