I need a reply to this discussion. the reply must be at least 250 words. Do not just say “good job” or “I learned something from your post.” Replies are not a cheering exercise. Instead, your replies 1

I need a reply to this discussion.

the reply must be at least 250 words. Do not just say “good job” or “I learned something from your post.” Replies are not a cheering exercise. Instead, your replies must be substantial, reflecting what you learned from reading the post, offering an extension, or correcting a mistake. Use what you learned in researching for your post (or knowledge gained from other classes or personal experience) to either supplement or critique the post you are writing about.

The unique business valuation topic/issue I’m going to discuss is the valuation of restaurants. Hitchner (2017) observes that “at first glance, restaurants appear similar and the valuation process would seem cookie-cutter. In reality, each restaurant has unique characteristics that require individual analysis and assessment” (p. 1144). “Restaurants are a common feature of our daily lives, yet their valuation requires a modicum of specialized knowledge and experience. Restaurants offer appraisers the opportunity to test their skills and attitudes for the market observation” (Rule, 2014).  

            Hitchner (2017) compares each restaurant to a mini factory, stating that each restaurant uses skilled labor that has to assemble raw products that have to be ordered, inventoried, and controlled. There are production operations. The chefs/cooks, servers, and management have to be trained and supervised. These small factories have shifts for all three meals and just-in-time product lines have to be scheduled and produced. The mini factory has to be cleaned every day and prepared for the next day (p. 1144).

            The valuation professional has to be aware of all of these ins and outs of the restaurant business and the industry as a whole. To help them with this, “A multitude of publications provide up-to-date industry information and statistics to be considered in preparing a valuation. In particular Nation’s Restaurant News reports macroeconomic news about the industry, including consumer and menu trends, segment news, same-store sales statistics, market share data, and more, updated daily” (Hitchner, 2017, p. 1145).

            Some problem areas that must be looked at closely by valuation professionals are things like “does the restaurant lease equipment and is that cost shown properly on the balance sheet…The restaurant may take partial, infrequent, or inaccurate inventories, causing unusual variations in COGS and profitability” (Hitchner, 2017, p.1152) Other problems valuation professionals should also take into account are that some restaurants might use management companies and the way the expenses reported on that could vary. “Unreported sales and inventory shrinkage may need to be considered. Could there be deferred gift certificate or frequent diner club obligations not recorded as liabilities on the balance sheet? These liabilities could be material” (Hitchner, 2017, p. 1152).

            One assumption that some falsely make is that “the higher-priced locations always provide higher restaurant food sales than the lower-priced locations. This is quite often not the truth… there are very many factors such as competition, visibility, access, synergy with surrounding developments, etc., that determine the potential restaurant food sales of any given location” (Hartmann, 1996). It is also observed, though, that “while good management can often overcome a bad location, average management most of the time cannot” (Hartmann, 1996).

            In fact, management, according to Hitchner (2017), is a “secret of restaurant valuation. Are their results consistent? Do they manage turnover well? Do they implement and monitor training programs, including food safety? How experienced are they? Enthusiastic? Customer friendly? Profit focused (p. 1157)?

            In conclusion, all of the above-mentioned factors and problems must be considered when conducting a restaurant valuation. These issues can be mitigated when the appraiser has knowledge of restaurant valuation and utilizes the correct approaches, methods, and techniques. According to USPAP, appraisers must “be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal” (USPAP).

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