Key Takeaways
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Cafes and restaurants are usually valued on verified, maintainable earnings rather than turnover.
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State the earnings measure being used. A multiple only means something when the profit figure is clearly defined and tested against comparable sales.
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Earnings adjustments can increase or reduce profit, and each needs supporting records.
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Lease term, options, rent and assignment requirements can have a significant effect on what buyers will pay.
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A licensed restaurant brings a liquor licence transfer into both the valuation and the timeline.
Valuing a cafe or restaurant starts with the earnings a buyer can verify, then considers the lease, the owner’s role and the risks a new operator would take on.
Understanding how buyers test those figures helps you set a realistic asking price. A free business appraisal can provide a market view of your venue before you list.
What Buyers Are Paying For
A buyer is paying for earnings they expect to continue after settlement, together with the right to operate from the premises for long enough to justify the price. Equipment and fit-out matter, but they rarely explain the price on their own.
Tax returns are prepared for tax purposes. A buyer’s accountant will usually rebuild the profit to show what the business earns on an ongoing basis for the person running it.
Hospitality Valuation Methods
Buyers, lenders and brokers may test a cafe’s price using one or more of these methods:
Earnings Multiple
Reported profit is normalised for owner-related, personal and genuine one-off items, and a multiple is applied that reflects the risk. Owner-operated venues are often assessed on seller’s discretionary earnings (SDE), while larger venues may be assessed on earnings before interest, tax, depreciation and amortisation (EBITDA) after a market-rate manager’s wage. State which measure is being used, because the same multiple applied to different measures gives very different results.
Payback and Return
Buyers and lenders often compare the price with the earnings to estimate how long it may take to recover the investment. That is a simplified view. Finance costs, tax, capital expenditure, working capital and changes in trading also affect the actual return.
Weekly Takings
Cafe prices are sometimes discussed as a number of weeks’ takings. It is a rough screening tool only. Two venues with the same turnover can have very different rent, wages and margins.
Asset Value
Where earnings are low or inconsistent, buyers may focus on usable equipment, fit-out, stock and the opportunity provided by the premises and lease. These assets may realise less than their book value, particularly where removal, repair or lease obligations apply.
Choosing a Multiple
A profit multiple can help test a price, but the appropriate multiple depends on the earnings measure, the lease, systems, buyer demand and comparable sales. A single national range can hide those differences.
Compare any proposed multiple with completed sales of similar venues rather than asking prices. Multiples tend to fall where profit is declining, sales cannot be verified or key supplier and staff arrangements are informal.
Earnings Adjustments
Normalisation adjusts reported profit to an ongoing basis, and adjustments can increase or reduce earnings. Review:
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Owner and family labour, adjusted to the market cost of the work actually performed.
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Private expenses paid through the business, supported by records.
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Interest and depreciation, where consistent with the earnings measure and without double counting.
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Genuine non-recurring costs, separated from ongoing repairs, maintenance and capital spending.
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Rent paid to a related party at a non-market rate.
Where the owner works long hours, a buyer will usually allow for the cost of replacing that labour. Keep records that support each adjustment, because a buyer’s accountant will test them.
What Moves the Number
Within the earnings assessment, these factors usually influence where a venue is priced:
Lease Terms
Buyers look at the remaining term, options, rent, permitted use and assignment requirements. A short or uncertain lease, a demolition clause or a landlord who has not yet been approached can reduce buyer confidence. Ask your solicitor to review the lease before you set a price, and see the Queensland retail shop lease guidance for the assignment process.
Trading Pattern and Location
Buyers consider foot traffic, parking, trading hours and seasonality. A venue with strong peak periods and quieter months is assessed differently from one with steady trade throughout the year, and monthly figures help show that pattern.
Staff and Systems
A venue that can operate without the owner in every shift is easier for a buyer to assess. Documented rosters, recipes, ordering procedures and supplier arrangements, together with a team likely to stay, can reduce perceived risk.
Equipment and Compliance
Well-maintained equipment with service records supports the price. Worn fit-out, overdue compliance items and equipment that is leased or under finance may reduce it. Provide an itemised list showing what is owned, leased or excluded.
Reviews and Reputation
Recent online reviews and a regular customer base can help show that trading is repeatable. Respond to complaints and keep information current before the venue is marketed.
Cafe Versus Licensed Restaurant
The valuation approach is similar, but the inputs differ. A licensed restaurant may have a larger fit-out, a liquor licence to transfer, longer hours and a higher wage cost. Its earnings may also depend more heavily on a chef or owner-host.
A liquor licence transfer is handled through the Office of Liquor and Gaming Regulation. Check current requirements early and have your solicitor align the contract and settlement arrangements with the approvals needed. Do not assume that an interim authority will apply automatically.
Worked Example
Illustration only: assume an owner-operated cafe shows net profit of $60,000 in its accounts after paying the owner an $80,000 wage. The accounts also include $15,000 of depreciation, $10,000 of personal expenses and a $5,000 one-off refrigeration repair, all supported by records.
Adding back those items gives adjusted earnings of $170,000 for one working owner. If the owner works more hours than one person could reasonably cover, the cost of the additional labour would need to be deducted. If the venue would be run by a manager, the full market cost of that role would be deducted first.
Applying an assumed multiple of 2 gives $340,000 before stock and the agreed treatment of equipment. The multiple would still need to be tested against comparable sales, and a short lease without options could lead a buyer to reduce the price or seek a new lease before committing. This is a simplified calculation, not a prediction of any venue’s value.
Check the Numbers Early
Reconcile the accounts, document each earnings adjustment and review the lease before you set an asking price. Allow time to address the issues a buyer’s accountant or solicitor is likely to raise.
For a market view of your venue before you choose an asking price, request a free appraisal from Bond Business Brokers.
Common Questions
Do I need a formal valuation to sell my cafe?
Not usually. Many owners use a broker’s market appraisal to set an asking price. A formal valuation from a qualified valuer is generally used where a figure must be independent, such as for legal, tax or partnership matters.
Are weekly takings a reliable way to price a cafe?
They are a rough guide only. Buyers look at verified earnings after rent, wages and other costs, so venues with similar takings can support very different prices.
How does a franchise affect a cafe’s value?
Buyers also consider the remaining franchise term, franchisor approval of the new owner, transfer or training fees and any refurbishment obligations. Check the franchise agreement and disclosure document with a franchise solicitor.
This article provides general information only. Obtain advice from appropriately qualified advisers about your circumstances before entering into a transaction or relying on tax, legal or regulatory information.