The value of most food service businesses is a ‘Going Concern Value,’ meaning that the value of the company as an operating entity is greater than the value of the company were it to be liquidated. A ‘Going Concern Value’ assumes that a business that is currently in operation is expected to remain in operation and be profitable indefinitely into the future. There are three types of assets which must be considered when valuing a restaurant, bar, food service, or liquor distribution business (Food & Beverage) in order to arrive at a total valuation.
- The first of these is real property, which includes buildings and the land that the buildings are on.
- The second type of assets are intangible and can include things such as a trained and assembled work force, liquor licenses, and the business or restaurant brand.
- The third and final type of assets are tangible, meaning “non-real” property. Examples of tangible assets might include fixtures, furnishings like chairs, tables, kitchen worktables and supplies. Typical machinery could include ovens, portable convection ovens, mixers, dish washers and dryers, deep fryers, refrigerators, walk-in freezers or custom-built food processing equipment that is specific to a business.
Real property is valued by state licensed real estate appraisers. Intangible assets are valued by those with business valuation credentials issued by professional organizations such as NACVA (the National Association of Certified Valuators and Analysts) and the AICPA (American Institute of Certified Public Accountants). Tangible “non-real” property is valued by those with the CMEA (Certified Machinery and Equipment Appraisers) professional designation. The valuation process of a food service company’s or restaurant’s “non-real” property can take some twists and turns, depending on the state of the business and the purpose of the appraisal. For example, quite often restaurants or food service businesses do not own the real estate where the businesses are located. In this situation, the value of the land and buildings is an asset of the property owner/landlord, and the restaurant is in the leasehold position. This means these businesses make Leasehold Improvements (LHIs) to the property which will revert to the property owner when the business exits from the site. The status of the lease term and the ability to renew the lease often hold clues as to whether the leasehold improvements have any value to the lessee. How much time remains on the lease term and what are the renewal provisions? Answers to these questions have a major impact on the rate of depreciation to be applied to the LHIs and its ultimate value. If the rent for the property is at or above market rate, there is no value attributed to the leasehold interest. However, when the contract rent is lower than the market rent, there is value in the leasehold interest. The capital value of the leasehold interest is the present value of the profit rent for the unexpired lease term or until the next rent review, and is calculated by multiplying the annual benefit by the appropriate present value factor and adding the sum of the benefit over the life of the beneficial lease. The leasehold interested can be provided by a Certified General Appraiser, or, if a real property appraisal is not being conducted, a Business Valuator will calculate the same as part of the business valuation.
Valuing a restaurant’s furniture can be tricky.
Is the furniture classical and in good condition, justifying a slower rate of depreciation? Or is the furniture following a new trend that will rapidly lose value as fashion tastes change? As stated above, restaurant or food service business’ machinery and equipment and furniture could include tables, chairs, food preparation tables, conventional ovens, range tops and ovens, convection ovens, refrigerators, walk-in refrigerators, deep fryers, mixers, and hot water heaters. In a perfect world, the year an asset was purchased and put into use, along with the cost, would be available so the ‘Cost Approach to Value’ could be applied and compared and reconciled with the ‘Direct Market Comparison Approach’ to value results. In the real world, more often than not the information on the non-real assets rarely exists and the assets were never formally recorded on the balance sheet or depreciation schedule. Once a restaurant or food prep business is sold or shut-down, the assets are identified in a consolidated number without supporting details. Business operating results no longer exist. This presents real challenges to the appraiser. In order to deliver credible results to the client, consideration must be given to all three approaches, including the ‘Income Approach to Value’ in addition to the ‘Cost Approach’ and ‘Direct Market Comparison’ methods. Quite often, with limited data available on the provenance of the assets, an appraiser is often boxed into employing the Direct Market Comparison method to value. When employing the Direct Market Approach to value, appraisers make use of commercial databases, used equipment lists, and the equipment manufacturers, in addition to a physical inspection of the inventory. These sources yield credible results but can be quite time consuming to pursue.
There are many nuances when considering the value of a restaurant.
There are key questions that may be asked, such as: Is it full service or limited service? Is it a formal or casual atmosphere? Is alcohol available? Is it a franchise or independently owned? Is it a seasonal operation; this could be based on location (e.g., a restaurant that the Jersey Shore) or product (e.g., seafood, or ice cream)? Sobel Valuations has been performing valuations of bars, restaurants, liquor distribution, and food processing companies for over 50 years. The firm has experienced personnel who rely on data gleaned from previous engagements to prepare credible, defensible valuation reports with supporting detail.
About the Authors
Allyson O’Malley is a Certified General Appraiser in Pennsylvania and New Jersey in SobelCo’s Forensic & Valuation Services practice group. To contact Allyson, please email her: Allyson.OMalley@SobelCoLLC.com
Lee Diestelow is an industry consultant for Sobel Valuations LLC. To contact Lee, please email him: Lee.Diestelow@SobelCoLLC.com
Mike Bankus is a industry consultant for Sobel Valuations LLC.