A restaurant valuation is the sum a restaurateur does before a broker does it, and it is done two ways: discretionary earnings times a multiple, or a rule of thumb as a percentage of annual sales, and the two answers usually disagree, which is the useful thing to know first. The earnings are the last twelve months' profit with the owner's salary and the one-off costs added back; the multiple and the rule of thumb are the owner's own, quoted or heard, and this hub publishes neither. This page works how to value a restaurant both ways on the hub's example, says what the restaurant value calculator adds for inventory and equipment, and works a bar the same way. The free small business valuation tool on this site does the sum from your own figures, with no account.
How do you value a restaurant business: discretionary earnings times your multiple
Net profit for the trailing twelve months, plus the owner's salary and benefits, interest, depreciation and one-off costs, is the restaurant's discretionary earnings; $180,000 on the hub's example. Value is that times the multiple you enter: $450,000 at 2.5, $360,000 at 2.0, $540,000 at 3.0. A restaurant's add-backs are the owner's own hours behind the pass and the family on the payroll, and the buyer's counter is the cost of a manager to replace them; the Bureau of Labor Statistics' occupational wage data is where that manager's salary is read. The lease is the fact that moves a buyer between multiples more than any other, and it is the owner's judgement entered as the multiple, not a figure the hub publishes.
The restaurant valuation rule of thumb, as you apply it
A rule of thumb values a restaurant as a percentage of its annual sales, and the profession passes several around. The hub's position is that the rule is yours to apply: enter the percentage you were quoted against the last twelve months' sales and the tool works the value; enter the earnings and the multiple and it works the other; the gap between the two is where the negotiation will be. For the illustration only, a restaurant with $1,200,000 of sales at a rule the owner enters as 35% reads $420,000, and the same restaurant on $180,000 of discretionary earnings at 2.5 reads $450,000; a restaurant with thin margins reads higher on the rule than on the earnings, which tells the owner which method the buyer will argue for.
The restaurant value calculator: inventory and equipment on their own lines
A restaurant sells with its food and beverage inventory, added at cost, and its kitchen and front-of-house equipment, added at its agreed value in place, and neither is multiplied. On the hub's example, $36,000 of inventory sold alongside takes $450,000 to $486,000, 2.7 dollars for every dollar of earnings once it is in. The equipment line is where a restaurant with a paid-off kitchen and a restaurant leasing every hood differ by the price of a kitchen, and the buyer's due diligence is whether the lease and the licences, liquor above all, transfer. The restaurant valuation calculator on this site carries the inventory as its own line and the report shows the earnings value and the additions separately.
How to value a bar: the licence is the asset
A bar is valued as a restaurant is, discretionary earnings at the multiple you enter with the inventory at cost and the equipment at its agreed value, and with one fact that can dominate the price: the liquor licence, which in some jurisdictions is scarce and transferable and worth a figure of its own, and in others is a permit re-issued to the new owner at a fee. That figure, where it exists, is a line added at its agreed value, not a multiple. On the hub's example the earnings value is $450,000 at 2.5 before the licence and the equipment; the Small Business Administration's guide to selling a business covers the sale, and the rule of thumb business valuation guide on this site says how to use the rule without being ruled by it.
Questions people ask about restaurant valuation
How is a restaurant valued?
Two ways: discretionary earnings, the profit plus the owner's salary and one-off costs added back, times the multiple you enter; or a rule of thumb as a percentage of annual sales as you apply it. Inventory at cost and equipment at agreed value are added to either. $180,000 at 2.5 is $450,000.
What is the restaurant valuation rule of thumb?
A percentage of annual sales the profession passes around, and the hub publishes none. Enter the percentage you were quoted and the tool works the value alongside the earnings method, so the gap between them is on the page.
How is a bar valued differently?
The same arithmetic, plus the liquor licence where it is a scarce transferable asset, added at its agreed value as its own line rather than multiplied.