Understanding Restaurant Valuations



Recently, I gave a presentation to several groups of franchisees on how to value the restaurant companies. Let's use an example to determine how to calculate the value of a single restaurant. Valuations are comprised of the business value plus the real estate value to equal an enterprise value. In this example, our restaurant has an AUV of 1.3 million. It has pre-G&A EBITDAR margins of 21%, or $273,000. It's a fee property, and it needs a remodel in three years at a cost of $150,000.

We first determine the real estate value by calculating the rent coverage ratio at various implied rent rates, solving for an implied rent figure that is the lesser of 8% of sales or a rent coverage ratio of 2.0 or greater. In our example, the rent coverage threshold is met, so we calculate the implied rent as 8% of a 1.3 million, or $104,000. We then need to divide this number by a cap rate. Cap rates vary wildly based on the buyer, 1031 buyer or REIT, number of units sold, credit quality of the tenant, geography, brand, rent coverage ratio, AUV, and several other factors. Determining this cap rate is both art and science. But in this example, let's say six and a half percent. This yields a final real estate value of $1.6 million.

To calculate the business value. We reduced the pre-G&A EBITDAR of $273,000 by the implied rent of $104,000. We also reduce it for G&A assumption of three and a half percent of sales, which is $45,500. And then post-G&A EBITA thus $123,500. We then apply the infamous EBITDA multiple to this figure to get a pre-CapEx business value. Now, EBITDA multiples very even greater than cap rates. A business operation yields quite a bit of mispricings since business buyers are not nearly as readily identifiable as real estate buyers. There are at least a dozen factors that affect EBITDA multiples, but several of the major ones include brand, geography, number of units sold, AUVs, condition of the assets and quality of the management team, especially in a midsize or larger business that would attract a financial buyer. Multiples range from 5X to 8 1/2 X, which is a wide range indeed. But in this example, let's use 6 1/2 X. Now multiplying, we get a pre-CapEx business value of 802,750. The final business value needs to incorporate some methodology for reduction to account for near-term CapEx expenses.

Now, in our modeling, we generally assume a deduction to the business value as the present value of three to four years of future CapEx, depending on the brand. In this example, there is a remodel due in three years at a cost of $150,000. At a 10% discount rate over three years, this present value is about $110,000. Subtracting the final business value is thus $692,750, and the enterprise value is therefore $2,292,750.

Now, I realize I just threw a bunch of numbers at you quickly, but if you'd like to talk about the value of your franchise business, please feel free to reach out to Unbridled Capital anytime. After getting to know you and understanding your objectives, we can discuss a confidential and complimentary evaluation. And in the meantime, please check out our website at www.unbridledcapital.com for more videos, podcasts, white papers, and a list of our transactions.