# Understanding Restaurant Valuations

Video

12.20.2019

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.