Most restaurant owners think their business is worth more than it is. Not because they are irrational, but because they are using the wrong math.
Revenue is not value. A restaurant doing $2 million a year is not worth $2 million. It might be worth $300,000. It might be worth $800,000. It might be worth nothing if the lease has two years left and the owner is the only person who can run it.
Here is how buyers and lenders actually calculate what a restaurant is worth.
The two methods: SDE and EBITDA
For single-unit owner-operated restaurants, the standard valuation method is Seller's Discretionary Earnings, or SDE. SDE starts with net profit and adds back the owner's salary, owner benefits, depreciation, amortization, interest, and any one-time or non-recurring expenses. It represents the total economic benefit available to a working owner-buyer.
For larger operations -- multi-unit groups, manager-run concepts, or businesses with $2 million or more in EBITDA -- buyers and lenders shift to EBITDA multiples. EBITDA (earnings before interest, taxes, depreciation, and amortization) is more appropriate when the business can run without the owner, because it measures the business's earnings independent of how it is financed or owned.
The difference matters because SDE includes the owner's labor as part of the return. EBITDA does not. A restaurant where the owner works 60 hours a week has a much higher SDE than EBITDA, because replacing the owner with a paid general manager would cost $60,000 to $100,000 per year.
What the multiples actually look like
According to Ad Astra Equity and Auxo Capital Advisors, the typical ranges by segment are:
Single-unit owner-operated: 1.5 to 3.0x SDE. A restaurant generating $150,000 in SDE with a working owner is worth $225,000 to $450,000 in most markets.
Profitable independent with consistent margins: 3 to 5x SDE. These are restaurants with documented financials, strong lease terms, and a track record of 3 or more years of profitability.
Multi-unit manager-run groups: 4 to 7x adjusted EBITDA. The business can operate without the owner, which commands a premium.
Scaled multi-unit or franchise platforms: 10x or more EBITDA. These are institutional transactions, not typical independent restaurant sales.
QSR franchise units: 0.4 to 0.7x annual revenue, according to Sofer Advisors. Franchise resales are often valued on revenue because the brand and systems reduce earnings volatility.
The five factors that move the multiple
Within any range, the actual multiple depends on five things.
The first is lease quality. A lease with 10 or more years of remaining term, including options, supports the top of the range. A lease with fewer than 5 years remaining reduces the valuation by 20 to 40 percent or kills the deal entirely, because SBA lenders require at least 10 years of remaining term to finance the acquisition.
The second is owner dependency. If the owner is the head chef, the face of the brand, and the only person with vendor relationships, the business has limited transferable value. Buyers discount heavily for this. Replacing the owner with a paid general manager adds $300,000 to $600,000 to enterprise value and increases the multiple by 0.5 to 1.5x, according to Sofer Advisors.
The third is financial documentation. SBA lenders require three years of clean tax returns that align with the financial statements. If the tax returns show losses and the owner claims the business is actually profitable, the lender will use the tax returns. Undocumented add-backs, cash sales that were not reported, and inconsistent records all reduce the buyer pool to cash buyers, who pay less.
The fourth is off-premise revenue. Restaurants with more than 25 percent of revenue from delivery, catering, or other off-premise channels command a 0.5 to 1.0x premium on the multiple, because off-premise revenue is less dependent on the physical location and more transferable to a new owner.
The fifth is the liquor license. In states where liquor licenses are issued by quota, a license can be worth $50,000 to $300,000 or more as a separate asset. This value is independent of the business's earnings and should be valued separately, not folded into the EBITDA multiple.
What buyers are actually buying
When a buyer acquires a restaurant, they are buying a cash flow stream, a lease, a brand, and a set of systems. The multiple they pay reflects how reliable that cash flow is, how long the lease runs, how transferable the brand is, and how dependent the systems are on the current owner.
A restaurant with $200,000 in SDE, a 12-year lease with two 5-year options, documented financials, and a trained management team is a different asset than a restaurant with $200,000 in SDE, a 2-year lease, cash-heavy sales, and an owner who works every shift. The first might sell at 4x. The second might not sell at all.
The normalization step most owners skip
Before you can apply a multiple, you need normalized financials. Normalization means adjusting the financial statements to reflect the true economic performance of the business, independent of how the current owner has structured their compensation and expenses.
Common add-backs include: owner salary above market rate, owner vehicle and personal expenses run through the business, one-time legal or repair costs, above-market rent paid to a related party, and depreciation on fully depreciated equipment.
Common deductions include: below-market rent paid to a related party, owner labor that is not reflected in the P&L, and non-recurring revenue from events or catering that will not transfer to a new owner.
The normalized SDE or EBITDA is the number you apply the multiple to. Getting this right requires clean records and, for any transaction above $500,000, a sell-side quality of earnings report from an independent accountant.
What this means if you are thinking about selling
If you are considering a sale, the most useful thing you can do right now is calculate your actual SDE. Add your net profit, your owner salary, your owner benefits, and any personal expenses you run through the business. Then look at your lease and count the years remaining including options.
Those two numbers -- SDE and lease term -- will tell you more about what your restaurant is worth than any broker's opinion or comparable sale.
If the SDE is thin and the lease is short, the math may point toward closing rather than selling. The cost to close a restaurant is often less than the cost of a failed sale process.
For a look at what the lease assignment process involves, see Restaurant Lease Assignment: What Owners Get Wrong When Selling. If you are weighing a sale against a closure, Sell vs. Close Your Restaurant: How to Make the Right Call walks through the decision. If you want a second opinion on your specific numbers, book a call with Rod.