As the food service industry continues to attract strong investment activity, there are a number of opportunities available to owners considering buying, growing, or selling a restaurant or chain of restaurants. For restaurant owners seeking capital or an exit, there is ample dry powder in the private equity markets – upwards of $3 trillion, a near record amount. While some restaurant chains are candidates for private equity transactions, others are targets for strategic buyers. In either case, it is important to understand the process buyers will use when valuing a restaurant.

The methodology shared here is to help restaurant owners better understand how investors typically arrive at a valuation. You will hear advisors speak of valuing a company via several methods including total asset value, precedent transaction amount, comparable transaction levels, or a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation Amortization). The EBITDA multiple method is what we see utilized almost exclusively in the lower middle market and what we discuss below.

Valuing a Restaurant on An EBITDA Multiple

Whether it is a private equity group or a strategic buyer, a potential acquirer will perform diligence around the EBITDA is being earned when valuing a restaurant on a multiple of EBITDA basis. The other variable that goes into valuation is the multiple these buyers will use. Valuation multiples are impacted by several factors including growth, leadership, financial performance, and investors’ mandate for that segment of foodservice. For restaurants that show consistently strong performance, or emerging concepts that demonstrate exceptional growth (historical and potential), buyers are often willing to pay a higher multiple than the market average. A key benefit to working with an investment banker and a market-based auction process is it generates competitive interest among multiple potential buyers that are at the table.

When using an EBITDA multiple methodology, the key inputs are the company’s EBITDA and the EBITDA multiple.

EBITDA

The starting point for EBITDA is to calculate Net Income + Interest + Taxes + Depreciation + Amortization. Once EBITDA is calculated, other one-time charges and personal expenses are removed to arrive at “Adjusted EBITDA”. For a restaurant owner, a calculation for adjusted EBITDA may look like:

Applying an EBITDA Multiple

Once EBITDA is calculated, which represents a good earnings proxy for what a new owner could expect when they take over, a multiple is applied to arrive at a transaction value. For example, a restaurant with an Adjusted EBITDA of $4 million selling at a 10x multiple will yield a $40 million transaction.

While applying an EBITDA multiple is straightforward, arriving at that multiple requires several considerations. This is where an experienced adviser can offer guidance and expertise to help inform owner expectations, as well as make sure a potential buyer isn’t undervaluing the brand. This advisor should also work with the restaurant owner to understand the company’s performance to date, its growth potential, and the enhancers/detractors to value. Each brand not only needs to understand these metrics, but also have a process of regularly assessing them:

1. Profitability: Restaurants with a higher EBITDA tend to receive higher multiples. A buyer is more likely to pay a premium on a restaurant that generates higher cash flow compared to its peers. For example, a restaurant with $1.5mm EBITDA may receive a 6x multiple, whereas one with $5mm EBITDA may command a 10x multiple.
2. Operating metrics: Restaurants with strong operating metrics tend to be valued at higher multiples. Metrics can include.
   • Same-store sales growth
   • Customer traffic
   • Food/Labor costs
   • Build Out Costs
   • Location Closings
3. Growth potential: Restaurant owners that can speak to growth opportunities and back up those assumptions will command higher multiples. Examples include a franchisor with an ambitious growth strategy underway, or an established brand with a proven concept that can scale beyond one area or one region.
4.  Specific value to a buyer: A buyer may see strategic value in the restaurant, whether it is a concept that bolsters its portfolio of brands or a restaurant group with advantageous locations.
5. Economic Market and Industry Dynamics: Factors such as interest rates can also influence investor activity and in turn, valuation multiples. Private equity, which most often relies on debt to fund acquisitions, will consider economic factors and what comparable companies that have been sold for determining a multiple. Industry dynamics also play a role, such as consumer trends and preferences.

An experienced advisor will walk through these methodologies and factors to provide guidance on valuation. The F&B Team at FOCUS has decades of experience in helping owners prepare for and successfully close deals. Our advisors have the expertise, combined with a proven process, to help owners maximize EBITDA, command a premium multiple, and successfully close a deal.

Mike McCraw is an investment banker focused on multi-unit restaurants. His practice includes independent restaurant groups, franchises, and restaurant chains. He has completed a variety of restaurant transactions, several with private equity firms. Mike has also served as CFO for several multi-unit companies. Contact Mike at [email protected] or 205-915-8282.