5.X — The Math Buyers Are Running #
You will hear the word EBITDA in almost every restaurant sale conversation. Earnings Before Interest, Taxes, Depreciation, and Amortization. Buyers and brokers use it as a valuation baseline — expressing purchase price as a multiple of that number.
EBITDA is a deeply flawed metric. In the restaurant business specifically, it is a dangerous one to take at face value.
Depreciation and amortization are not fictional expenses. They represent the real, inevitable deterioration of the physical assets your restaurant depends on. Your equipment is aging. Your build-out is wearing down. Your refrigeration, your hood system, your HVAC — all of it will need to be repaired or replaced. Adding those costs back to arrive at a prettier earnings number doesn’t make them go away. It just hides them from the calculation. A restaurant showing strong EBITDA on a fifteen-year-old kitchen is a restaurant with a capital expenditure emergency sitting just off the balance sheet.
Interest is real too. Debt service doesn’t disappear because a metric ignores it. A buyer who is financing the acquisition has a new debt obligation from day one.
What actually matters is free cash flow — what the business genuinely generates after it has paid its real obligations, maintained its physical plant, and compensated the person running it at market rate. That number is harder to dress up. It’s also the only one that tells the truth.
A more honest metric for independent operator valuations is Seller’s Discretionary Earnings — SDE — which adds the owner’s compensation and personal expenses back to net income to reflect the true economic benefit to a working owner-operator. A healthy independent restaurant typically trades at two to three times SDE. A multi-unit operation with documented systems, professional management, and clean financials can command higher. A single-unit restaurant that is entirely owner-dependent with no documented systems is difficult to sell at any meaningful multiple.
When a broker or buyer presents you with an EBITDA multiple, ask the follow-up question: what is the actual capital expenditure requirement of this business over the next five years? What does free cash flow look like after debt service on the acquisition? Those are the numbers that determine whether the deal is real.
Don’t let a flattering multiple on a flawed metric substitute for understanding what your business is actually worth.
