Do you need to do due diligence on a food truck? If YES, here is a 7 step guide on how to properly value a food truck business before you buy or sell it.
Valuing a business essentially means to know the worth of the business. You can value a business to find out what the business would cost exactly if you put it up for sale. One way to do this is to calculate all the assets and liabilities of the company, then you minus the assets from the liabilities.
Of course there are various other methods you can use if you want to value your business except the one mentioned above.
As an entrepreneur, it is very pertinent that you know the value of your business as the business grows especially if you want to invest some more money into the business, bring in a partner, or use it as a leverage to borrow some money.
The value of your food truck business is based on its net income as well as its assets and liabilities. Although daily, weekly, monthly, and annual revenue of your food truck play a critical element in determining the overall worth of your business, you also have other factors to consider. It should be noted that a food truck can bring in a lot of revenue without being very profitable.
Food trucks are different from most other businesses, which is why determining their fair market value is more complex. Being fair or neutral as the owner can be difficult when it comes to valuing the reputation of your food truck. This is why obtaining a business evaluation from a professional is so critical. Because a financial analyst isn’t vested in your company, they’ll be able to provide a realistic valuation that’s free from emotional attachments.
5 Different Methods With Which You Can Value a Food Truck Business
Gross Sales Valuation
This is a common and simple formula that takes a percentage of the food truck’s sales to value the business. The percentage can vary, but typically, it can range from 20%-30%. The sales approach may be simple and cut to the chase, but it doesn’t take into account the expenses to run and maintain a food truck, such as food prices, labor, and other costs.
The cost-to-build calculation is used when a food truck is new and has no documented sales. This valuation is calculated by taking the actual cost to build based on a builders cost per square foot, multiplied by the total square footage of the food truck, and then discount the total by a percentage, which typically ranges from 40%-60%.
Income valuation, better known as the seller’s discretionary earnings (SDE) approach, is a strategy frequently used by the industry to value a food truck. SDE is defined as the pre-tax earnings of a business with non-cash expenses, owner’s compensation, interest expense or income, depreciation, amortization, and non-business-related income and expenses all “added back” to the bottom line of the business.
Once the SDE is calculated, a food truck can generally be valued at SDE times a multiple that ranges from two to three. To calculate a more accurate SDE, a salary for a hypothetical person that would take over the CFO or CEO services of the owner that is exiting would be subtracted to lower the SDE, but a higher earnings multiple could be used to calculate the value of the restaurant.
This approach puts more emphasis on the food truck’s potential and less on the current earnings. Under this approach, the food truck is valued based on what a food truck with a similar concept or Business model would be worth in an open and competitive market. A newer food truck could benefit under this approach when, historically, there are less earnings, but they may be a hot trend in the food truck they are looking to capitalize off of.
This method is a simple computation based on value of the food truck’s assets (e.g. equipment), minus any liabilities of the food truck. This approach is not the most accurate valuation method and may not net the most profit. However, it is a simple approach for food truck owners that are looking to quickly sell their food truck.
Valuing a food truck is subjective and there is not a one-size fit all methodology for doing so. Food truck investors and owners that are serious about buying and selling should consult with CPA professionals that have valuation expertise to determine which strategy makes the most sense for their valuing their food truck venture.
How to Properly Value a Food Truck Business
Due to the short length of the mobile food industry’s existence, your best evaluations will probably come from analysts who have experience in evaluating restaurant businesses.
Let’s start with the basic formula for determining food truck value.
Food Truck Value = Cost Of The Truck + Cost Of The Attached Equipment + Labor Cost To Install Equipment
This applies universally, whether your truck is a brand new restaurant on wheels, a second-hand truck, or even a converted school bus.
Next, breakdown each variable in the formula:
- Valuing The Truck Itself: What is it worth?
Start by evaluating what your food truck is worth without all the gear and equipment. In insurance language, this is the “Actual Cash Value” or “Current Value” of the truck.
Items not attached to the truck but kept inside the truck are not part of the truck value. Instead, they’re classified by insurance companies as “Business Personal Property” or “Equipment Not Attached”.
If you have a new truck or are looking to buy a brand new one, you’ve got it easy. There’s no depreciation to factor in, so the value of the truck is simply the amount you paid (the sale price).
Most people dread the process of finding the value of a used truck, but it’s actually quite simple in most cases. Here’s what you need to do:
Search for the same truck online. You should be able to find the same model and year (and rough mileage) on eBay or Craigslist, which will give you a strong estimate of your used truck’s value.
- Add in your improvements/investments
If you have updated the engine, replaced the transmission, or made other improvements, then you have to add those costs to the value of the truck. Don’t add the truck’s cooking equipment just yet in this category.
- Value Attached Equipment
It is now time to assess all the equipment that’s attached to your truck. And when we say attached, we mean permanently built-in by bolts, plumbing, or a gas line. To get this accurately, you may have to flip the truck upside down, literally. Anything that stays put and does not fall of can be categorized as “Attached Equipment”.
- Calculate value of New Equipment
This part is easy. Simply add up the cost of the equipment, as well as the cost of the labor to install the equipment. Even if you did the work yourself, you can still add an estimated installation cost to your equipment’s value.
- Calculate value of Used Equipment
Valuing any used equipment is a bit more tedious, but not difficult. Here’s how you can do it. Take inventory of all your equipment. A sheet of paper or excel document will do fine. Search for used items online. Search for the same items on buy-used sites like eBay or Craigslist to make a value estimate.
When it comes down to it, you’re making estimates. So if you can’t find the used price for an item, don’t worry – just make an educated guess.
How to Estimate Depreciated Value of a Food Truck
There’s really only one rule you need to keep in mind when estimating depreciated value of a food truck. Generally, kitchen equipment depreciates over a 20-year life cycle. You then need to discover the age of the item, as well as the cost of the item brand new.
From here, it’s actually a simple process.
- Discover the percentage of life lived. For example, equipment that’s 5 years old has lived 25% of its 20-year life cycle.
- Subtract that percentage from the brand new price. If the item was $1,000 brand new, subtracting 25% leaves you with a $750 value.
- Add in labor costs. If it costs $50 to install that item (whether you did it yourself or hired someone to), the equipment value then becomes $800.
Don’t forget about aftermarket additions. Did you add any graphics, paintings, wraps, or other permanently attached items? Add those as well.
If you need help with this process, your Food Truck’s original builders can also be a source for valuing the attached equipment. Create a list of equipment and value during this process to reference in the event of a claim.
You should now be able to plug in all the needed numbers for this formula to find the value of your food truck.
- Food Truck Value = Cost Of The Truck + Cost Of The Attached Equipment + Labor Cost To Install Equipment
Equipment in your food truck that’s not permanently attached to the truck is its own separate coverage and limit of insurance. Here are a few examples of these items:
- Table Warmers
- POS System
- Pots / Pans
- Non-Bolted Refrigerators
If you have any strapped down tools and items, those are also considered “Not Attached”. It must be bolted down or attached by plumbing or gas line to be considered “Attached”.
Valuing this equipment takes the same process as valuing attached equipment. Brand new gear is just the new price. Used gear’s depreciated value can be calculated using the 20-year life cycle. However, there’s no labor to calculate with these items.