Ask George: When selling a restaurant, how does the seller determine its value? What criteria are used? —Dennis K., St. Louis
I’m guessing this question may have been spurred by the news that Katie’s Pizzeria in Richmond Heights is for sale for a cool $1 million.
Regardless, it’s a good question, and a complicated one. Four criteria are generally used when evaluating the worth of a restaurant.
- The Comps – What have similar restaurants in the area sold for in recent months/years?
- The FF&E (Furniture, Fixtures, & Equipment) – Most times they’re included in the sale, but sometimes not.
- The Formula – Generally, the sale price is determined by taking net profit times a factor of 3 to 5. So if a restaurant realizes $100,000 in yearly profit, it's asking price should be between $300,000 to $500,000.
- The Intangibles – Many times the worth of an item is affected by what the market will bear. If the buyer has a special fondness for that particular restaurant, for example, it might affect what (s)he's willing to pay for it.
Complicating matters, the value of a restaurant is affected if there is a personality involved. Bistro Georges may not be worth nearly as much if Georges is not involved, for example.
Is it a franchise operation? Are the name, concept, and recipes part of the deal? Is there a good lease, and is it easily renewable? All factor into the asking price of a restaurant.
Compounding the matter still further, as with cars and houses, sellers often have an inflated view of a restaurant’s value on the open market, skewing the asking price upward. But just because you think your pride and joy is worth a million dollars, that may not be the case.
In the case of Katie’s Pizzeria, Katie Lee is its face and personality (her father Tom Lee actually owns the business) and has announced she will be opening a new restaurant this fall in Rock Hill What’s Katie’s worth without Katie? Estimates range from “not much” to “who knows?”
According to its listing information, Katie’s Pizzeria has $1.5 million in annual sales. Assuming 10% of that goes to the bottom line (a legit percentage), yearly profit would be $150,000, pegging its value at $450,000 to $750,000. Ah, but then there are all those intangibles…
