Whether you’re looking to purchase a restaurant, or you currently own one, understanding the contributing factors to a restaurant’s valuation is critical for success. 

As restaurant owners already understand, running a successful restaurant requires more than great food and an amazing ambiance. Restaurants operate on razor-thin cost margins, meaning owners are beholden to keeping a laser focus on operating costs, sales, employee wages, food prices, and more. 

In fact, it’s normal for restaurants not to be profitable in the first year of business, which is why securing startup loans and other forms of capital is so important. And while the greatest impact of the pandemic is likely in our rearview, it’s impossible to discuss restaurant value and ownership without acknowledging COVID-19’s profound effect on the industry.

More than 70,000 restaurants closed as a result of the pandemic, but the news isn’t all bad. Some experienced record years during the peak of the lockdowns in 2020 based on their successful pivot to a combination of outdoor dining and take-home business. At the same time, the industry has faced a persistent and widespread labor shortage that has affected the majority of businesses. Additionally, supply chain problems, trucker shortages, and inflation have affected the overall picture.

The National Restaurant Association's (NRA) 2022 State of the Restaurant Industry report forecasted the restaurant industry to generate $1.1 trillion in sales and employ 15.3 million people in 2022, an indication that restaurant sales are trending in a positive direction despite the challenges of the pandemic. Embracing technology, such as apps, third-party ordering, and direct online ordering, is becoming increasingly vital for ongoing success in this industry.

For restaurant owners, an understanding of restaurant valuation trends and their implications across the broader industry is important for making key business decisions. BizEquity has aggregated both transaction database valuation information and data from restaurant valuations into a substantial report, with highlights below:

Examining Restaurant Valuation Trends Based on BizEquity Data


From 2017 to 2022, more business valuations were performed for restaurants on the BizEquity platform than any other industry. 


Average Metrics for Restaurants 2017 to 2022 



 

BizEquity Firms

    

Market Data
 

Mean/Median

Source One

Source Two

Mean/Median

Revenues

$2581K/$1,183K

$951K/$400K

$758K/$519K

$854K/$460K

SDE

$438K/$152K

$106K/$74K

$140K/$100K

$123K/$87K

SDE Margin

17.0%/12.8%

11.1%/17.0%

18.5%/19.3%

14.4%/18.9%


The comparison between BizEquity restaurant valuations and transaction database valuations suggests the following:


  1. Businesses valued by BizEquity advisors are significantly larger than the industry wide averages in terms of both revenue (3 times larger) and SDE (2 to 4 times larger)
  2. They are also more profitable in relative terms at the mean level.

Evolving Restaurant Outcomes from 2020 to 2021


Based on the improving fundamentals during 2021, the average (mean) asset sale value and equity value for restaurants rose considerably:


  1. The average asset sale value rose from $1,417K to $2,152K, or by $735K or 52%.
  2. The average equity value rose from $1,415K to $2,243K or by $826K or 58%.
  3. The close proximity between asset sale value and equity value indicates that the firm’s cash and receivables (liquid financial assets) were roughly equal to total liabilities.
  4. The average asset sale and equity values going back to 2016 were approximately $1,763K and $1,767K respectively.

Changes from 2021 to 2022


BizEquity restaurant data also unlocked meaningful insights about restaurant valuation and revenue as we transitioned from 2021 to 2022: 


  1. Between 2020 and 2021, the average (mean) revenue rose by 6% per annum while the average SDE rose by 28%.
  2. At the median level, revenues rose by 10% and SDE rose by 32%.
  3. The average reported expected revenue growth rate was nearly 14% per annum during 2021 and 2022 and the average expected long term EBITDA margin was around 14%. 

Looking Ahead to the Future of Restaurant Valuation and Ownership


Current and aspiring restaurant owners should keep the following trends in mind as we move further into 2023:


  1. The restaurant industry is expected to continue its recovery in 2023, but owners will need to remain flexible and adapt to changing consumer behavior and preferences.
  2. Health and safety concerns will continue to be a top priority for customers, who will continue to seek out restaurants with visible cleaning protocols and contactless payment options.
  3. Digital technology will play an even greater role in the restaurant industry in 2023, with a focus on mobile ordering and delivery, as well as virtual and augmented reality experiences.
  4. Sustainability will become increasingly important, with more restaurants emphasizing environmentally friendly practices and offering plant-based and alternative protein options.
  5. Labor shortages will continue to be a challenge for the industry, with many restaurants exploring automation and robotics to help fill the gap.