How Would you Value a restaurant

You gotta think outside the box, it's easy to manipulate the figures in an all cash business for the purposes of tinkering with taxes, or for inflating earnings before a planned sale.

My advice is believe none of what they tell and spy on them to make your own earnings estimates.

If that is really how it went I would guess you got dinged, through your post you come off like a "know-it-all". Do you really have any understanding of the restaurant business? I think he wanted to see how you thought on your feet not how much you know. You probably should have just done a build up method with sound assumptions, instead of telling him what is right and wrong to do. I am pretty sure the restaurant analysts use multiples valuation so I think you're wrong.

Find someone who works in and/or has worked in and knows a ton about restaurants and start there. One of my best friends from high school never went to college and worked his way up from a busboy to waiter to bartender to eventually a general manager. Trust me you need some inside help to really understand how it works.

Hey all, thanks a lot for the responses.

I don't presume to know anything actually that is why I'm posting this. I am sorry if it came off that way. To be honest, I didn't know where to start so I did the next best thing I could think of by quickly eliminating standard valuation methods.

Bottom line: My knowledge of the restaurant business is highly limited and I was wondering (given that) what else I could have come up with.

Depends, can you get accurate historical and projected financial statements from management? If yes, use this to build a simple DCF, create a public comp set for the exit multiple (no one uses growth in perpetuity), and then either use empirical data or calculate a dliscount for lack of marketability (assuming your comps will trade higher due to being public).

If you can't get reliable cash flow forecasts, comparable acquisitions is your best bet. Liquidation value is definitely not going to be the best answer because most restaurants do not have much tangible asset value. They usually just have a few stoves, ovens and shit like that plus inventory has no resale value and the building is usually leased...

I disagree w/ some of the points here...

Your first assessment is whether it is asset rich or not. If they own equipment, HFFBALLFAN123 is incorrect in assuming that this is insubstantial. In a non-London/NYC/LA/SF market, commercial equipment is a restaurant's largest capital spend category.

If it's a small restaurant, you should familiarize yourself w/ the concept of "owner benefit".

Also, assessment of any credit lines will be a helpful data point. The cost of their facility will give you some indication of an implied default rate (typically very high) as assessed by loan officer or banker with tons of experience in the field.

Chef/Management team is huge - experience is the best predictor of success in this industry...

Yes but in valuing a restaurant, regardless of how much capital is spent on equipment, the main driver in the valuation will most surely not be the type of equipment the restaurant has. Restaurant A with 100k in equipment may get better credit terms than restaurant B (all is being equal), this may slightly affect the valuation by allowing restaurant A to have a lower WACC, but will surely not be that significant.

I agree that the intangible value of a great Chef/Mngmt team is very important and is also very hard to acurately value, and agree with everything else Kevin said.

Again, thanks a lot for the responses.

I'm surprised that this question even stumps some of the most experienced people. It's definitely interesting to see how you guys think though.

I think another thing to take into account is opportunity cost. I mean "the owner" essentially takes on all the different roles that are equivalent to upper management in a fortune 500 company. Meaning, he is doing A LOT of the work on his own. A buddy of mine began his own yogurt shop in Asia and during the first year or so he got absolutely no sleep and lived out of his kitchen (all the while barely making the break-even point).

I asked an owner of a few restaurants this question. He mentioned that rent was particularly important - basically, how the real estate agents value the building/land. I have some ideas why this would be the case, but do you all have any other ideas? I know it's been way past the superday but again, just curious how you all think.