What is a enterprise multiplier for Restaurant or fast food industry? Review - Business FAQs - Business Do Business - Business News, Products Stock Market & Financial Advice

What is a enterprise multiplier for Restaurant or fast food industry? Review - Business FAQs - Business Do Business - Business News, Products Stock Market & Financial Advice

Question:

I am planning to buy fast food joint, popeyes chicken or del Taco.
And I want to know what would be the enterprise multiplier to time it with EBITDA. I have the cash flow and all the information but I just want to make sure I am not over paying for the business.

EBITDA x enterprise multiplier.

Answer:

The Market Approach

Commonly used by real estate professionals, this approach determines the value of a business by using an "industry average" multiplier. This industry average is based on the price at which comparable businesses have sold for. As a result, an industry-specific formula is devised, usually based on a multiple of gross sales. These formulae, often called Rules of Thumb can be troublesome, because they may not focus on bottom line profits, earnings, EBIT or EBITDA. If an industry Rule of Thumb says that companies sell for 50% of annual gross sales, would you pay 50% of sales if the company was not profitable? Probably not.

The appraiser therefore tries to focus on industry formulae where they are applied to a multiple of earnings. This approach is similar to analysing a publicly traded company by its P/E (price to earnings) ratio.The approach, if enough empirical data is available, can very often be the most reliable valuation methodology for many industries. .

Here are a few industry multiplier examples:
Restaurants (Family) 1/3 of annual sales
Car Washes (Tunnel) 5-7 times adjusted earnings
Service Companies (General) 1.7 X annual net profit + inventory + equipment
Manufacturing (Job Shop) 3-5 times EBITDA plus WIP

also -

Rule of Thumb Methods

One of the more common, albeit less exact, approaches to small business valuation is the use of industry rules of thumb. While most financial analysts cringe at the use of these approaches, they are often useful as a cross-check to more well-thought-out calculations.

There are many rules of thumb. Some examples are as follows:

Internet Service Provider $75 to $125 per subscriber plus equipment value
Weekly Newspaper 100% of one year’s gross income
Insurance Agencies 1 to 2 times annual gross commissions
Real Estate Agencies .2 to .3 times annual gross commissions
Restaurants .3 to .5 annual gross sales
Travel Agencies .05 to .1 times annual gross sales
Convenience Stores .5 times annual gross sales
Liquor Stores 2 times owner earnings plus asset value

The good news about rules of thumb is that they can be derived from actual historical sales. They are also usually easy to calculate. The bad news is that they are representative of the average business sold. So it is recommended that they always be tempered with judgment and used in conjunction with other methods

If needed I can supply you with more info – HOWEVER – please note that the financial records of the company and the local economy of the town/city of the business you are looking to buy will yeild more than any equation I can give you.