Selling a restaurant is unlike most other property transactions as the value to the buyer is in the profit potential rather than in the bricks and mortar. In a sector dominated by leasehold properties, demand comes from operators keen to service the strong eating-out market and buyers will look to either operate the restaurant as is, or more often, to completely change the restaurant’s name, menu, look and feel. In such cases the sale price will represent little more than “key money” to create the opportunity to trade from the premises and in doing so the buyer naturally assumes that changing the restaurant will yield improved profits.
However according to the Restaurant Association, more than 1 in 2 new restaurants fail resulting in sale or closure, which whilst good for restaurant property agents selling in the current strong market, this is less good for new comers to the restaurant sector and of course their financial investors. asiate baden baden
Whilst selling restaurateurs will be keen to realize the goodwill from their restaurant, buyers will be reluctant to pay high premiums for goodwill unless they have a “proven” profitable business, with sustainable profits for the future.
A restaurant’s value will be derived from a multiple of potential yearly profits, and the purchaser will generally make a judgment as to price and pay back period. The multiple of profits will depend on many factors, but in essence will be influenced by; lease terms / rent, location, the attractiveness and configuration of the property, and will also reflect the risk to the buyer. All of these factors impact on potential profits and in our experience, leasehold restaurants typically sell for between 1 – 4 times yearly profit, before depreciation costs, interest on borrowings and lease amortization. In practice this can mean premiums of, very approximately, £1,000 – £4,000 per restaurant cover.
The restaurant’s actual trading accounts will naturally assist the purchaser in assessing trading potential, and will provide a guide as to trading patterns and fixed costs, however at the “lower end” of the private restaurant market, accounts are often unreliable and provide little assistance; accordingly buyers will have to form their own opinion of profit potential, although Banks are less keen to lend on established businesses with “flaky” accounts.
A common mistake by restaurateurs is to associate value with the amount of money they have spent on the premises, and whilst a well fitted out restaurant will no doubt add value, if the purchaser is going to strip-out the restaurant, the cost will have little or no bearing on price. Only if the purchaser wishes to continue trading the restaurant unchanged, will the buyer consider the quality of fit out.