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BVR's Guide to Restaurant Valuation
Business Valuation Resources, Feb 2010, Pages: 352
Why do you think my first chapter is about restaurant rules of thumb (ROT)? The publisher cannot think of another industry where the use of primitive rules of thumb is more prevalent.
Rules of thumb vary even among different types of restaurants. Talk to a Wendy’s owner operator and he will have a different metric than a McDonald’s owner operator. The publisher suspects you probably already sense that a simplistic rule of thumb in a restaurant valuation setting would ignore many of the detailed observations that the publisher will be discussing in this book.
In performing a restaurant valuation, the valuator should ask the owner what simple multiples he or she might use to determine a restaurant’s value. Remember, after you submit your valuation, the owner will use these ROTs to question, criticize, or evaluate your results. Knowing what these ROTs are from the start will allow you to convincingly explain why you think your valuation resulted in a higher or lower estimate of value.
At one point in the publisher's career he decided to correlate the sales price of restaurants with the dollars in the expense account labeled “operating supplies.” Of course, this was my “camp” answer to the use of ROTs. The premise was that a store with more sales would use more operating supplies. A restaurant with more sales very likely would be worth more money. A good old regression analysis could possibly supply him with a formula that he could use to fool disbelievers. The author had a lot of fun with this silly premise. You should have seen some of the looks that he was given when he announced a restaurant’s value using this bizarre method! The point of my madness was to show the owner how crazy the use of simplistic formulas was.
Why would an owner work an entire lifetime to build up a restaurant empire, only to value it at the conclusion with a simple rule of thumb? If you don’t think this happens, you are wrong. The publisher has seen it time and again—hundreds of thousands of dollars either taken from the table or left on the table because of this stupid practice.
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