What's my restaurant worth?
Surprise: Cash flow is irrelevant to buyers, who care more about zoning.
(FORTUNE Small Business) -- Dear FSB: I have a small restaurant (approximately 800-square feet). The rent is $850 per month, including tax and garbage pick up. I am thinking of selling it if we average about $700-$750 per day in food sales. My food cost is about 40 percent of the operational expenses. What do you think the restaurant is worth?
- Frank, Orland Park, Ill.
Dear Frank: "Your cash flow is completely irrelevant," says Jerry Prendergast of Prendergast & Associates, a Los Angeles firm that has helped open over 250 restaurants. "Buyers are interested in your zoning entitlement." If your restaurant is located in a very restricted area, they know there is no potential for growth other than increased volume. But the more add-ons (read: liquor license) you're allowed, the better. They'll boost the value of any restaurant up for sale, regardless of whether it's ever made a nickel. With that said, locate an appraiser who can give you an estimated price tag for your restaurant by factoring all the variables into the equation.
Before selling it off, reprioritize your expenses. The national average for food costs in the restaurant industry is 33 percent (the same goes for labor costs). "Forty percent is way too high," says Prendergast, who recommends structuring your menu around seasonal availability. For instance, a savvy chef will take wild salmon off of his menu during March because he knows that its price goes through the roof around then.
Joyce Mallonee of Mallonee & Associates, a marketing firm in Lafayette, Calif., that services specialty-food companies, suggests exploring additional revenue streams. For instance, you could inexpensively build a "To-Go" section in the front of your restaurant. If you have a signature product, you might consider selling a take-home version at your check-out. Stay away from selling your stuff anywhere else - especially if there's meat involved. "If there's a third-party, you have to go through the very expensive and difficult process of getting USDA approval. But if your take-home products are just an arm of your restaurant, then you're exempt."