1. BVR’s Guide
Business Valuation Resources, LLC
1000 SW Broadway, Suite 1200
Portland, OR 97205
(503) 291-7963 Fax • (503) 291-7955 • www.BVResources.com
7. Valuation Report Cross-Reference Guide
A quick reference guide to help with the creation of valuation reports, containing a list of report
sections referenced to their respective chapters and pages in the book.
Opening Letter from Valuators
Table of Contents
Disclosures and Description of the Assignment
Overview of the Valuation
Sources of Information . . . . . . . . . . . . . . . . . . . Chapter 2, Chapter 4
Basis and Standard of Value
Economic and Industry Factors Affecting the Company . . . . . . . . Chapter 2
National Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 29
Regional & Local Economy . . . . . . . . . . . . . . . . . . . . . . . . . . p. 30
Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 32
Survey of the Subject Restaurants . . . . . . . . . . . . . Chapter 3, Chapter 7
Financial Analysis of the Company . . . . . . . . . . . . . Chapter 8 pp. 168–170
Valuation of the Subject Interest
Methods Considered, Selected and Rejected
Asset Approach . . . . . . . . . . . . . . . . . . . . . . . Chapter 9 pp. 181
Income Approach . . . . . . . . . . . . . Chapter 12 pp. 295–288, Chapter 6
Market Approach . . . . . . . . . . . . . . . . . . . Chapter 10 pp. 205–215
Indication of Value
Discount for Lack of Control . . . . . . . . . . . . . . . . . . . Chapter 9 p. 194
Discount for Marketability . . . . . . . . . . . . . . . . . . . . Chapter 9 p. 192
Reconciliation of Indicated Values
Conclusion of Value
Justification of Potential Financing . . . . . . . . . . . . Chapter 13 pp. 181–303
Appendix A – Financial and Other Information
Appendix B – Sources of Information
Appendix C – Statement of Assumptions and Limiting Conditions
Appendix D – Qualifications of Appraisers
Appendix E – Glossary of Terms
Appendix F – Glossary of AICPA Additional Terms
Appendix G – The National Economy
9. BVR’s Guide to Restaurant Valuation 3
Please indulge me while I spend a few short paragraphs describing my background so that you
can see the evolution of my interest in restaurant valuation.
My undergraduate degree in economics from Georgetown University and my Masters degree in
my four year obligation as an Officer in the United States Air Force. My service fulfilled, I went to
work for General Electric and their Medical Systems Division in the San Francisco Bay area. After
several years I decided to go into business for myself, and Nancy and I returned to Tucson, Arizona.
I took a job at a local CPA firm while I completed accounting coursework at the University of
Arizona, which was preparatory to taking the CPA exam. Transferring credits and completing
these accounting requirements awarded me another degree, which was in accounting. So, you see,
I really cheated on this third degree.
Several years later in 1978, I opened my own firm, and shortly afterward I acquired the account-
ing and tax work for my first four restaurants, which were local franchise McDonald’s restaurants.
In high school I worked at Gino’s in Baltimore, Maryland. Gino’s (named for Gino Marchetti, a
player who helped win the Championship for the Baltimore Colts in 1958 and 1959) was an exact
copy of the early McDonald’s restaurants, which were not yet established in Maryland at that time.
In these early years, my CPA clients were a combination of various local businesses. The Jimmy
Carter years with the 20% interest rates eliminated my construction clients, so I decided my future
emphasis would be the acquisition of additional restaurant clients. In 1985, Jeff Quick (who had
been an auditor and a regional controller for McDonald’s) and I formed Moran & Quick, which
At the time of this merger, our combined offices were producing approximately 3,000 financial
statements per month in the restaurant and franchise industry. From sports bars and fast food
restaurants to fine dining establishments, we advised the owners on all aspects of their business.
On any given month, restaurant purchases or restaurant sales occurred. Owners often turned to
us to help them determine pricing. As you will learn in this workbook, rules of thumb prevail in
this industry. Originally, I had relied on spreadsheet programs to help me simulate profit and loss
statements under various pricing options.
It seemed odd to me that a restaurateur would work his or her entire life and then determine
the value of this life’s work with a simple multiple. There had to be a better solution.
In the mid-1990s, I signed up for an intensive week in Las Vegas with Kevin Yeanoplos, CPA/
ABV, ASA, and NACVA (National Association of Certified Valuation Analysts) to obtain the
designation, Certified Valuation Analyst. A big thank you goes to all my friends at NACVA. From
this point on, I began a quest to read, attend, and acquire every article, lecture, conference, or
reference book that dealt with the restaurant industry and its science (art??) of valuation.
10. BVR’s Guide to Restaurant Valuation4
My first formal valuation (a sports bar), which I had valued at $100,000, undershot the eventual
sales price by $250,000. The owner later confessed to me that there were some things he had not
told me about. Welcome to my world!
Along the way I acquired other valuation certifications (Certified Business Appraiser and, very
recently, Accredited in Business Appraisal Review from the Institute of Business Appraisers. I was
Accredited in Business Valuation, from the American Institute of Certified Public Accountants
of Business Appraisers and the Financial Consulting Group.
the Billy Joel song quote I always reference—“Listen, this is good information from a man who has
made mistakes.” And I’d like to begin this restaurant valuation workbook with the same quote. As I
While this workbook is intended for valuation professionals, I realize that bankers, controllers,
restaurant owners, financial consultants, and other industry experts may read it as well. I will
attempt to be sensitive to this. In the offenses I make, I try to offend everyone evenly, although I
very sincerely intend no disrespect.
I dragged my guest authors one by one through my focused interview approach. I tried to be sensi-
tive to their time constraints and busy schedules. As this book goes to press, each co-author has
seen only their piece of the puzzle. It might be fair to state that not everyone will agree with the
information in my chapters, or my logic, historic experience, or statements. However, my overall
feeling is that these guest authors have really “kicked it up a notch” and, in some cases, they have
even corrected my direction. I am so thankful to them.
When I first discussed this book with the editors at Business Valuation Resources, they encouraged
me to go outside of my Horne partners in order to fire test my experience. I think this was good
advice. However, I want to pay sincere respect to the Horne Restaurant and Franchise Partners:
Jeff Quick, Dee Boykin, Mike Roberts, Vera Reed, and SuzAnne Eubanks. This gang eats, breathes,
and sleeps restaurants twenty-four hours a day. You can reach any of them through the Horne
website: www.horne-llp.com. Here is Jeff ’s cell phone number…Just Kidding, Jeff!
Actually, I want to thank everybody at Horne, but especially those poor souls who, over the years,
had to work directly with me, by typing, proofing, correcting, re-correcting, assembling, polishing,
and suggesting changes. For this, I thank Carla Diaz, Jayna Woods, Nick Trent, Doug Letkeman,
Cindy Chaney, Tanya Eskue, Karen Osborne, and Bita Abrams.
You will also be pleased to know that Don Wisehart, ASA, CPA/ABV/CFF, CVA, MST (Master in
11. BVR’s Guide to Restaurant Valuation 5
Thanks, Don! We had some exciting ideology battles, with Don winning most. Needless to say, any
It is my intent, in this workbook, to share my experiences with you so that you benefit from them. It is
of valuation that you rely upon for formulas and reference. It would be helpful to have Jim Hitchner’s
Financial Valuation, Second Edition (Third Edition early 2010) handy to supplement my references.
intended—you know I love you! You deserve the best valuation possible and that is my challenge.
About the Author
Edward F. Moran, Jr., MBA, CVA, CBA, ABAR
for franchise and restaurant clients throughout the United States.
Ed has been advising small businesses and franchises on account-
ing and valuation issues for more than 35 years. He has been
Examiner, CPA Expert, Valuation Strategies and Franchise News,
among others. He is author of Special Industry Valuations:
Restaurants, Bars and Nightclubs, Financial Valuation, Second Edition and Third Edition, edited
by James Hitchner, CPA/ABV, ASA. Ed has valued, or participated in hundreds of industry sales,
mergers, purchases, exchanges, estate planning and gift engagements.
He is currently a Certified Valuation Analyst (CVA) from the National Association of Certified
Valuation Analysts as well as a Certified Business Appraiser (CBA) and Accredited in Business
Appraisal Review (ABAR) from The Institute of Business Appraisers. Ed recently retired as a
Certified Public Accountant (CPA), Accredited in Business Valuation (ABV), from the AICPA.
of Science in Business Administration (with a major in Accounting) from the University of Arizona.
Mr. Moran is a member of the American Institute of CPA’s and the Arizona Society of CPA’s as well as
other professional, Air Force, and civic groups. He is a member of several organizations including the
also a member of National Franchise Consultants Alliance, a nationwide alliance of accounting firms.
12. BVR’s Guide to Restaurant Valuation6
The following individuals provide their expertise in portions of this book:
Thomas Bates is an Associate Professor of Finance at Arizona State University. He has a Ph.D.
from the University of Pittsburgh, and a B.A. from Guilford College. His research areas include:
corporate finance, valuation, corporate governance and executive compensation, financial state-
ment analysis, mergers and acquisitions, law and finance. He is a Dean’s Council of 100 Scholar,
a McCoy-Rogers Fellow, Eller College of Management, 2008, and a Scrivner Teaching and Service
Award recipient, 2008.
Michael L. Bradnan, FCSI, CSI
Michael L. Bradnan began his career managing a full service foodservice equipment dealership.
In 1977, Mike founded his own consulting firm which provides planning, design and manage-
ment services to the foodservice industry. Michael L. Bradnan & Associates, Ltd.’s clients include
architects, hospitals, schools and universities, private foodservice clients, correctional institu-
tions, country clubs and national restaurant chains. Mike is a Lifetime Professional Member of
the Foodservice Consultants Society International (FCSI) and a Professional Member of the
Construction Specifications Institute (CSI).
John T. Hall
John has been in the restaurant business for 36 years on both the operational and the finance
sides of the business. John spent 30 years with McDonald’s Corporation in positions ranging
from crew person to Vice President. He was Regional Manager for a 300 restaurant territory,
Division Controller for a $4 billion division, and held numerous other operational and financial
positions. He also worked on new concept and new restaurant development. During his time with
McDonald’s, John was involved in the pricing, sale, or purchase of over 1,000 restaurants. John
was also a partner in a CPA firm servicing the restaurant industry for 5 years, and is currently the
CFO of a $90 million restaurant company and an oil and gas exploration company.
John Hamburger is the founder and president of Franchise Times Corp., a national publisher
of business trade journals in franchising and finance. He publishes Franchise Times Magazine, a
national franchise industry trade journal; the Restaurant Finance Monitor, a monthly financial
newsletter which covers the capital markets in the restaurant industry; and Foodservice News, a
monthly newspaper for independent foodservice and restaurant operators in the Upper Midwest.
John also produces a number of industry executive conferences including The Restaurant Finance
& Development Conference and the Franchise Finance & Development Conference.
13. BVR’s Guide to Restaurant Valuation 7
John has almost 30 years of experience in franchising and finance and during that time served as
chief financial officer of a public restaurant chain. He is frequently quoted about financial matters
concerning restaurant, franchise and hospitality businesses in national business publications
including The Wall Street Journal and USA Today.
John serves as a board member of Park Midway Bank in St. Paul, Minnesota and is director of
the Western Golf Association, which administers the Evan’s Scholarship Program. He attended
St. John’s University in Collegeville, Minnesota and the University of St. Thomas in St. Paul,
Minnesota where he graduated with a B.A. in accounting in 1977.
Cindi Roney has 22 years experience in banking for commercial lending, specializing in franchise
Prior to this, she was the SVP Manager Franchise & Specialty Lending/Regional Credit Manager
for the National Bank of Arizona.
Bruce S. Schaeffer
Bruce S. Schaeffer, co-author of CCH Franchise Regulations and Damages and author of the BNA
Tax Management Portfolio on Franchising, is an attorney in private practice with over 30 years’
experience and offices in New York City. Mr. Schaeffer holds a Master of Laws (in Taxation) from
New York University School of Law and a Juris Doctor degree from Brooklyn Law School. He is
the founder and president of Franchise Valuations, Ltd. (www.FranchiseValuations.com), which
provides expert testimony on damages and valuations in franchise disputes, performs lender due
diligence, and resolves succession and estate planning problems for the franchise community.
Mr. Schaeffer has been named a “Legal Eagle” by Franchise Times magazine. He can be reached
at 212.689.0400 or Bruce@FranchiseValuations.com.
Claudia’s accounting career began with the McDonald’s Corporation in 1979. After gaining
valuable experience with this Fortune 500 company. In 1985, she began her career at the firm
of Foelgner &Ronz, P.A. As the Managing Partner since 1992, she has helped the firm achieve
astronomical growth and still maintains a strong niche with McDonald’s franchisees as well as
other restaurants. Foelgner, Ronz & Straw, P.A. also gives back to the community by supporting
the Ronald McDonald House Charities and other non-profit organizations.
Kevin R. Yeanoplos, CPA/ABV, ASA is the Director of Valuation Services for Brueggeman and
Johnson Yeanoplos, P.C., a firm with offices in Seattle, Washington, Tucson, Arizona and Salt
Lake City, Utah that specializes in the areas of business valuation, financial analysis and litigation
14. BVR’s Guide to Restaurant Valuation8
support. Mr. Yeanoplos has extensive experience, having valued over 900 businesses for a variety
of purposes, including divorce and other litigation, gift and estate taxes, mergers and acquisitions,
and ESOP’s. He has valued businesses for a broad spectrum of companies in various industries,
and various retailers. He has also valued various professional practices, including accounting firms,
law firms, and medical and dental practices. Mr. Yeanoplos has evaluated economic loss suffered
by parties in cases involving contract disputes, medical malpractice and wrongful termination. He
has been recognized as a leading expert in accounting/valuation by attorneys listed in The Best
Lawyers in America as part of Best Lawyers Preferred.
Mr. Yeanoplos is currently serving as Chair of the AICPA’s ABV Credential Committee and a
of the Year in 2006. He served as a member of the AICPA’s Consulting Services Business Valuation
Committee, Chaired the AICPA’s 2000 Annual Business Valuation Conference, is Chair of the
ASCPA’s Business Valuation Committee and was the founding Chair of the UACPA’s Business
Valuation Committee. Mr. Yeanoplos is a Certified Public Accountant Accredited in Business
Valuation and was in the charter class of those earning the ABV credential. In addition, he is an
Accredited Senior Appraiser in the Business Valuation discipline for the American Society of
Appraisers. He is a member of the American Arbitration Association’s Commercial Panel. He is
currently a member of the ASA’s International Board of Examiners.
15. Chapter 1
Rules of Thumb
16. BVR’s Guide to Restaurant Valuation 11
Chapter 1: Rules of Thumb
Why do you think my first chapter is about restaurant rules of thumb (ROT)?
I cannot think of another industry where the use of primitive rules of thumb is more prevalent.
Rules of thumb vary even among different types of restaurants. Talk to a Wendy’s owner operator
and he will have a different metric than a McDonald’s owner operator. I suspect you probably
already sense that a simplistic rule of thumb in a restaurant valuation setting would ignore many
of the detailed observations that we will be discussing in this book.
In performing a restaurant valuation, the valuator should ask the owner what simple multiples
he or she might use to determine a restaurant’s value. Remember, after you submit your valu-
ation, the owner will use these ROTs to question, criticize, or evaluate your results. Knowing
what these ROTs are from the start will allow you to convincingly explain why you think your
valuation resulted in a higher or lower estimate of value.
At one point in my career I decided to correlate the sales price of restaurants with the dollars in
the expense account labeled “operating supplies.” Of course, this was my “camp” answer to the
use of ROTs. The premise was that a store with more sales would use more operating supplies. A
restaurant with more sales very likely would be worth more money. A good old regression analysis
could possibly supply me with a formula that I could use to fool disbelievers. I had a lot of fun
with this silly premise. You should have seen some of the looks that I was given when I announced
a restaurant’s value using this bizarre method! The point of my madness was to show the owner
how crazy the use of simplistic formulas was.
Why would an owner work an entire lifetime to build up a restaurant empire, only to value it
at the conclusion with a simple rule of thumb? If you don’t think this happens, you are wrong. I
have seen it time and again—hundreds of thousands of dollars either taken from the table or left
on the table because of this stupid practice.
Examples of Rules of Thumbs
Here are some examples that are often bandied about1
• 1.5 to 2.0 times the seller’s discretionary earnings (the cash flow of the owner), plus
fixtures, equipment, and inventory.
• 25 to 35% of the independent’s annual sales.
1 Council of International Restaurant Brokers; North Palm Beach, FL 33408; Valuing Restaurants: Handbook of
Business Valuation, West and Jones, First and Second Edition, John Wiley & Sons; National Restaurant Association,
Washington, DC 20036-3097; Inc. Magazine, various annual issues Ultimate Valuation Guide.
17. BVR’s Guide to Restaurant Valuation12
Chapter 1: Rules of Thumb
• 40 to 50% of franchise annual sales.
• 2.5 To 5.0 times the monthly net revenue (should this be annual?), which has been
stabilized. Fixed assets, lease, and intangibles are included in the indicated value.
• 1.0 to 3.0 times the owner’s cash flow, which has been stabilized. Fixed assets, lease, and
intangibles are included in the indicated value.
• Net equity value is determined by adding the net of current assets less liabilities to the
value of formula assets determined above.
• Inc. Magazine had a variety of reports, including the following:
• 1.94 times net income; and
• .38 times net sales.
• Full-service—33% of annual sales.
• Fast food—40 to 50% of annual sales.
• Franchised fast food—50 to 60% of annual sales.
• Casual style restaurant—33% of annual sales.
• Fine dining—20 to 30% of annual sales.
• Full-service tablecloth restaurant—2.5 to 3.0 times annual net (SDC), depending on the
condition of the premises.
• Family restaurant—30% of annual sales.
• Restaurant (no alcohol)—44% of annual gross sales.
• Restaurants overall—20 to 30% (doesn’t say of what? Assume sales).
• Bagels—30% of annual sales.
• Barbecue—150 % of annual sales.
• Barbecue—just kidding on that last statistic, 30% of annual sales.
• Bistro—30% of annual sales.
18. BVR’s Guide to Restaurant Valuation 13
Chapter 1: Rules of Thumb
• Brewpubs—25 to 30% of annual sales.
• Billiard parlors—45% of annual sales.
• Cajun—30% annual sales.
• Caribbean—30% of annual sales.
• Chicken—30% of annual sales.
• Chinese—33% of annual sales.
• Coffee house—40% of annual sales.
• Continental—30% of annual sales.
• Deli—30 to 40% of annual sales.
• Diners—30% of annual sales.
• Fine dining—30% of annual sales.
• French—30% of annual sales.
• Gourmet shops—40% of annual sales.
• Hamburgers—35% of annual sales.
• Ice cream—35 to 40% of annual sales.
• Irish—40% of annual sales (should be more!!).
• Italian—30% of annual sales.
• Mexican—30% of annual sales.
• Nightclubs—25% of annual sales.
• Pancake House—30% of annual sales.
• Pizza—30% of annual sales.
• Sandwiches—40% of annual sales.
19. BVR’s Guide to Restaurant Valuation14
Chapter 1: Rules of Thumb
• Seafood—40% of annual sales.
• Sports bars—40 to 45% of annual sales.
• Steakhouse—40% of annual sales.
I am sorry to report that some of the worst ROT offenders come from the valuation industry.
I will later be discussing the contribution margin and its dramatic effect on profitability in the
restaurant industry. If an industry ROT is developed from restaurants with lower levels of sales
volumes, the ROT is worthless. If an industry ROT is developed from a wide average, the ROT
may not be appropriate for the restaurant that you are valuing. Irish restaurants are worth 7%
more than Chinese restaurants, and 10% more than Mexican restaurants. Does Guinness have
a lower Cost of Goods Sold?
This is crazy stuff.
Don’t use any of these rules of thumb.
The Internet to the Rescue
Googling “restaurant valuation” returned 2,130,000 hits. This scary stuff has to be the equivalent
of the TV series “Hell’s Kitchen” for restaurant valuations. I immediately saw a “Value a Restaurant
$25,” “Restaurant Valuation $399,” and even better, “Value Your Restaurant—Find out in 10
Seconds for Free!”, “Fast Food Restaurant, Franchise Valuation Formula provides a general busi-
ness valuation formula for fast food restaurants and franchises based on a percentage of annual
gross revenues,”…and on.
I spotted a PDF from the Cornell Hotel and Restaurant Administration Quarterly titled, “A
Financial Approach.” This ancient article from 1991 touted the use of a weighted average cost of
capital. I did not purchase it. I did order a $7.95 PDF from Harvard Business Publications, think-
ing that “Valuation Ratios and the Restaurant Industry” might be an academic breakthrough I
could use for my book. The PDF turned out to be a case study problem based on four restaurant
groups. Sadly, no answers were offered in the PDF! What was I to do?
According to my favorite blog, “I was told that restaurants sold for three times cash flow or two
times cash flow, sales times the multiplier ( say 30% of gross) to arrive at a valuation…” I pictured
some poor restaurant owner struggling to price his restaurant for sale using this madness.
Don’t use any of these Internet restaurant valuation templates.
20. BVR’s Guide to Restaurant Valuation 15
Chapter 1: Rules of Thumb
Maybe there are one (or two) models buried somewhere in the 2,130,000 hits that might be
useful. Good luck hunting!
Don’t give up on me, however. I’ll demonstrate a much better solution in my chapter titled,
Justification of Purchase Price with Mike Adhikari’s Business ValueXpress from the Merger &
Acquisition Industry Segment.
Where Do We Go from Here?
Researchers often see a sales price to revenue factor of $.30 or $.40. Deliver a valuation report to a
As Claudia Straw, Bruce Schaeffer, and I will later discuss, a multiple of cash flow or EBITDA
seems to have the most value potential in the restaurant setting. Perhaps this multiple will get us
somewhere on the correct playing field. However, it is shadowed with various grease traps that
will catch the unaware analyst.
Multiples of cash flow are related to their inverse—capitalization rates. A multiple of five times cash
flow is equal to a capitalization rate of 20%. A multiple of four times cash flow is equal to a capital-
ization rate of 25%. A multiple of six times cash flow is equal to a capitalization rate of about 17%.
If the discount rate less the long-term growth rate equals the capitalization rate and the capi-
talization rate is always 20%, doesn’t this imply that the growth rates will always be the same?
Or does it make sense that discount rates might proportionally increase as growth rates increase
such that the overall result for the capitalization rate is always 20%? Higher growth rates seem to
be a factor in lower capitalization rates rather than higher capitalization rates. If there is one thing
we can take from the Nielsen Claritas market studies you will examine later, it is that growth rates
vary dramatically among restaurants.
We will value two restaurants, each with $200,000 in cash flow. A quick keystroke or two tells us
that each of the restaurants is worth $1,000,000.
It is that simple and you were stupid to purchase this book.
Or were you?
1 (Now this is not to say that an unusual group of these stores might not be worth this calculation or
even worth less.)