In Part 1, we outlined how to assess the viability and value of a new restaurant project using the sales-to-investment ratio. In this article, we walk you through valuing an existing restaurant and how these valuations are determined by thinking like an investor, and describe common pitfalls and factors that could affect a restaurant’s valuation.
Building a new restaurant, expanding or selling an existing restaurant, or admitting a new partner require an accurate valuation so that you will know how to structure the terms of a deal. Whether you are a single-unit or multi-unit concept, the value of your restaurant is mostly driven by profitability and cash flow at the
Third-party delivery (such as UberEats, Grubhub, and Doordash) has gained a bad reputation due to the exorbitant fees charged by the platforms. However, changes in Americans’ eating habits are making these platforms vital for the survival of restaurants. About half of all restaurant sales in the US are consumed off-premises, and these off-premises options (catering,
Negotiating an ideal lease is the first step to ensuring your restaurant is set up for success. If sales are not high enough for the space that a restaurant is in, no amount of cost management will be able to fix a cash flow or profitability problem that could arise later. In this article, we
Commissaries and shared central kitchens have always been advantageous for single-concept restaurant groups. Due to increased off-premises dining and high labor costs, commissaries are becoming more and more advantageous. In this article, we’ll cover when a commissary is beneficial, and two of the most common and simple methods of invoicing and accounting for food and
Tenant improvement allowances (frequently referred to as “TI”), are an enticing and common incentive that many restaurateurs and landlords incorporate in their lease agreement because it’s a win-win for both parties. The landlord gets the benefit of someone building out their space and committing to rent it, which will in turn attract future tenants and
Restaurants may legally organize in several different forms. Most people are familiar with the Limited Liability Company (LLC) and Corporation, all legal classifications. It’s commonly misunderstood that the legal classification is automatically the tax classification, but that’s not quite true. This blog will NOT address the ideal legal entity type for restaurants; you should discuss
The rise in operating costs and shortage of restaurant labor has forced restaurant owners to incentivize key employees with performance bonuses and equity by building the ideal restaurant management incentive plan. The ideal incentive or bonus plan should: Incentivize and reward key employees for increasing profitability and improving the hospitality experience; Provide an ROI to
You already know the benefits of offering gift cards for your restaurant: bringing in new customers, encouraging customer loyalty, and providing a “guarantee” of revenue for your eatery. Accounting for those gift cards correctly is an important part of maintaining accurate financials. In collaboration with Toast, the Fork CPAs team members Raffi Yousefian, CPA and
If you take out a business loan, is the interest expense that you paid on that loan deductible on your taxes? The short answer is “it depends.” Tax deductibility of interest expense depends not on the type loan, but on how the loan is used. Debt financing that is used for business purposes – that
You shouldn't run personal expenses through your restaurant for multiple reasons, but here are the top 5:
You cannot analyze and assess labor costs and profit without paying or accruing a market-based wage.
If owner-operators are not paid a market-based wage, then the net income/profit and labor costs lie to you; better yet, you're lying to yourself. Until the owner's compensation is reflected in the financials at a market rate, the financial data we're working with is nearly useless.
This is extremely important because net profit and labor cost as a % of sales drive many of our analyses and concepts in this guide.
Without reflecting a market rate owner's comp on the books, you will never know if you have a profitable restaurant.
You could easily claim zero owner's salary and 20% net profit (which is extremely high), but that will not mean anything because if someone were to buy your business and hire someone to do what you do (paying market wages) it could be a losing business.
That is important if you want to eventually transition out of your business either fully or partially, raise money for your business, or sell your business at a high valuation that doesn't require an earn-out payment. If all of the value of the business is tied to you, then you don't have a business, just a stressful job.
Refer to How Much Should Restaurant Owners Be Paid to determine how to set a market-based wage and why it's important.
You must ensure that revenue and expenses are reported in the period they relate to; otherwise, your financials will not tell you anything besides cash flow performance.
Refer to the Importance of Accrual Basis Accounting in a Restaurant to understand the importance of Accrual Basis accounting and how to implement it.
Non-finance people frequently overlook the balance sheet. The balance sheet is equally, if not more important, than the P&L. If the balance sheet is off, then the P&L will certainly be off.
The balance sheet shows a snapshot of a restaurant's health and financial position at a point in time. Imagine knowing all your annual expenses and income but not how much money you have in your bank account. That's what the balance sheet tells you: what you own and owe.
Many important ratios and formulas used to analyze financials and a restaurant's health require an accurate balance sheet.Besides the simple reference to cash balance above, another example of balance sheet accuracy is ensuring loans are represented accurately. You need to remove any loans from the balance sheet that are not truly loans.
This refers to amounts owed to/from affiliates and partners or shareholders that are not loans or have no intention of being paid back. This will be necessary for calculating your ROE (Return on Equity), one of the most important ratios investors use to assess the value and viability of a restaurant investment.
For example, assume investors contribute $500k to open a restaurant, then another $150k loan because the $500k is not enough, and the restaurant generates $150k in profit.
$150,000 Profit / $650k Total Net Equity =Return on Equity=23% ROE
$150,000 Profit / $500k Total Net Equity =Return on Equity=30% ROE
In restaurants, the cash and working capital you keep on hand are determined by liquidity ratios, such as the current ratio, which measures the ratio of your current assets to current liabilities.
If your balance sheet is inaccurate, one of the most important financial measures of your restaurant's viability and health will be thrown off.
For restaurants, the chart of accounts must match the restaurant uniform COA provided by the National Restaurant Association.
For example, the paper cost in a quick-service restaurant is coded to the Cost of Goods Sold account, but in a full-service restaurant, they are coded to Direct Operating Expenses. This can affect COGS as a % of sales by 2-4%. Another example is bar consumables/supplies, which should be bifurcated and coded to liquor cost, not food cost.
If transactions are not coded according to the restaurant uniform COA, you cannot assess your performance compared to industry standards.