Valuing a business can sometimes seem like a game of darts. For many, the varying approaches, often confuses everyone involved. As a previous Financial Planner, Director of Black Market Roasters and Founder of Oz Café Exchange, Angus Nicol offers his experiences on a solution to this problem.
How do you put a price on the sweat, tears and joy that you have worked so hard for? How do you value your café?
The old adage that something is worth only what someone is willing to pay for it offers us a starting point. For me, though, it is kind of a frustrating way to start.
When valuing something, you can break it down into a couple of parts:
1) It’s capital (equipment) value
2) It’s income earning potential
Valuing your Café Equipment
Valuing equipment is pretty simple. There is a standardised value accountants will use. Basically it is just the purchase price minus wear and tear, taking into account what it would cost to replace that piece of equipment.
List all the equipment you have in your café and then put a value on that. Secondly, list all the stock in your café and put a price on that. By that I mean all the coffee beans, dry goods, drinks etc. This will give you a general guide on how much stock value you are holding.
Valuing your Goodwill
When you have a business, let’s say a café, you have the right to trade food and beverages at a certain location for a certain amount of time. This has value. So long as you have your lease setup correctly and you can prove your financials, you can then work out what that income stream is worth.
We can discuss a number of ways to come up with a number for the cashflow value, though it all has to do with profit.
Profit = How much money is left over at the end, after everyone else is paid.
Remember you can twist, adjust, add and subtract numbers to make them look a number of different ways, so understanding the way these numbers are portrayed can be crucial.
Once you find out what that net profit is, after wages, rent, all expenses, tax, fees etc you then annualize it. By that I mean find out what the profit for the year is, based on historical data.
This profit figure can be written in a few bays in the sense that some of the profits don’t have tax, depreciation and interest taken out. Though, the goal here is just to find out what the net profit is after everyone has been paid, then you tell the potential buyer how you came up with the figures.
This annualised profit figure is then multiplied by a magic number. This number is called the multiple and is used and differs from business to business and industry to industry. All it is, is how long the buyer wants to get their money back from the business. By that I mean, if the net profit is $100,000 per year and as a buyer I want to get my money back after 2 years, then the multiple will be 2 and the income valuation of the business will be about $200,000.
Income Valuation = Annual Net Profit x Multiple
For café’s typically the multiple will be between 1.5 and 2.5. The better the café is the higher the multiple. The longer the lease, the cooler the marketing, the more opportunity for growth, the higher the multiple.
How to Value a Cafe?
Value = Income Valuation + Equipment Value + GST
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