Written by The Pragmatic CFO. 15+ years running restaurant P&Ls.
This article is part of The 4-Wall EBITDA Series.
When you buy a restaurant, you’re buying its cash flow. Everything in due diligence comes down to one question: is the cash flow the seller shows you real, and will it still be there after you own it?
Start with three sets of numbers that should match
- P&Ls: three years, monthly if you can get them.
- Tax returns: the same three years.
- Bank statements and POS reports: deposits and sales by month.
POS sales should match bank deposits, after card fees and timing. Both should match the sales on the tax return. If the seller says the real sales are higher than the return shows, you can’t buy that. A lender won’t lend on it either.
Rebuild the earnings: SDE and add-backs
Seller’s discretionary earnings (SDE) is what one owner-operator takes out of the business. You build it from net income by adding back what a new owner wouldn’t pay.
| Line | Example |
|---|---|
| Net income on the tax return | $60,000 |
| Owner’s salary | $70,000 |
| Owner’s car and phone run through the business | $12,000 |
| Interest on the seller’s loans | $18,000 |
| Depreciation | $25,000 |
| One-time roof repair | $8,000 |
| SDE | $193,000 |
Every add-back needs a receipt or a ledger line behind it. “My cousin works here for free” is not an add-back. It’s a cost you’ll have to pay.
If you won’t run the restaurant yourself, take out a market-rate GM salary. That turns SDE into something closer to what an absentee owner earns.
What it’s worth
Small independents usually sell for about 1.5x to 4x SDE, with the multiple set by the lease, the trend and how much depends on the current owner. See restaurant valuation 2026 for the full table.
At 2.5x, the example is worth $482,500. At 1.5x it’s $289,500. The gap is mostly about risk you find in diligence.
The diligence list
- Lease: years left plus options, rent increases, whether it can be assigned to you, and the personal guarantee. A short lease can sink the value.
- Sales trend: same months, year over year. A falling trend lowers the multiple.
- Prime cost: food and labor as a share of sales, by month. See prime cost.
- Equipment: age and condition of the hood, walk-in, dish and HVAC. Get a tech to look.
- Licenses: whether the liquor license transfers, and how long it takes.
- Health inspections: the last few reports.
- Staff: who stays, and whether the chef or GM is the reason guests come.
- Taxes owed: sales tax and payroll tax paid up. Unpaid taxes can follow the business.
Red flags
- Cash sales “off the books”: you can’t pay for income nobody can prove.
- The owner is the business: if guests come for them, the value leaves with them.
- Add-backs bigger than profit: possible, but check every one.
- No monthly P&Ls: if the seller can’t produce them, they probably don’t know their numbers either.
If you’ll borrow to buy it, the lender will test the same cash flow. See SBA loans for restaurants for the coverage math.
Free: The Restaurant Financial Health Checklist. 30 monthly checks across sales mix, prime cost, 4-wall EBITDA, cash and operations, with the target ranges I use. Written by a former chain CFO. Instant PDF.
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More on this: the debt ratios lenders check, preparing a restaurant for sale.
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What is SDE?
Seller’s discretionary earnings: net income plus the owner’s pay, perks, interest, depreciation and one-time costs. In the example, $193,000.
How much is a restaurant worth?
Usually about 1.5x to 4x SDE for a small independent. The example is $482,500 at 2.5x.
What documents should I ask for?
Three years of P&Ls, tax returns, bank statements and POS sales reports, plus the lease.
What kills a deal most often?
Numbers that don’t match across the P&L, the tax return and the bank account, or a lease too short to finance.