How to Value a Restaurant — Part Math, Part Craft

Finance, Restaurant Operations, Closing a Restaurant,
By Carrie Zhou and Jessica Hussain at Aprio

How involved is the restaurant owner? How long has the business been in operation? What’s trending in consumer dining? How is the competition performing?

Auditors employ rigorous due diligence when determining how to value a restaurant, but the scrutiny of variables beyond the numbers also has a significant impact. The valuation process thus becomes part math, part craft.

Selling or refinancing are the most common reasons for a valuation. But other triggers, such as income or estate taxes, new investors, a departing partner or even divorce, may require one as well. Let’s look at the basics, a few key variables — and Popeyes Louisiana Kitchen.
Running the Numbers
A restaurant’s efficiency and profitability are reflected in its earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA reveals a restaurant’s earning potential by focusing on cash flow.

To do this calculation, adjust earnings to exclude non-cash deductions, such as depreciation and amortization; interest from debt and income taxes; and discretionary expenses like cars, cellphones or life insurance.

Are you paying yourself an above-average salary? If so, subtract the excess compensation from your expenses and add it back to income to ensure the valuation is accurate.

Let’s say you want to valuate a café with maintainable earnings (and equivalent EBITDA) of $44,000 and revenue of $380,000. If you’re paying yourself $80,000 as the general manager — and the industry average is $40,000 — add in the difference in excess compensation. Then, adjust for any personal expenses. (Let’s say $8,000 for this example.) This comes out to an adjusted EBITDA of $92,000.

The National Restaurant Association’s annual Restaurant Operations Report is an excellent resource for baseline operating costs in various restaurant businesses.

A variation of this calculation is the “4-Wall EBITDA,” which defines operating costs by unit level rather than the whole business. This version is often used by franchisees, as they’re not shouldering corporate-level costs like an accounting department, human resources (HR), IT — or an executive chef and test kitchens.

The restaurant industry did a double-take in February 2017 when Restaurant Brands International Inc., the parent company of Burger King and Tim Hortons, paid a stunning $1.8 billion in cash for Popeyes Louisiana Kitchen Inc. That indicated a 21-times EBITDA valuation, as well as a 6.7-times revenue multiple, the highest ever paid in the North American restaurant industry, according to Bloomberg.

The multiple tells you what business units are selling for in the market. Pay attention to the base of a multiple, which can be anything from revenues, gross profits, operating profits or EBITDA. Take the earlier café example and turn it into a national quick service restaurant (QSR) concept: If the café is currently trading at six times EBITDA, its market value would be $92,000 x 6 = $552,000.

The tricky part is the selection of the multiple. Generally, there should be some indications from the industry. When there are many acquisitions in the marketplace, these transactions provide a range of multiples for consideration. Also, there are other factors to consider when selecting multiples. For example, for similar restaurants with similar annual revenue, the one with the higher EBITDA margin can normally ask for a higher revenue multiple.

More Than Dollars and Data
While calculations were vital, there were undoubtedly many non-quantitative measures that pushed Popeyes’ valuation so high. Let’s use the company as an example:

The longevity of a business has a value impact, as do its influence on its community and brand strength. Popeyes was founded in Arabi, Louisiana in 1972. The company’s unique Cajun heritage differentiates the brand globally and defines its identity. This identity steers the menu development and shapes the style of its hospitality.

Track Record
Is the business showing consistent profitability and brand recognition? How does it compare to similar concepts in the market? While Popeyes’ same-store sales increased for eight years, the company is also nearly 98 percent franchised, which makes for healthy margins and cash flow.

In 2008, the name changed from “Popeyes Chicken and Biscuits” to “Popeyes Louisiana Kitchen,” and new brand positioning quickly followed. The following year, a feisty new television spokesperson appeared in ads.

Management Team
A significant portion of a restaurant’s value could be tied to the people managing the operations and leading the kitchen. Consider these crucial questions before sitting down at the table to negotiate with a potential buyer:
  • Will the award-winning chef stay if the owner moves on?
  • Does the business have a highly skilled and effective management team?
  • Will the team remain if the owner sells?
  • Does the business have any management issues, negative inspection reports or outstanding HR issues that could detract from the value?
Popeyes enjoyed nearly a decade of progressive leadership under CEO Cheryl Bachelder, who stepped down following the acquisition.

“Cheryl created a collaborative culture among franchisees and the restaurant support team,” said Howard Mangen, president of the Popeyes International Franchisee Association, in a March 2017 press release. “It’s been a true partnership that turned out to be the secret success for Popeyes.”

Head Chef and Owner Involvement
After an acquisition, can your business operate at the same level without you or the chef? How much of a role do you or the chef play in the day-to-day operations or overall success of the brand?

It’s best to develop your exit strategy early if you’re planning to sell. Begin delegating responsibilities to other staff and spending less time with the business.

Al Copeland, the founder of Popeyes and other restaurants, was a lively entrepreneur with a history of high-profile public skirmishes. He was forced to file for bankruptcy in 1991 due to mounting debts after the acquisition of Church’s Chicken. He lost both chicken chains but retained the rights to the recipes.

Copeland had no other direct involvement with Popeyes through his death in 2008, when Bachelder entered the picture and the brand began to turn itself around. (The recipes were sold back to the company in 2014.)

Summary: The Perfect Recipe
How to value a restaurant can vary significantly because many of the critical non-quantitative factors are subjective.

You, your accountant and an outside CPA-lead advisory firm would all likely come up with different values for your restaurant. Find a fair market value everyone can agree upon.

Whatever your reason for a valuation, a little bit of math and a dash of craft will result in the perfect recipe. Once you have a valuation for your restaurant, you can move into the next phase of the process: the sale.

About the Authors
Carrie is a director in the Transaction Advisory Services group at Aprio. She has over 14 years of client-serving experience, including over 11 years of professional valuation experience, and she has performed a wide range of valuation services to clients in a broad range of industries. To reach Carrie, call (770) 353-3024
Jessica is a tax senior manager at Aprio. She has 10 years of experience in public accounting and works with clients in the real estate and retail, franchising and hospitality industries. In her role as senior manager, Jessica manages a team of five professionals, supervising their day-to-day activities, assigning work and reviewing all tax returns. To reach Jessica, call (770) 353-3051