Industry Confidential: Restaurant Edition
Introducing: “Industry Confidential”, the not-too-stuffy series where I unpack the economics behind specific industries with a little wit and a lot of numbers.
This week’s lucky winner: Restaurants
So, you’re thinking of buying a restaurant. Or selling one. Or maybe you just want to know if your margins are out of whack before your next wine order arrives. Either way, you’re in the right place.
An industry powered by ambition, exhaustion, espresso machines, and the hope that “this Tuesday will be busier than last one.”
1. Industry Benchmarks: How Do Your Numbers Stack Up?
Let’s start with the basics. Here’s what the typical independent restaurant looks like by the numbers:
| Metric | Typical Range |
|---|---|
| Cost of Goods Sold (COGS) | 30%–35% of sales |
| Labour Costs (wages + benefits) | 25%–35% of sales |
| Rent | 6%–10% of sales |
| Other Operating Expenses | 10%–20% of sales |
| Owner's Discretionary Earnings (SDE) | 5%–20% of sales |
This means, for every $1 million in annual revenue, a profitable restaurant might generate $50,000 to $200,000 in Discretionary Earnings.
Examples of factors that can impact these metrics:
High-end restaurants can have lower food costs but higher labour
Quick-service spots (fast casual, takeout) often run leaner on wages
Urban restaurants tend to have higher rents (and more parking tickets)
Pro Tip: If you’re evaluating a restaurant to buy, compare each of these components against industry benchmarks. A business doing $800K in sales but spending $150K on rent might need more than just a new owner - it needs revenue and a prayer.
2. Valuation Multiples: What Are Restaurants Selling For?
Here’s where things get juicy. Based on small business sales data (e.g., BIZCOMPS, DealStats, restaurant brokers, and my own experience):
| Valuation Metric | Typical Multiple Range |
|---|---|
| SDE (Seller’s Discretionary Earnings) | 1.5x – 2.5x |
| Revenue (Sales) | 0.25x – 0.40x |
What that means:
If a restaurant has $100,000 in SDE (earnings before taxes, interest, depreciation, owner/manager salary, etc.), it might sell for $150K to $250K.
But here’s the catch: Multiples vary wildly based on factors like:
Sales
Location(s)
Brand reputation
Lease quality
Strength of team
State of equipment and facilities
Want top dollar? Show clean books, a transferable lease, systems that don’t require a superhero, and a loyal customer base that isn’t tied to your personality.
3. Industry Outlook: Is the Restaurant Biz Still Cooking?
Despite headlines about inflation, ghost kitchens, and tipping fatigue, the restaurant industry is showing remarkable resilience.
According to recent research:
Consumer spending on dining out is rebounding, especially in the quick-service and fast-casual categories.
The global restaurant industry is projected to hit $4.4 trillion by 2028, growing at 9.9% annually
U.S. consumer demand is projected to grow 5% annually during this same time period
Over 97,000 foodservice establishments operate across Canada.
Challenges persist in staffing, food inflation, and rising rents - meaning owners must be operationally sharp and financially literate (or engage someone who is).
But here’s the takeaway: people still want to eat out. They just want a slightly different experience than they did in 2019. Think; flexible hours, simplified menus, ethical sourcing, unique experiences, and better ordering/takeout technology.
Final Course:
Whether you’re buying a restaurant, selling one, or just dreaming about turning your fish chowder recipe into a retirement plan, the key is understanding what’s normal in this industry, and what’s not - so you can recognize problems early and make adjustments quickly.
Margins are tight. Workloads are heavy. But for the right operator with the right systems and a clean balance sheet, a restaurant can still serve up solid returns - and sometimes, a whole new lifestyle.
If you’re evaluating a restaurant for purchase, look beyond the P&L. Ask; Is the location defensible? Are revenues stable without the current chef or owner? And (very importantly) are the labor costs sustainable with minimum wages climbing (or how can they be offset)?
If you want help evaluating a specific deal - or just want to know if your food costs are out of control - I’m here, calculator in one hand, green tea in the other.
Keep your eyes open for another Industry Confidential coming soon.
Sources Referenced: BIZCOMPS, Business Reference Guide, IBISWorld, RestaurantOwner.com, Toast POS, National Restaurants Association, Restaurants Canada, and DealStats.
Disclaimer: I am (thankfully) not a lawyer, nor am I an accountant. If any of this sounds like legal/financial advice, it's not. Take everything I say with a grain of salt. But not too much - I hear it's bad for your blood pressure.
