Operating a restaurant is a challenging experience for investors and restaurateurs. Restaurants are subject to high operating expenses and a thin profit margin, making it difficult to determine the real value of a restaurant. EBITDA shows the earning power of the business based on its cash flow. This article covers the following important points:
- What is Restaurant EBITDA?
- What is adjusted EBITDA?
- Why Use Restaurant EBITDA?
- How to Calculate Restaurant EBITDA?
- Ways of Improving Restaurant EBITDA
What is Restaurant EBITDA?
EBITDA is an accounting acronym that stands for Earnings Before Interest, Taxes, Depression, and Amortization. It is a metric used to determine a restaurant’s worth before adding factors like depression, taxes, and interest. This metric represents restaurant earnings from operations excluding the effects of accounting, financing, and capital spending. The ideal EBITDA for businesses in the restaurant industry is between 13 and 30% of the sales.
EBITDA is different from the restaurant operating profit. Operating profit is calculated directly by subtracting costs of goods sold (COGS) and expenses from the total restaurant sales. EBITDA subtracts all non-cash items. It focuses on operating expenses while excluding general and administrative costs. This makes it more effective in comparing a business against another since they carry different depreciation and debt levels.
What is adjusted EBITDA?
Adjusted EBITDA includes the removal of one-time and irregular items from EBITDA. Adjusting restaurant EBITDA provides a normalized number of regular gains and losses. This metric is useful to investment bankers, financial analysts, and other financial professionals in making key decisions. Some of the items excluded in Adjusted EBITDA include non-cash items, unrealized gains and losses, one-time gains and losses, non-operating income, and litigation expenses.
Why Use Restaurant EBITDA?
EBITDA considers earnings from restaurant operations only. It excludes earnings related to accounting, financing, and capital expenses because they are not directly related to business operations. This allows restaurant management to get an accurate value of the business before the impact of tax jurisdiction, capi