Restaurant Valuation

The Number That Everything Else Depends On

Every restaurant transaction starts with the same question: what is the business actually worth? Not what the owner hopes it's worth. Not what a buyer wants to pay. The actual, defensible, market-supported number.

Get it wrong and everything downstream suffers. Price too high and the listing goes stale — serious buyers skip it, months pass, staff starts to notice, and eventually you're negotiating from weakness instead of strength. Price too low and you leave real money on the table — money you spent years earning through early mornings, late nights, and the relentless grind of running a restaurant.

An accurate valuation is not a formality. It is the foundation that determines how fast your restaurant sells, how much you walk away with, and whether the deal actually closes. At Smith Allen Group, we treat valuation as the most important step in the entire process — because it is.

How We Value Restaurants

There is no single formula that works for every restaurant. The right valuation method depends on the size of the operation, how it's managed, and whether it's profitable. We use three primary approaches and often combine them to triangulate the most accurate value.

SDE Method — The Standard for Owner-Operated Restaurants

Seller's Discretionary Earnings (SDE) is the most common valuation method for restaurants where the owner works in the business. SDE starts with net profit and adds back the owner's salary, personal benefits, one-time expenses, depreciation, and any other costs that wouldn't exist under a new owner.

Once we calculate the true SDE, we apply a multiple based on the earnings tier, concept type, and business quality factors. Most owner-operated restaurants in Southern California sell for 1.5x to 3.5x their annual SDE.

This method works best for single-unit restaurants generating under $2M in annual revenue where the owner is actively involved in daily operations. That covers the vast majority of restaurant transactions in California.

EBITDA Method — For Larger and Multi-Unit Operations

For restaurants with absentee ownership, management teams in place, or multi-unit operations, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is the appropriate metric. Unlike SDE, EBITDA does not add back owner compensation — because in a manager-run business, that role is already a paid position.

EBITDA multiples for restaurants typically range from 3x to 5x, with well-performing multi-unit concepts and franchise groups commanding the higher end. This method aligns with how institutional buyers, private equity firms, and sophisticated investors evaluate acquisitions.

Asset-Based Method — For Distressed or Pre-Revenue Operations

When a restaurant isn't generating meaningful profit — or is losing money — earnings-based methods don't tell the whole story. In these cases, we evaluate the tangible assets: equipment, leasehold improvements, furniture, fixtures, inventory, and the value of the lease itself.

Asset-based valuations are common for restaurants in turnaround situations, recently built-out spaces that haven't hit their stride, and closures where the real value is in the physical infrastructure and location. A well-equipped restaurant space with a favorable lease in a strong location can be worth considerably more than the sum of its parts.

What Goes Into a Broker Price Opinion

A Broker Price Opinion is not a back-of-napkin estimate. It is a structured analysis that accounts for every factor a buyer and their lender will scrutinize. Here is what we evaluate:

• Financial performance — Three years of tax returns, trailing 12-month P&L, revenue trends, cost structure analysis, and normalized earnings after add-backs
• Lease terms — Base rent, NNN charges, remaining term plus options, renewal conditions, assignment clauses, and landlord flexibility
• Location quality — Traffic patterns, visibility, parking, demographics, competition density, and neighborhood trajectory
• Concept viability — Whether the concept is trending up or down, market saturation, and how transferable the brand is to a new operator
• Equipment and condition — Age, condition, and replacement cost of all kitchen equipment, HVAC, refrigeration, POS systems, and furniture
• Market conditions — Current buyer demand in the area, interest rate environment, SBA lending appetite, and seasonal factors
• Comparable transactions — Recent closed sales of similar restaurants in the same market to validate the multiple and price point

The BPO synthesizes all of this into a recommended listing price range — not a single number, but a range that reflects where serious buyers will engage and where lenders will approve financing. This is the difference between a valuation that generates offers and one that collects dust.

SDE Multiples by Earnings Tier

The multiple applied to your SDE is the single biggest driver of your restaurant's valuation. Multiples increase with earnings because higher-earning restaurants attract more qualified buyers, support better financing terms, and carry lower risk for the purchaser.

These are the ranges we see in the current Southern California market:

Where you land within the range depends on the quality factors discussed below. A restaurant earning $200K SDE with a long lease, strong trends, and low owner dependency will sell at the high end of its tier. The same SDE with a short lease and declining revenue will sell at the low end — or below it.

Use our free SDE Calculator to see where your restaurant falls based on your current numbers.

Factors That Raise or Lower Your Multiple

The multiple is not arbitrary. It reflects the risk and opportunity profile of your specific business. Here are the factors that move the needle:

Lease Terms

This is often the single most important factor after earnings. Buyers need at least 5 years of remaining lease term (including options) to secure SBA financing. A 10+ year lease with favorable renewal terms can add a quarter-point or more to your multiple. A lease with 2 years remaining and no options can cut your value by 30% or more — because the buyer pool shrinks to cash-only purchasers willing to gamble on a renewal.

Owner Dependency

If the restaurant can't function without you in the kitchen or at the front door every day, that's a risk factor. Buyers pay more for operations with trained management, documented systems, and a brand that isn't tied to a single personality. If you are the restaurant, your multiple will be lower than a comparable operation that runs smoothly in the owner's absence.

Revenue Trend

Three years of consistent or growing revenue tells a buyer the business has staying power. A restaurant with rising same-store sales commands a premium. One with declining revenue — even if the current SDE looks healthy — will face skepticism about sustainability and a lower multiple.

Location and Market

Prime locations with high foot traffic, strong demographics, and limited competition support higher multiples. A restaurant in a growing trade area with new residential development is worth more than the same concept in a declining retail corridor. Southern California's market varies enormously by city and neighborhood — the location premium in Encinitas is different from Riverside.

Concept Type

Some concepts are simply more attractive to buyers than others. Established fast-casual concepts, proven franchise models, and restaurants with strong takeout and delivery revenue tend to command higher multiples. Highly specialized or niche concepts that require rare skills or serve narrow audiences typically sell at the lower end.

Equipment and Facility Condition

A restaurant with a recently renovated kitchen, modern equipment, and a dining room that doesn't need immediate investment sells for more. Buyers mentally subtract deferred maintenance from the purchase price. If your hood system is 20 years old and the walk-in is struggling, that's coming off the top — either through a lower multiple or a direct price reduction during negotiation.

When You Need a Valuation

Selling is the most common reason, but it's not the only one. You need to know what your restaurant is worth when:

• Selling your restaurant — to set the right asking price and negotiate from a position of knowledge. An overpriced listing wastes months. An underpriced one costs you real money.
• Buying a restaurant — to verify the seller's asking price against actual financials and market data. Understanding valuation methods protects you from overpaying.
• Partnership dissolution — when partners split, you need a neutral, defensible number to divide the business fairly. Guessing leads to lawsuits.
• Divorce proceedings — a restaurant is often the largest marital asset. Courts require a credible valuation, and opposing counsel will challenge anything that looks like guesswork.
• Estate planning — transferring a business to the next generation or gifting ownership interests requires documented fair market value for tax compliance.
• Financing and refinancing — SBA lenders require a business valuation as part of loan underwriting. The valuation directly affects how much a buyer can borrow and on what terms.
• Exit planning — even if you're not selling for 2 to 5 years, knowing your current value establishes a baseline and helps you focus on the improvements that will generate the highest return when you do go to market. Our seller representation services include strategic exit planning.

Free Valuation Tools

We built our free SDE Calculator to give restaurant owners an instant, no-obligation estimate of what their business might be worth. Enter your gross revenue, add-backs, and basic business details, and the calculator returns a value range based on your SDE tier and industry-standard multiples.

It also scores your business health across key metrics — rent-to-sales ratio, labor costs, prime cost, and profit margin — so you can see how your operation benchmarks against industry standards before we even talk.

The calculator is a solid starting point, but it has limits. It cannot account for lease nuances, location-specific demand, concept trends, buyer market conditions, or the dozens of qualitative factors that influence what a real buyer will actually pay. That is what a Broker Price Opinion is for.

Think of it this way: the calculator tells you the neighborhood. The BPO tells you the exact address.

Frequently Asked Questions

Get Your Number

Whether you're preparing to sell, evaluating an acquisition, or planning an exit that's still a few years out, it starts with knowing what the business is worth today.

Try our free SDE Calculator for an instant estimate. Or fill out the form on this page to request a confidential Broker Price Opinion — we'll review your situation, tell you what we'd need to get started, and give you an honest take on where your restaurant stands in the current market.

No pressure. No obligation. Just the number you need to make informed decisions.