The time has come: you’ve had your fill of being a barista-cum-accountant-cum-marketer-cum-manager, and you’re looking to hang up your apron for good. But how do you go about valuing a café, with all its tangible and intangible assets, and other variables such as location?
One thing is for sure: there is no one-size-fits-all for business valuations. Tourist hotspots and world-renowned names such as Les Deux Magots in Paris are likely to be valued differently than, say, your local greasy spoon.
In this guide, we’ll be looking at the three main approaches to valuing a café business – the income approach, the market approach, and the asset approach. We’ll also be looking at the supply-demand dynamics and other factors that can affect the return on investment you can expect from your café entrepreneurship.
Income approach
This approach focuses on the cafe’s ability to generate future income. It’s based on the principle that a business’s value is equal to the present value of its expected future cash flows.
Income-based valuation methods include:
Discounted Cash Flow (DCF): This method projects future cash flows and discounts them to present value.
Capitalisation of earnings: This method uses a single year’s earnings divided by a given capitalisation rate/factor – a factor that will reflect the rate of return an investor can reasonably expect.
Income-based approaches are usually appropriate where (1) a cafe has a stable income history and predictable future cash flows, (2) the business is expected to continue operating similarly in the future, and (3) there’s good financial data available, including detailed income statements.
“Oh great,” I can hear you say, as you pull out your calculator. “That seems straightforward enough.”
However, determining a capitalisation rate for a business involves significant research and knowledge of the type of business and industry. An experienced business broker like CoGoGo can assist with this.
Market approach
This method compares the café to similar businesses that have recently sold, using various multiples or ratios. Simple enough? The challenge here is that, unlike (say) the house market, business transaction data tends to be more opaque.
Fortunately, an experienced business broker, like CoGoGo, is exposed to large volumes of historic and recent SME transaction data and can use this as a benchmark for valuing comparable cafés.
The two main valuation methods for the market approach include:
Comparable company analysis: This method uses financial ratios like Price/Earnings or EV/EBITDA from similar cafés.
Recent historic transactions: This method looks at recent sales of similar cafés in the area.
These methods will be appropriate where (1) there’s sufficient data on recent sales of comparable cafés, (2) the local market for cafés is active and transparent, and (3) the café being valued is similar to others in terms of size, location, and operations.
Average café prices in the UK
The average café sold in the UK can go from anywhere between £10,000 and upwards of £3 million, depending on variables such as turnover and profitability, location, size, inclusion of the property, and the brand name and other intangible assets.
Asset approach
This approach values the café based on its assets minus its liabilities. In other words, it focuses on the balance sheet rather than the café’s income-generating ability.
Two possible methods include:
Book value: This method uses the historical cost of assets minus depreciation.
Adjusted net asset value: This method adjusts asset values to current market prices.
The asset approach is typically appropriate where (1) the business is not generating significant profits or has inconsistent earnings, and (2) the cafe is considering liquidation or sale of assets separately from the business.
Besides financial health, what else will affect the value of your café business?
Like most things in this world, a business’ value will largely be determined by the dynamics of supply and demand. And demand for your business will in turn be determined by:
The condition of the economy. Economic factors, including interest rates and consumer demand for your services, can impact investor appetite. Prospective buyers who cannot secure affordable finance, for example, are less likely to want to shell out on a loan to buy your business.
Intangible assets. Maybe your brand name is widely recognised in the local area; maybe your digital presence is second-to-none; or maybe you are forecasting a significant uptick in sales in the near future. Maybe you also have franchise agreements and licenses for, say, alcohol sales. All these intangible assets will have an accumulative impact on the desirability of your café business.
Tangible assets. To state the obvious, tangible assets directly impact your business’s operational capacity and value. For a café, this will include your fancy-schmancy espresso machine, your décor and furniture, the property, and cooking equipment.
Your people. It’s no secret that the hospitality sector is facing a hiring crisis. If you have a well-tenured group of staff and management at the helm of your café, you’ll likely be able to command a higher price tag.
Still confused about how best to value your café business? It’s difficult to remain objective when you’ve poured blood, sweat and tears into a project. At Cogogo, we offer a free business valuation with one of our specialist team. Armed with time-tested expertise, they can advise on how best to position your café to attract maximum interest from prospective buyers, while maximising your return on investment.
