Valuing a restaurant business - help!

[Calum_H]

Hi folks,

I am interested in putting in an offer for a restaurant business but I am trying to establish what a good offer would be.

Details:

70 cover, Run under management.
High footfall city center.
Rent - £56k
10 years left on lease
Turnover: £680k
Net: 150k

Now I am used to working out valuations based on a multiple of Net profit which is fine if the trading name was included in the sale but there is a possibility it may not be.

So my question is this - what value would you put on the business if the business keeps the well knowen trading name and what value would you put on the business if it had to change its name.

If I have to change the name it would literally just be that, I would keep everything else the same.

I know this is hard for people with such limited details but it would be interesting to know what peoples thoughts were.

Thanks!

 

[dp0848]

I'm no expert in this area so what I'm about to write is a bit of an educated guess. If the name of the business is not included in the sale and the business has a name on which is based a good reputation then you will need to workout how much goodwill you believe is wrapped up in that name. Would trade just vanish overnight because the name above the door has changed? In the restaurant trade I would think that the quality of the food and services were equally important. So if you were retaining the waiting staff and the kitchen staff maybe the change of name would be less of an issue as with a bit of clever marketing you'd soon be able to build up a reputation under the new name.

I wish you every success.

David.

 

[Truemanbrown]

There are a number of ways of valuing the business (a factor of net profit, for example). However, there are a number of other factors that you could consider. For example, did the restaurant one-off event which will not happen in the future and which is included within the figures at your disposal.

I would advise that before you make such a purchase that you follow the procedures outlined in this blog and employ your accountant to help you.

 

There are still too many questions and variable, plus I wouldn't put any faith in a valuation proposed on here.

If the current owners are keeping the name, is it with the intention of re-opening nearby?

There are valuers who specialise in this sort of thing (I'm guessing Pinders will be in there), they will advertise in the trade press. At this level of investment I would certainly be paying professional for information.

What is it on the market for?

 

[Calum_H]

Hi folks,

Thanks to all how replyed.

For everyones information I have no intention of taking any advice with regards to valuation without seeking proffessional advice. I am trying to figure out what a business like this may go for to work out if its in my price range before pay proffesional advisors.

More detail:

The restaurant I am interested in is part of a small local chain, 5 in total. The group is in administration as 2 of the restruants are performing very badly. They are being sold either as a whole or individually. This is why it maybe difficult to keep the name as I am only interested in one.

Thanks!

 

I still advise that you talk to a professional, industry specific valuer. They are often happy to give advice pre-contract and will give you pointers relevant to the field.

If you look at most valuation threads on here they generally degenerate into an argument about multiples of net profit.

 

[Spongebob]

The value of any business (or anything else for that matter) is simply the price that the market is willing and able to pay for it.

Work out what you are are willing and able to pay, deduct a percentage for haggle room, and make an offer.

There is no such thing as a formula for valuing a business or anything else.

 

[Chris Ashdown]

The fact it's in administration has a huge effect

The name being ruined by administration means there is no goodwill you would be starting again and all past marketing will just be history

The administrator will probably just be looking for someone to buy the fixtures and fittings as there will be no value in the building it belongs to the landlord


I would just quote the administrator your best guess of the F&F at their todays value to you and a few thousand, he probably has no interest in th

You would then need to talk to the owner of the property for a new lease

 

[Rhodes100]

I would suggest that historical figures are irrelevant here, if what you are doing is buying the fixtures and fittings and any premium on the lease if it is in a prime position.

I could buy a Costa Coffee if one was available and carry on running the business as Harry's Coffee Shop, but I can assure you that I would not get anything like the amount of turnover that a Costa Coffee would achieve.

So you have to be very careful about offering too much for the business otherwise you will never get your money back when you sell the business with a fraction of the previous businesses turnover.

Your starting point is to try and work out what you think you might be able to achieve in the business and rework the P&L to come up with your profit, does it work. This is the most difficult for new businesses as they often get forcasting wrong.

I assume if this outlet was making £150k a year it must have been the other outlets that where loss making?

 

[Calum_H]

I assume if this outlet was making £150k a year it must have been the other outlets that where loss making?

Yes it is a very profitable unit but it couldn't support the restruants that were making a loss.

I take your point about Costa and that is my fear. Even though I would intend to do the exact same menu with the same staff I am struggling to work out how much the turnover would drop just on the name.

 

[Calum_H]

The name being ruined by administration means there is no goodwill you would be starting again and all past marketing will just be history

I don't think this is the case because if you look at this restaurant on its own it does very well under a well respected name. This is why I would be keen to keep the name if possible.

 

[jim_price]

Goodwill and restaurants is an interesting area. I'd always put myself in the shoes of the customer you're looking to attract. Are they concerned by the name of the restaurant or, more likely, the location, the food, the staff, the ambience etc. Yes the brand is in the mix but I'd argue it's not the overriding factor.

A 10 year lease is OK in so much as it ought to give you more than enough time to get a good ROI, but on the flip side you'd want to see break clauses and look out for the landlord seeking PGs.

When negotiating with an Administrator bear in mind that an ability to move quickly with funds can put you ahead of other offers that might be higher on paper.

I'd agree with SpongeBob that you've got to run realistic financial projections, decide on what's an accepatble ROI, formulate an offer, shave quite a bit off that offer and start negotiating.

 

[Calum_H]

Thanks for that Jim, very interesting.

I would normally formulate an offer and start with a low offer to the administrators and negotiate form there but there has now been a closing date called, very soon, as there is a lot of interest. I am in a very good position financially and am relying on no bank borrowing so this is a definite advantage.

I think the way forward is to make two offers, one with the name and a lower offer without. I can use passed trading figures for the offer with trading name but what would people recommend basing the other offer on. I am trying to think of worse case scenario and really couldn't see turnover drop by more than a third just on name - thoughts?

Thanks again for everyone's input!

 

[Chris Ashdown]

If I was you I would be talking to the landlord first not the administrator who cannot sell the premises or let them, there may be a sub let clause in the lease but it will most certainly be controlled by the landlords approval

It's no use buying the F&F and name if nowhere to trade

Personally i see no future for using the name, much better a clean break

Are you experienced in the trade, as most people would be shy of starting in the present financial uncertainties

 

[Billmccallum]

The value is not with one unit, it's with the three profit making units, the best way to extract value is to purchase the full group at a knock down price (this depends very much on what the liabilities are for the whole) and close the two loss making units.

For example, if the total liabilities for the group are £500K and it has no liquid assets, then offering that level would probably get the whole business as the liquidator will be able to pay off most of the debts.

Selling individual units will lower the price dramatically and provide a much lower return for the administrator.

As an aside, the value of any of the units would normally be with the chef, without a good chef you cant have good food.

Just one opinion.

 

[Calum_H]

The value is not with one unit, it's with the three profit making units, the best way to extract value is to purchase the full group at a knock down price (this depends very much on what the liabilities are for the whole) and close the two loss making units.

Completely agree but funds would not allow such an acquisition.

I have to make a decision today about whether to make an offer or not. These are my thoughts:

1. I am leaning towards making an offer for one of the units with the name included. Very high chance this would be unsuccessful.

2. I have no real way of knowing the effect that a name change would have so find it very difficult to project the future financials. This is high risk for me, with the amount of money involved. Although it is in a very very good location - am I being to risk adverse?

3. Could make two offers one with the name one without. Again I am comfortable about my offer with the name but would be making an educated guess without.

4. I think, due to the popularity of the majority of the units, that another operator may well do as Jim has indicated and make an offer for all - should I waste money on an above average chance both offers would be unsuccessful?

Would love to hear some thoughts before I take the decision.

Thank again!

 

[Alan R Price]

I mean no disrespect to Chris Ashdown but the fact a company is in administration does not mean there is no goodwill or that the administrator will simply be trying to sell the kit. We sell many businesses as going concerns thereby realising many multiples of the break-up value. I am just selling an accountancy practice out of administration for over £300,000, compared to a liquidation value of about £10,000. Very often the name alone has value; or the fact there is a website which generates hundreds of hits a day that can potentially convert into sales; or a good strong customer list; or even the lease of premises in a desirable or popular location.

Goodwill is the opportunity for somebody to make revenue from an existing business in the future. The fact that one owner has not been able to make a business work financially does not mean that another cannot - it may be down to a flawed financial model. Sometimes simply bolting on turnover from a failed company to an existing (solvent) business will lead to a significant rise in profits because a whole layer of administrative overhead has been stripped away. On other occasions the ability to bring a manufacturing process in-house rather than having to out-source expensive components can give a company a significant financial advantage.

My recommendation when buying a business from administrators is to seek advice from an insolvency practitioner or other professional experienced in dealing with insolvency matters. He/she will be able to talk to the administrators in language they understand and will also understand the constraints under which they are working. The normal multipliers go out of the window: agreed, any purchaser will only be able to carry out a limited amount of due diligence and so will expect to pay a lower price than in an ordinary sale; but the IP will be looking for a far better amount than the break-up value.

 

[Chris Ashdown]

No Problem Alan, I understand what you are saying and would agree for most companies, but somehow doubt there is much in a single restaurant that was part of a small group that will most probably be shutting up at least two outlets

Many pubs build up great turnovers and then change hands and soon fail, few customers have any loyalty in the food industry where as when Alexandra PLC went into administration it had massive customer loyalty and goodwill and I doubt it lost more than about 10-20% of its customers

 

[Truemanbrown]

One thing that you have not mentioned is through which business vehicle are you going to run the company - sole trader or limited company. I ask this because the limited company should get tax relief for the amortisation of goodwill while the sole trader will not.

 

[KeithGreen]

Consider this. How much would it cost you to set up a similar business from scratch in a similar location. You would need to find and acquire and refurbish/fit the premises. Buy all furnishings, set the ambience etc. Recruit staff and open on day one with no customers.

With this business you have most of the infrastructure in placeand the premises/location that you want. Given that most customers will book the restaurant by phone, are you able to take over the phone number? Losing the name and phone number may reduce a lot of the goodwill but if you are keeping the same type of food, style, pricing and chef then you should still have a core of customers who will return.

Valuations based on profit multiples are probably not appropriate in this case but for the reasons above it is probably worth more than F & F value. I notice you had an offer deadline so my advice here is probably too late but we would all like to know how you got on.