Restaurant Business Valuation Key Terms

Learn the different methods for putting a value on your restaurant business

By Trisha Schulz

Figuring a restaurant's value can be difficult, no matter whether you are looking to sell your bagel shop or you're a potential buyer for an Italian sit-down restaurant. New or developing businesses (especially those in the restaurant industry) usually are in the red for a while before they start showing a profit. However, high financial returns are entirely possible later on. But the current value still must be estimated. Different valuation methods further add to the complex task, as using one method may yield a higher valuation than using another.
Consider the following key terms when it comes to restaurant business valuations.

Market value

Market value is based on what a buyer would be willing to pay for your restaurant. Regional and local market conditions, as well as industry conditions, come into play when determining market value.
Try: Learn more about how market value is determined for a restaurant through FGH International.

Asset-based valuation

Asset-based valuation refers to a valuation approach in which the restaurant's assets and liabilities are measured and analyzed.
Try: Check out the example of asset-based valuation offered by the law firm of Hoge, Fenton, Jones & Appel.

Income-capitalization valuation

Income-capitalization valuation is a forward-looking method in which calculations are made based on what income the restaurant can expect to produce in the future.
Try: Review this example from Restaurant Report on calculating a cap rate for an income capitalization restaurant valuation.

Valuation multiples

Valuation multiples are different factors used to come up with a restaurant selling price. These multiples are expressed as ratios and used in valuation calculations. Examples of valuation multiples include the selling price divided by business gross revenue, business net sales or cash flow.
Try: Visit Entrepreneur Media to learn how valuation multiples can be used.

Discounted cash flow valuation

The discounted cash flow valuation method arrives at a valuation price by figuring the expected cash flow of the restaurant.
Try: Review the formula used to calculate a discounted cash flow valuation and a further definition through Investopedia.

Owner's benefit method, or seller's discretionary cash flow

The owner's benefit method, sometimes called the seller's discretionary cash flow, does not make predictions on expected business income. Instead it makes assumptions based on business history and uses those numbers for valuation calculations. This method is most popular with and beneficial for small restaurants.
Try: The Diomo Corporation offers an owner's benefit formula when determining a restaurant value.