Buying a Closed Restaurant:

This is referred to as an "Asset Sale" you will be buying the lease, leasehold improvements, licenses, and fixtures/equipment.  The name, menu, and goodwill are not typically included. included.

One method of establishing value is the "ratio of the price to the former yearly sales"

Here is how that works for different levels of sales:
$200,00 to $500,000 gross sales the average sale price should be 32% of yearly sales.
501,000 to $999,000 sales price should be approx 29% of yearly sales.
$1,000,000 to $2,000,000 sales price should be approx 21% of yearly sales.

Buying an On-Going Business:

When looking at the Income Statement or tax return, remove the following to get a true "Cash Flow".

  • Owner's Salary
  • Personal expenses
  • Life and health premiums
  • Auto expenses
  • Entertainment and vacation expenses
  • Depreciation
  • Interest on any loans
  • Net operating loss carried forward into this period
  • Any other expenses that are not applicable to the Buyer

Now that you have the Cash Flow you will use a multiplier between 1 and 3 against this number to obtain a final value. 

To determine which multiplier to use, consider all of the following questions (if positive use a higher multiplier).

Degree of difficulty in operating the business ie. a coffee shop has a lower degree of difficulty so you would use a higher multiplier
How long in profitable operation. Longer the better and would receive a higher multiplier
Value of the lease (if it is a good lease, long term at market value) would increase the multiplier.

Potential upside (if menu change or services added)
Future growth based upon good location.  Add these multipliers up and then create an average (by dividing by 4).  

Use that end result to calculate the true value of the business (ie. if resulting average multiplier is 2.2 and Cash Flow is $100,000 the value of the restaurant is $220,000).

Note: there are additional factors which could increase value.

What's it Worth?