How to Influence the Value of Your Restaurant

If I ask you to estimate the value of your house, you might research listings and selling prices of comparable properties in your neighborhood or town. Given the current state of the housing market, you might be seriously dismayed over the value of your home compared, let's say, with what you had projected its value would be today three years ago; however, I doubt you would say, "I poured my heart and soul into that property, and, the market be damned, I expect to be compensated for it," or "I'm getting divorced, and I need to get enough money to pay my alimony."

It is also unlikely that you would assume that you would recoup the cost of a swimming pool if you knew that buyers in your market do not value pools or even consider them a liability. And while you might pay heed to "rules of thumb," such as what local economists say about average home appreciation (or depreciation) in your market, you would only use such information as guidelines to be weighted along with many other factors.

As with most assets, the value of a home is ultimately driven by the market, which sometimes favors sellers and sometimes favors buyers. So why do some restaurateurs seem to place so much weight on factors beyond what the market is willing to pay when determining the value of their businesses?

"Selling a restaurant is a more emotional transaction than selling a home," says Neal DePersia, a Cary, North Carolina, business broker with National Restaurant Associates, who has brokered more than 50 restaurant sales. "Restaurateurs want to recoup their sweat equity," he says. On the other side of the deal, however, prospective buyers are driven by the romance of owning a restaurant, and might not be truly objective in their purchase.

"As brokers we have an ethical responsibility to give sound advice to sellers on pricing, and our message is not always what they want to hear, DePersia says. "The price is established by the market." That begs the question: How do you define market value for an independent restaurant? Unfortunately, there is no pat answer or formula.

Douglas Fisher, a certified management consultant, writes in his article "Restaurant Valuation: A Financial Approach (Cornell Quarterly, February 1991)," "the value of a restaurant should be based on its fair-market value," which, when it comes to restaurants is affected by a number of variables:

Based on this ideal scenario, for both parties to realize fair market value in a given restaurant sales transaction, both seller and buyer need to have options and a minimum of compulsions to act. This scenario may be the exception rather than the rule in transactions involving independent restaurants, and thus fair market value is less predictable using this definition, regardless of the valuation techniques applied.

While it may be difficult for the owner of an independent restaurant to assign a hard-and-fast value to his or her concept (the valuation of franchise units tend to be more predictable due to their uniformity and franchisor support), the question, "What is my independent restaurant worth?" is not an impossible conundrum. There are factors that drive actual and perceived value of independent restaurants, and allow owners to maximize the valuation of their businesses.