How Much is my Hospitality Business Worth?

As Business Brokers we do not ‘value’ businesses; we ‘appraise’ them for the market.

There is certainly a degree of theory involved and we do use certain formulae to assess a hospitality business for a likely selling price, but there are many factors that can influence the asking price within and even outside an accepted price range and that’s where an experienced and specialist Hospitality Broker will add value.

“My restaurant has weekly sales of $15,000 ….. how much is it worth?”

I get asked this a lot. To me that’s like saying “I have a 4 bedroom house …. how much is it worth?”! There’s just not enough information to answer. You simply cannot asses a business’s worth accurately by its turnover alone.

Bottom line

A buyer is interested in how much money or surplus they can expect to make from a business. In simple terms it is what we call “Seller’s Discretionary Earnings” (see my earlier article for explanation!). This is the money left over at the end of the year after all costs have been paid (but not including the owner’s salary or drawings, tax, depreciation, or abnormal operating expenses).

Secret Multiples

There’s no secret really! Cafes are usually more attractive to a wider group of buyers who look to repay their investment in around 2½ to 3 years. The multiple, then is roughly 2½ x to 3 x SDE. Restaurants and Bars can attract a lower earnings multiple but, then again, sometimes they attract higher multiples!!

Confused?!

Comparing apples with apples

First off, it is is essential that you compare ‘apples with apples You really pay attention to how the surplus or profit has been calculated. To start with, every business I look at I work out the SDE to one full time working owner. Only by doing this can you hope to have a basis for comparison.

The asking price is not just a factor of profit, however, and this is when a Specialist Broker’s experience counts. There are many other factors that may well have an influence on the asking price. Some examples are: rent, length and strength of lease, desirability of location, days and hours involved, ease of entry and operation, is it a franchise?, is the current owner essential to its future success?, what is the breakdown of coffee sales vs food?, is there the ability to positively influence Cost of Sale by producing more product on-site? Is it reliant on a specific customer or group of customers? And on and one we go!

Brokers really do add value

A good Broker, with sound industry knowledge, can help sellers understand the market and the true worth of their business by helping to analyse all of the above. They also have access to valuable information on previous successful sales against which to compare.

I have 11 years of this information behind me to back up my analysis and, as a company, we have a ton of this essential ‘IP’.

A successful Broker, then, is fully armed with information and knows how to position your business with potential buyers to realise the maximum price for you.

Contact me or one of my team at LINK Hospitality Division and we would be delighted to help you navigate the tricky appraisal waterway.

Nick Giles - Head of Hospitality New Zealand