How Business Appraisers Should Evaluate Restaurants Post-Pandemic
By Rafael Amanau, Senior, Advisory Services
The COVID-19 pandemic wreaked havoc on many of this nation’s small businesses and industries. In March 2020, many believed COVID-19 would be over by the summer; little did we know that more than 18 months into the pandemic restrictions would continue to pop up as case numbers spike once again.
Few industries were more negatively impacted by the pandemic than the restaurant industry. Whether it was government-imposed shutdowns, new health and safety regulations, or a quick pivot to takeout and delivery, restaurant owners had to adapt to the new normal or shut down their business permanently. Those that survived the initial lockdowns faced many additional challenges: a customer base wary of returning to in-person dining; increased expenditures related to health and safety; increased focus on outdoor dining; staffing shortages; supply chain issues; and the adoption of new technology to facilitate contactless ordering and payments.
The aforementioned factors caused a decrease in projected cash flows throughout the industry, as well as increased volatility and uncertainty. That combination of outcomes played a significant role in the decline of restaurant values since the beginning of the pandemic. Utilizing BVR’s DealStats (formerly Pratt’s Stats) transaction database, it’s clear that transaction searches for restaurants “post-pandemic” yield lower multiples compared to pre-pandemic results (assuming a March 15, 2020 pandemic start date).
In the market approach (method of determining the value of an asset based on the selling price of similar assets), restaurants are typically valued using a seller’s discretionary earnings (or SDE, calculated as the sum of operating profit, the owner’s compensation, and non-cash charges) multiple. A transaction search of restaurants in the one-year period post-pandemic, assuming a March 15, 2020 start date, yielded a Market Value to Invested Capital (“MVIC”)/SDE multiple of 1.75x as compared to the one-year period prior to the start of the pandemic multiple of 1.95x. These multiples suggest that for every $1 million in SDE, MVIC values were approximately $200,000 less post-pandemic compared to pre-pandemic.
When applying the market approach, business appraisers often look up to five years back when evaluating peer transactions. Now more than ever, business appraisers need to meticulously scrutinize the transactions they rely on. Appraisers must ask themselves: Should pre-pandemic transactions be considered with post-pandemic valuation dates? Each case is different, but for restaurants specifically, it’s important to consider value-added by synergies and state regulations.
Restaurants are beginning to recover nationwide, but the issues surrounding business valuation remain. For any questions, please reach out to a Marcum professional.