Study uncovers souring restaurant chain valuation multiples

BVWireIssue #71-1
August 6, 2008

A recently published study by Restaurant Research, LLC highlights a disturbing trend in the restaurant industry.  The 6th Annual Restaurant Valuation Trends Industry Data Report "outlines EBITDA multiple estimates on 30 chains based on data provided by several leading appraisal firms.”  This year’s survey showed that “restaurant valuations declined to their lowest levels in four years, while cap rates continued to rise.”  Rising food and fuel costs and the tightening of credit markets makes this unlikely to change in the near future. 

The announcement of this study comes on the heels of the recently announced Chapter 7 bankruptcy filings by S&A Restaurant Corp., the parent company of restaurant chains Bennigans and Steak & Ale.  According to, the filing was the largest restaurant bankruptcy since 1997.  Though it may be tempting to lay the blame on tough economic conditions, it’s important to know that S&A Restaurant Corp.’s parent company, Metromedia, changed CEOs three times in the last three years.

While investors and venture capitalists may be lukewarm on the restaurant market right now, a recent query found that by far, more Pratt’s Stats® users were looking for transaction data relating to SIC 5812 (restaurants, non-drinking) than any other industry (BVWire #67-4 Wednesday, April 23, 2008), suggesting that this industry is still quite dynamic.  And not all necessarily in the wrong direction either.  Panera Bread, one of the companies included in the Restaurant Valuation study, announced 2nd quarter earnings of $0.55 a share on July 23rd, and beat estimates by $0.06 a share.   Whether S&A’s failure was mainly based on a difficult economic climate, or whether poor management and a weak concept was to blame for their downfall, the clear message is that the market is following the law of the jungle: Only the strong survive. 

Kevin Yeanoplos CPA/ABV, ASA (Brueggeman and Johnson Yeanoplos, P.C., Seattle, Washington), who has appraised many a restaurant, provided the BVWire with the following comments on this recent development:

"Only the strong survive" hits the nail on the head.  And without any question, we're talking about strength of management.  Some business appraisers make the mistake of focusing almost exclusively on the quantitative aspects of a restaurant, looking just at the raw numbers.  From this limited perspective, a business' value changes simply due to changes in income, EBITDA or some other measure.  They forget to consider the very important qualitative aspects of the business.  The ability or inability of management to change a company's future economic performance is arguably the most important qualitative factor that should be considered.  These qualitative factors are at least as important if not more important in determining the value of a closely-held business.

Please let us know if you have any comments about this article or enhancements you would like to see.