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How to Evaluate a Restaurant for Sale

If you have looked through the classifieds and at the restaurant advertisements on the Internet, you most probably have seen that there are more "restaurant for sale" advertisements than any other type of business for sale ads.

Why is that?

One reason is that people always need to eat and with a society based on luxury, coffee shops, pubs, and restaurants are always in demand. It should, however, also be noted that it also means a lot of competition and the following play an important role in the success of restaurants, pubs and coffee shops:

  • Location
  • Clientele
  • Menu
  • Venue
  • Rent
  • Service
  • Atmosphere
  • Pricing
  • Management
  • Capital.

With almost 27% of restaurants failing within the first year of operation, it is a risky business, but if you have the needed background, experience in business management, food and people handling, as well as the commitment to put every available minute into the business, you have a winner.

Before you buy the first one that comes along, you will need to know how to evaluate it. Business brokers have the required knowledge to help you make the right decision. It should be noted that the seller is the broker's first client and this means that although the broker has an obligation to ensure a fair deal for both, the broker's loyalty will be with the seller - unless you sign a mandate with the business broker to find an opportunity according to your requirements. As such you as the buyer will pay the commissions or the search and find fee of the broker and not the seller.

Even when making use of a business broker to find a business you still need to know how to evaluate it. Below is your first pointer to help you get on the right track in establishing the business value and thus ensure that you don't pay more than it is worth, or even worse, buy a sinking ship.

Methods used::

  • Asset based method
  • Cash flow multiple technique.

Asset based

When the business is not profitable at present or has been closed you will purchase the assets and not goodwill and income or clientele. This means you will need to look at the value of fittings and equipment, stock that can be used and also keep depreciation in mind.

Multiple cash flow technique

This method is used when the business is still in operation and claims to make a profit. The purchase price will thus be calculated by getting a total for the nett income, owner salary, equipment depreciated, as well as the interest expenses.

As a rule of thumb, you can expect a value or price of twice to three times that of the owner's benefit total as calculated above for a full service business. If it is a self service establishment, the value can be equaled or twice that of the owner's total benefit figure.

Author - Isebell Gauche