By RA partner, LINK

How much is my hospitality business worth? It’s one of the first questions café, restaurant and bar owners ask when they start thinking about selling.

The answer, however, isn’t simply a multiple of profit or a percentage of turnover. There are a number of things that determine what a buyer will actually pay for your business.

Profit is obviously important, but so is the quality of that profit. How reliable are the accounts? How dependent is the business on you? How consistent is the trading? And, importantly, will a buyer and their bank have confidence in the numbers?

A hospitality appraisal really comes down to answering one key question:

What will this business realistically earn for its next owner?

Get that number right, understand the strengths and weaknesses around it, and you have the foundation for a realistic and defendable business value.

What is SDE, and why does it matter more than turnover?

Seller’s discretionary earnings, or SDE, is what a hospitality business would actually earn a new owner. It starts with net profit, then adds back costs that are specific to the current owner rather than the business itself, most commonly the owner’s own wage. These are called “add-backs”.

Net profit (on the official financials) plus add-backs (including owner’s wage) equals SDE. This is the figure used to set the appraised value, not turnover, and not the profit sitting in the official financial accounts.

Turnover is not a good measure of a business’s value. Two businesses with the same turnover can have very different values indeed.

Common add-backs in hospitality include:

• Owner’s wages and drawings
• Family members on the books who aren’t essential to day-to-day operations
• Personal vehicle, phone or travel costs processed through the business
• One-off repairs, legal fees or refits unlikely to recur
• Interest and depreciation, which reflect financing and accounting choices rather than trading performance

This is called normalisation: stripping out anything one-off or out of the ordinary to leave a clear read on ongoing profitability. Every add-back needs a paper trail. A buyer’s accountant will test each one, and anything unsupported gets stripped back out, taking the valuation down with it.

A LINK broker builds this list against what’s actually held up in past sales. The figure presented to a buyer reaffirms your asking price throughout due diligence rather than giving opportunity for it to be picked apart and eroded.

How does cash handling affect what a buyer will pay?

Hospitality has traditionally been a cash-heavy industry, but when it comes to selling there is one simple rule:

A buyer can only pay for the profit you can prove.

Cash sales that don’t go through the books might be very real, but a buyer can’t verify them, and a bank won’t lend against them.

Ideally, buyers want to see two or three years of clean, consistent trading history. Telling them the business “actually makes more than the accounts show” simply won’t cut it.

And suddenly declaring more income just before selling can create more questions than answers.

Get the numbers right early. Clean, transparent accounts make your business easier to value, easier to finance and, ultimately, easier to sell.

Does key-person dependency lower a hospitality business’s value?

A business that runs beautifully because the owner is an exceptional chef, an instantly recognisable host, or the only one who can manage the pass on a Friday night carries real risk for an incoming owner. If profitability walks out the door with the owner, so does the confidence a buyer needs to pay full price for it.

Businesses that command a higher sale value tend to have:

• A head chef or manager who isn’t the owner
• Documented systems, recipes and supplier relationships
• A trading history that holds up during owner leave or illness
• Staff capable of running a full service without the owner on site

If the business is currently owner-dependent, that’s not a reason to delay a sale. However, it’s worth addressing in the twelve months beforehand where practical. Reducing that dependency is one of the most direct ways to lift a business’s value before going to market.

Why does seasonality matter when valuing a hospitality business?

Hospitality earnings rarely land evenly across the year. A beachside café, a Queenstown bar and a corporate lunch spot near an office district each carry a different seasonal shape. Buyers expect to see it rather than have it averaged away.

A valuation built on a single strong month, or on turnover figures without the seasonal pattern behind them, won’t survive scrutiny. Multiple years of financials, shown month by month, let a buyer see the real cash flow cycle and plan working capital through the quiet months rather than being caught out by them.

What effect does a lease have on a business’s value?

With no lease there is very little to sell. None of the other factors above have much relevance if the lease is not secure.

A key phrase used when looking at a business is future maintainable earnings. In other words, when a buyer takes over a business, how confident can they be that the stated earnings will continue well into their tenure? Lease strength is critical to this assessment.

Buyers will also think about their own exit strategy when buying a business.

A lease with only a few years to run and no guarantee of extension will severely limit the value that a buyer will put on a business. A long lease that has a redevelopment clause or demolition clause, likewise, will dramatically affect the business’s market value. 

It’s not always practical or desirable for an owner to negotiate new lease terms with a landlord prior to going to market. However, this is always preferable. Where this doesn’t or can’t happen, expect a buyer to insert a “lease extension” clause into the contract. 

How is a hospitality business’s value actually calculated?

Once SDE is verified, add-backs are substantiated, cash handling is transparent, key-person risk is understood, and lease concerns are dealt with, a multiple gets applied, the figure used to turn SDE into the business’s overall value, reflecting how much a buyer is prepared to pay for each dollar of earning power. What moves that figure is the type of hospitality business and several other factors. These factors include its location, lease terms, competitive position, quality of assets and the strength of its financial reporting.

That figure isn’t a fixed industry number. It’s set by comparing the business against actual historic hospitality sales, which is where a broker’s access to real transaction data does the work a spreadsheet can’t.

If you’re weighing up a sale and want a proper read on what your business could be worth in today’s market, talk to a LINK broker who specialises in hospitality.

FAQ

Find out more about the Restaurant Association and LINK’s partnership here.