Restaurant Appraisals and Why You Need an Expert When Buying or Selling
September 28, 2017
According to recent State of the Industry numbers from the National Restaurant Association, restaurants in 2017 will generate $799 billion dollars in sales with more than 1 million restaurant locations nationwide. The restaurant industry is big business in the U.S. and with new restaurants going up every day, there is growing demand for valuation in this industry.
Restaurant appraisal goes beyond standard commercial real estate appraising requiring a certain level of art combined with the science of financial data. Restaurant appraisals allow a buyer and a seller to work together to determine the value of a restaurant and reach a selling price. Appraising a restaurant involves assessing its physical assets such as the building, land, and in some cases, equipment and furniture, and examining the financial performance of the establishment such as the recent cash flow, loans, balance sheet, insurance policies, and long-term leases. In addition to tangible assets, there are other factors involved in determining value like location, employee base and ease of operation. A restaurant determined to be “turn-key” is guaranteed to command a higher sales price than one that is poorly organized or in need of an overhaul. An opinion of the market value of this involves developing total assets of the business (MVTAB).
In many instances, buyers and sellers are interested in the value of the real property, which may involve a long-term triple net lease, an owner-operated property, or a tenant with only a short term remaining on the lease. Each of these scenarios requires different data sets and expertise in understanding the market. For instance, does the tenant have 200 locations and a successful 20-year history, or is this their first venture into fast-food. This will measurably impact the value of the real property, and your consultant needs to understand these market conditions.
Another aspect of restaurant appraising is discussing employee agreements. An appraiser must determine if/what employees will be available after the restaurant is sold. This involves checking to see if employees have signed any kind of agreement relating to being a part of the possible sale or not. Restaurants intangibles, such as the name, logo, trademark, licenses, and recipes, must also be examined to determine if the buyer could operate the business without them and decide which ones will transfer with the sale.
An additional important consideration in to valuation of a lease asset is if the corporate franchisor is backing the lease. A lease backed by Yum Brands may produce a completely difficult value than a Taco Bell franchisee with three units. It is imperative the valuation expert understand these variations in lease terms.
Also, the valuation of an owner occupied asset presents a different set of challenges. Is a lender involved? Some lenders require an as-dark (vacant) value, others allow for an assignment condition that considers the possibility the property could be leased. This subtle difference could result in a value variance of as much as 50%. It is important the borrower, lender and valuation expert are all fully on the same page before the assignment begins. It may impact which lender a borrower chooses when seeking financing.
In restaurant valuation, it is extremely important to focus on an income approach “excess earnings approach”, which focuses heavily on the market rent, a real estate capitalization rate, and a business multiple. This method is popular across the industry because of the credible results it produces. It is also important for appraisers to differentiate between restaurants and recognize whether the establishment has a regional or national presence. According to Nation’s Restaurant News, the restaurant industry is seeing a "gold rush" unlike any in the industry’s history from private equity firms and investors looking for the next “big thing” in upstart chains with 20 or fewer locations. This trend indicates the need for expertise in this specialty market.
Valbridge Property Advisor’s newly introduced Specialty Practice Group, Franchise Finance and Single Tenant, now offers restaurant appraisal service for both local and national brands. Valbridge Advisors have expert knowledge that can help the buyer and seller of a restaurant examine all the important and complex details to properly appraise and value restaurants. For more information on the Franchise Finance and Single Tenant Specialty Practice Group visit https://www.valbridge.com.