The best way to start a discussion of the value of a restaurant business is to be sure that everyone understands what a business valuation is all about and why one would want to have an idea of what a restaurant business is worth in terms of monetary value.

To begin, the valuation of a business is the valuation of the components of the business most commonly referred to as the assets and the goodwill. Since most restaurants are holders of a leasehold interest, and not owners of the land and building where the restaurant is located, real property is seldom part of a restaurant valuation. When real property is involved, it is valued or appraised separately and then added to the value of the business.

Since goodwill can be such an important component of the restaurant's valuation it pays to understand what it is. Our definition is simple. Goodwill is an intangible asset that can have a material influence on the worth of a restaurant business. Goodwill carries the expectation of continued good reputation and business success. Goodwill is a capital asset and a relatively high goodwill value will materially influence the worth of the restaurant.

In reality, there are two types of goodwill. One is the goodwill of the business that may be relatively easily transferred. The other is the goodwill of the owner, owners or key personalities of the business. When one's personality is a key ingredient in guest relations and sales the passing of such goodwill can be difficult if not impossible to achieve.

Before beginning a restaurant business valuation there are a number of steps to be taken including the gathering of vital information. Our list of information to review would include:

- Three or more years of financial statements
- Sales and income tax returns
- A copy of the existing property lease
- Copies of all equipment leases and vendor contracts
- Accounts receivable and accounts payable aging
- Copies of all notes payable and receivable
- Copies of all advertising and employee contracts
- A list of all the included and excluded equipment

We would also acquire the demographics of the area including both residential and business statistics.

Prior to reviewing the gathered data, a thorough visual inspection of the premises and its equipment is done. Extensive touring of the neighborhood is done to track competitors and to catalog generators of customers. Traffic counts are ascertained for the streets in front of and adjacent to the site.

After a thorough analysis of the information listed above, we will come to a preliminary conclusion as to the worth of the restaurant business that is principally based on the quality of the cash flow. One must always remember that buying a business is like putting money into any investment. The quality of the return on the invested capital is always a prime determinant of the worth of the investment. This analysis helps us to understand that the approach to valuing a restaurant is not unlike putting a value on a stock, bond, certificate of deposit or a savings account.

The follow-through after the initial conclusion of the worth of the restaurant business is the application and review of some forty factors that can cause the valuation to rise or fall. Some of the most important factors to influence the value include:

- Comparable business sales
- Replacement cost of the facility
- The quality of the lease in terms of rate and length of term
- The condition and extent of the furniture
- Fixtures, equipment and leasehold improvements
- Assumable loans and liabilities
- Administrative systems
- Quality and extent of personnel
- Name, reputation
- Recipes, customer lists
- Franchise rights
- Location, sales trends, area trends
- Competitive trends
- Whether the sale is to be all cash or financed

Having a clear understanding of the value of a restaurant business is an important first step in the business of selling a restaurant. Having a clear understanding of the worth of a restaurant business can also be a vitally important step in supporting the asking price of the business when it is the process of being sold.