Considering biting into the restaurant business? Here are ways to know the sector’s value

Be it ordering in food for daily meals or late-night binge, eating out on a weekend or just using delivery platforms during lockdowns, the restaurant and food services business will never run out of demand, since it appeals to basic needs of human beings to socialise and satiate hunger as well as taste-buds. After progressing from full service restaurants to fast-food outlets and chains that have spread across the globe through franchises, the food business is gearing up to boost home delivery through cloud kitchens, that also allow people to become entrepreneurs from home. The UAE’s food services sector is surging ahead at a rate or 17% and the revenue for the fast-food sector in the country is expected to reach $4.5 billion in 2022, followed by a projection of $2.36 billion for full service restaurants. In the US, the quick service restaurant industry’s output surpassed $261 billion for 2021, while the number was beyond $72 billion in case of full service restaurants.

The global cloud kitchen market is also on track to cross a valuation of $139 billion by 2028, with franchised cloud kitchens accounting for 60% of the revenue. In the modern food services landscape, after the pandemic increased demand for home delivery, the UAE’s leading cloud kitchen kitopi surpassed the valuation of $1 billion in July 2021. These trends indicate a strong growth in value for the food sector across the board, since consumers are flocking to fast-food outlets for affordable bites, and heading to upscale restaurants for unique dining experiences as well as diverse cuisines. This is trend especially in the US known for hosting people from across the globe and the UAE where people of more than 100 nationalities form 90% of the population. Before starting a restaurant or delivery kitchen, entrepreneurs need to look at the valuation of the sector in a particular market, as well as variables which determine and drive this value. For those already in the business, valuation of their business and factors behind it, need to be in focus when they expand a restaurant business through a chain or by offering franchises.

Take McDonald’s for example in the US, the heavily franchised business, which makes 56% of its revenues from franchises across the globe, ended the year at a valuation of $200.31 billion. The valuation lends credibility to the fast food brand, which is at an all time high, as its franchise operators are making 10 times that of the EBITDA.

So let’s look at the things that market analysts as well as any insightful restaurateur need to keep an eye on before setting up a new business, expanding a restaurant chain or selling a food service venture.

One method to value a restaurant, is the Gross Revenue Valuation, which focuses on the estimated appraisal of the business in the future, rather than the actual value. According to this, a full service restaurant can see an appraisal of up to 30% while the same can go up to 40% if we look at bars and coffee shops. Now the method takes the annual revenue of a restaurant or bar, and calculates the estimated appraisal on it between 30% or 40% based on the nature of the eatery, and that number is taken as a baseline, which determines the value of a restaurant.

Another way to know the value of a restaurant is to factor in construction costs, and 50% of the total money spent on construction of he eatery, is taken as a baseline, which decides how much the business is worth.

Then there’s the method which involves finding the gross profit of a restaurant business, and multiplying it with a multiple of discretionary earnings, ranging from 1.25 to 2.25, and the final result is the estimated value of the business.

But beyond these calculations, restaurant trends in a country and the price at which restaurants in a location were sold for are ;eading factors that influence food businesses anywhere.

The lease and cost of establishing an eatery in a particular area, the food supply chain, cold chain and storage expenses are also to be taken into consideration. Food import prices also determine valuation of the restaurant sector in a country such as the UAE, where 90% of the food comes from abroad.

Policies also drive the valuation of the food services sector, for instance in the US a license for a restaurant can cost up to $7000, while a cafeteria license in a city such as Dubai can cost as much as $54000. Policies such as the UAE government’s decision to set limitations on hiking food prices in the country, can also be beneficial for restaurants by insulating them from global inflation.

Costs of the assets and equipment ranging from smart appliances to kitchen tools, and furniture to storage facilities as well as devices such as coffee machines along with depreciation on them, are obvious factors to determine the value of a restaurant or fast food business. The economic conditions in a country also determine the difference in valuation between a cafeteria, a quick service restaurant and a high-end restaurant, depending on the spending power of the population.

The age of a business must also be calculated for valuation, for instance legacy restaurants are more dependable and while new fast food chains have higher growth prospects. Both are factors that contribute to the value of a business, alongside customer loyalty, which is essential for any food service establishment.

The valuation of a restaurant is crucial not just for selling a restaurant or offering franchises or cloud kitchens, but it also helps entrepreneurs attract investors in this age of expansion and digitization.