Restaurant Business Valuation: What's Your Business Worth?
Thinking of selling your restaurant or retiring? Learn how to value a restaurant, goodwill calculations, and asset vs share sale tax implications.
- Restaurants are typically valued at 2-3x annual cash flow
- Goodwill is taxable as capital gains (50% inclusion)
- Asset sale vs share sale have very different tax results
- $1.25M+ Lifetime Capital Gains Exemption may apply
- Proper planning can save $100,000+ in taxes on a sale
How Restaurants Are Valued
After years of hard work, you're ready to sell and retire. But what's your restaurant actually worth?
- Multiple of Cash Flow: 2-4x annual "seller's discretionary earnings"
- Multiple of Revenue: 25-50% of annual revenue
- Asset-Based: Equipment + inventory + goodwill
Example Restaurant Valuation
- Annual revenue: $800,000
- Owner salary + profit (SDE): $120,000
- Multiple: 2.5x SDE = $300,000 value
- Plus: Inventory at cost (~$15,000)
- Estimated sale price: $315,000
What is Goodwill?
Goodwill is the value of your restaurant beyond the physical assets. It's what makes someone pay more than just equipment value.
- Established customer base and reputation
- Trained staff who stay with the business
- Recipes and systems
- Prime location and lease
- Brand recognition
- Online reviews and social media following
Asset Sale vs Share Sale
There are two ways to sell a restaurant. The tax implications are dramatically different.
Buyer purchases individual assets: equipment, inventory, goodwill, lease.
- Corporation sells assets and pays corporate tax
- Then you withdraw money and pay personal tax
- Double taxation possible
- Buyers often prefer this (cleaner)
Buyer purchases shares of your corporation (gets everything inside).
- You sell shares personally
- Capital gains taxed at personal level (50% inclusion)
- May qualify for Lifetime Capital Gains Exemption
- Much better tax result for you
Lifetime Capital Gains Exemption (LCGE)
This is the BIG tax break for selling a small business.
- Exemption amount: ~$1,250,000 (indexed to inflation)
- Applies to sale of Qualified Small Business Corporation (QSBC) shares
- Can shelter over $1 million in capital gains from tax
- Available to each individual shareholder
LCGE in Action
- Restaurant sale price: $500,000
- Cost base: $50,000
- Capital gain: $450,000
- Without LCGE: Tax on $225,000 (50%) = ~$80,000 tax
- With LCGE: Tax on $0 = $0 tax
Your corporation must be a QSBC:
- Canadian-controlled private corporation
- 90%+ of assets used in active business in Canada
- Shares held for at least 24 months
- 50%+ of assets in active business during 24 months before sale
Tax Comparison Example
Selling Restaurant for $400,000
Asset Sale (Worst Case):
- Corporate tax on gain: ~$50,000
- Dividend to withdraw: $350,000
- Personal tax on dividend: ~$80,000
- Total tax: ~$130,000
Share Sale with LCGE (Best Case):
- Capital gain: $400,000
- LCGE shelters entire gain
- Total tax: $0
Difference: $130,000!
Pre-Sale Planning Checklist
- Is your corporation a QSBC? (Check asset tests)
- Have you owned shares for 24+ months?
- Any non-active assets to purify? (Investments, real estate)
- Can spouse also be a shareholder to multiply LCGE?
- Are your books clean and auditable?
- Do you have transferable lease?
- Are key employees committed to staying?
LCGE requires 24 months of share ownership. Estate freeze strategies take time. Don't wait until you have a buyer to start tax planning.
Thinking of Selling?
Tax Punjabi can help you structure the sale to minimize taxes and maximize what you keep.
This article is for educational purposes only. Consult a tax professional for your specific situation.