Trial court relies on just cash flows (but not gross sales) to value a high-revenue restaurant

BVWireIssue #89-3
February 17, 2010

A couple owned a 60% interest in a successful Ohio restaurant. During their divorce, the wife’s expert valued the restaurant at $650,893. Interestingly—the husband’s first expert used a “blended” approach (percentage of average cash flow and gross sales) to find the restaurant was worth $691,000—or nearly $40,000 more than the wife’s. Perhaps that’s why the husband retained a second expert, who reduced the first valuation to take into account cash, deposits, accounts and notes payable, and reached an “adjusted value estimate” of $279,494.

The trial court started with the husband’s first valuation—but it may have misheard the expert’s testimony, because it found that a restaurant valuation could be based on a percentage of gross sales or a percentage of cash flow; and in this case, the profitable restaurant would likely sell for 2.5x cash flow. This resulted in a value of nearly $795,000—which exceeded the expert’s blended average by roughly $104,000, so the court added this amount to the second expert’s value, to reach a final determination of nearly $385,000, allocated to the husband.

On appeal in Foppe v. Foppe (Oh. App., Dec. 30, 2009), the husband argued that the trial court should have relied on both portions of his expert’s value—but the appellate court disagreed. On closer examination, the first expert used a range of values from both cash flows and gross sales, and he testified the former would likely determine the sales price. Although the trial court may have “misstated” the expert’s valuation methods, its decision was based on competent evidence, including the restaurant’s steady revenue growth.

To ensure clear, comprehensive, credible values, take a look at the just-published, BVR’s Guide to Restaurant Valuation by Ed Moran (along with industry professionals.) The Guide includes a fascinating overview of the industry—including an inside look at “winning kitchens”—and provides details on site visits, market research, fixed asset values, financing, using projections, the market approach, franchises, and more. Check out the table of contents for a “complete smorgasbord” of all this Guide offers: You’ll be impressed by the variety and by its winning style.

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