By Karen E. Klein Q: I own a small breakfast-and-lunch restaurant in an office building. A prospective buyer has approached us and I would like to know a quick, easy way to figure an approximate value for the business. There is no real estate involved, since we rent from the building owner. -- H.M., Albany, N.Y.
A: Probably the easiest and quickest way to get a general idea of the market value is to call two or three local restaurant business brokers and ask them. Tell them you are considering listing your restaurant for sale and you would like to get an idea of what your listing price should be. They may be able to give you some comparables of other restaurants in the area that have sold recently or are on the market.
If you want to sell without involving a broker, there is a simple formula for finding a ballpark value for your business. Generally, restaurant sales prices are based on a multiple of "free cash flow" (cash from operations, minus capital expenditures), says John Hamburger, a consultant and president of the Restaurant Finance Monitor. "For instance, if the cash flow of the business after the owner's reasonable salary -- you need a manager, right? -- is $50,000, I would value the business at three- to four-times cash flow - or $150,000 to $200,000, plus inventory," he says.
Restaurant valuations can be anywhere from three times to six times net cash flow, depending on some or all of the following specific issues, says Art Manask, a restaurant consultant with Manask & Associates.
KEY QUESTIONS. Is the business very profitable, or only marginally profitable? How many years has it been profitable? Are profits and sales growing, flat, or shrinking? How about customer counts? What are the terms and conditions in the current lease? Is the lease terminable by the owner for any reason and/or for cause? How much time is remaining on your current lease and what is the probability that it can be renewed under similar terms? What is the condition of the restaurant's furniture, fixtures and equipment? Will the place need major work, repairs and replacements in the near future? Does the operator's profit and loss statement show true net cash flow and profitability?
"Some business owners charge expenses to the business -- like cars, insurance and salaries -- that reduce overall profitability," Manask explains. "A buyer wants to know what the net profit is -- not including owner-related costs and expenses."
If you get some list prices from brokers, discount what they tell you a little bit, Manask advises. "Just like a real estate broker evaluating your house for sale, a business broker will tell you a high price in hopes he will get the listing," he explains. Reduce that optimistic number somewhat and factor in the answers to the questions posed above in order to arrive at a realistic number.
Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.