How does Covid-19 affect Restaurant Valuations?
Everybody has a unique story about how the coronavirus crisis has affected their lives. During my alone time I have thought about how does Covid-19 affect Restaurant Valuations moving forward?
My personal story as a Restaurant Broker is that I was scheduled to close my 1st deal with my brokerage EATS Restaurant Brokers in March and the deal got canceled. The buyer was worried about the uncertainly of the future regulations for the restaurant industry.
My experience of eight years as a Restaurant Broker has prepared me for the “new normal” in the restaurant industry. The biggest concern I hear from my current clients is, “how much is my restaurant worth now after Covid-19 pandemic”?
While most restaurants struggle to open the doors back up for business, others apply for the Paycheck Protection Program (PPP) to help with expenses. Regarding Restaurant Brokerage one of the biggest questions not being talked about is, what happens to the restaurants that were listed for sale before the Covid-19 pandemic?
My personal experience is that I was able to save my deal that was canceled but my seller client had to reduce the asking price by 40% to keep the buyer interested. Now the deal is scheduled to close in June. If you are asking yourself why the price reduction, the restaurant industry has changed in the last 60 days, uncertainly will drive restaurant prices moving forward.
How does a Restaurant Broker recommend a price valuation for a restaurant?
1. EBITDA: An acronym, EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and is a useful metric for understanding a business’s ability to generate cash Add Backs flow for its owners and for judging a company’s operating performance.
2. Replacement Cost Method
The restaurant advertised as an Asset Sale is valued using the Replacement Cost Method. The replacement cost method assumes a buyer pays the seller in order to benefit from the existing investment in the restaurant facility, lease, leasehold improvements, location of the restaurant, and equipment. This helps the buyer avoid spending time and money to build and comply with city regulations, and delays in building a new restaurant.
Due to the Covid-19 pandemic, some restaurants that were priced as profitable restaurants will be sold as an Asset Sale. The remaining profitable restaurants listed for sale should be ready to lower the asking price.
Restaurant valuations are based on 2019 sales numbers and 2020 sales projections. Banks will require quarterly 2020 profit and loss statements for bank lending approval. Based on national sales reports, most restaurant owners have seen a 70%-80% sales loss in March-April. Today’s buyers are more worried about how sales will increase moving forward much more than previous profit and loss statements.
For restaurant buyers seeking restaurant ownership buying an existing restaurant that is being sold as an Asset Sale is a quick path to Restaurant Ownership. The previous seller has done the hard work of building out the restaurant, dealing with contractors, getting the permits, negotiating terms on the lease, and establishing the location as a restaurant. Now it is time to bring your experience, ideas, menu, leadership skills and buy a restaurant that is priced pennies on the dollar.
My advice to restaurant owners looking to sell a restaurant or currently listed for sale:
-Be flexible with your asking price and be ready to negotiate.
-Re-evaluate your listing price after your restaurant is listed for sale a couple of months.
-Be realistic about the “new normal” in the restaurant industry
-Offer owner financing to a financially qualified buyer
-Listing with equipment liquidation company is a terrible idea- you will get pennies on the dollar for used equipment.
-Use a professional trained Restaurant Broker
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at email@example.com. Visit our website at www.EATSbrokers.com