Restaurants are one of the most popular businesses people want to own. After all, what can be more romantic than owning your own restaurant? Every year, thousands of people search for a restaurant to buy, and thousands of restaurant owners decide to sell their business for one reason or another. This article will explain how a restaurant is valued, and what you should look for when obtaining a business valuation on your restaurant.

There are several valuation approaches commonly utilized by restaurant brokers. The first approach is the income approach. In other words, it doesn’t matter if the revenues are high if the expenses are also high and the owner doesn’t make any money. The valuation of the business is based on how much money the owner makes – the more the better. Think about it from the perspective of the restaurant buyer. Chances are the buyer is an individual or couple looking to quit their jobs and go into business for themselves. As romantic as it is to own a restaurant, people have bills to pay and living expenses that need to be covered. In other words, a restaurant that allows the owner to take home a lot of money is highly attractive to potential buyers, which allows the restaurant to fetch a high business valuation. All the considerations of location, food concept, ambience, etc. are secondary to the owner’s discretionary income when it comes time for a business valuation. For better or for worse, the cold hard cash the owner makes plays a larger role on the valuation of a restaurant than all the romanticism of the restaurant’s history, location, and décor.

The second valuation method is the asset approach or replacement value approach. This approach is often used for restaurants where the owner is barely breaking even or losing money. In this scenario, the restaurant is not selling the income stream for the owner but the assets of the business at a deeply discounted price. If a restaurant is losing money, the owner might have spent $300,000 or $400,000 opening the restaurant 2 or 3 years ago, and business buyers might only pay $50,000 or less for the business with all equipment and inventory included. In other words, the restaurant owner is giving up the business for someone to take over the lease, and moving on to do something else with his or her life. In the world of restaurants, you make the money running the business, not selling it. Often times, people sell their restaurant not to get rich, but to do something different in life.

Another valuation approach we see sometimes is the gross sales approach where the restaurant broker simply takes a percentage of the restaurant’s gross sales to determine its business value. This approach is usually inaccurate and can result in highly inflated asking prices and restaurants that sit on the market and never sell.

You are an expert at operating your restaurant, and business appraisers are experts at valuing businesses. You have one chance to make a first impression when you put your business for sale on the market. Don’t blow your chances of selling the business by getting a valuation from an inexperienced restaurant broker. Obtain a professional business valuation from a business valuation advisor, and you will be able to confidently price your business for maximum profitability and salability.

Advantage Business Valuations provides business valuation services for small to mid-sized business owners in the United States. Founded by Aaron Muller who has valued thousands of companies as a business broker, Advantage Business Valuations helps small to mid-sized business owners determine the value of their business with ease and confidence. To discover the value of your business, visit www.AdvantageBusinessValuations.com.