Whats the most accurate method of calculating the value of a hotel, restaurant or pub?
Hugh Caven, Walbrook Finance
In the current market, I would suggest that there's no exact science, as I feel that at the moment prices are being achieved that are sometimes hard to justify.
However, the two main valuation techniques are comparison and profit multipliers. The former is generally the method applied by selling agents. They will have examples of sales they have achieved in your area and will be able to give you a valuation based on their experience and knowledge of your business.
Remember that the agent has two masters, the wish to value correctly and act in your interests, and the wish to win the business and earn money from your sale.
While it's right to get more than one opinion, if the agent believes that it's part of a beauty parade, it may pitch higher than it would ideally like to win the business. Be realistic, the highest price is not necessarily the best price. I would suggest that if you're undecided as to whom to appoint, you invite three appropriate nationally represented agents, and assuming differing values add them all together, divide by three and then pick the agent you feel will represent your interests in the most professional manner.
Whatever price you agree, this will eventually be tested by the technicians. Once your purchaser employs an independent valuer, probably for mortgage purposes, comparison is not the main methodology. Yes, they will look at comparables, but their main thrust will be the rule book, and the profit multipliers.
Coming to the market is a big decision, and to maximise your value, ensure that you're ready to do so. Certified and management accounts must be up to date, and ensure all the requisite certificates are current.
Simon Stracey, Marlborough Leisure
The exact methods applied to the valuation of restaurants and other hospitality businesses are less than straightforward, and a bit of a closely guarded secret on the part of the professionals who derive their living from calculating them. My experience, however, reveals that the application of a few simple rules of thumb will often arrive at a very similar figure to that calculated by the professionals.
I will assume that the business in question is leasehold and can demonstrate a sustained record of sales via a professionally prepared profit and loss account, and that overheads are consistent (or that future costs can be clearly quantified). I would then seek to establish a fair assumption of likely sales in the coming year and to assess what overheads a typical operator might expect to incur, while excluding any costs that might be considered personal or specific to an individual owner/operator. These might include loan interest, depreciation, and personal drawings.
It's then simply a matter of applying an acceptable multiple to that adjusted profit (usually somewhere between two and three, depending on the desirability of the business and its location) and adding an appropriate sum to reflect the real value of fixtures and fittings at the premises. For example, a business with an adjusted net profit of £50,000, in a reasonably attractive location, benefiting from owner's accommodation and including fixtures and fittings valued at £25,000, might be worth £150,000.
Richard Negus, Fleurets
Selling a restaurant is unlike most other property transactions as the value to the buyer is in the profit potential rather than in the bricks and mortar. In a sector dominated by leaseholds, buyers will look to either operate the restaurant as it is, or more often, to completely change the restaurant's name, menu, look and feel. In such cases the sale price will represent little more than "key money" to create the opportunity to trade from the premises and in doing so the buyer assumes that changing the restaurant will yield improved profits.
A restaurant's value will be derived from a multiple of potential annual profits, and the purchaser will generally make a judgement as to price and payback period. The multiple of profits will depend on many factors, but in essence will be influenced by lease terms or rent, location, and the attractiveness and configuration of the property, and will also reflect the risk to the buyer. Leasehold restaurants typically sell for between one and four times annual profit.
The restaurant's trading accounts will help the purchaser to assess trading potential. However, at the lower end of the restaurant market, accounts are often unreliable and provide little assistance.
A common mistake by restaurateurs is to associate value with the amount of money they've spent on the premises, and while a well fitted-out restaurant will no doubt add value, if the purchaser is going to strip it all out, the cost will have little or no bearing on price. Selling a restaurant is a little like selling a second-hand car. The restaurant enables the operator to generate income, but at the point of sale, the restaurateur should not expect to recoup their capital investment.
