What is my Business Really Worth?Aug 07, 2023
With so many changes in the hospitality industry over the last three years, now more than ever we MUST know the current value of your business.
Knowing the value of your business is the foundation of building a business that can accelerate.
The truth is, whether we realize it or not, your business is CREATING value every day.
But what is that value? And what can be done NOW to improve this value moving forward?
The first step is to understand how the value of your business is calculated. Valuing a business is a complex process that involves assessing various factors to determine its worth. The method used for valuation can depend on the industry, the size of the business, the purpose of the valuation, and other specific considerations.
In the hospitality industry, there are three common valuation methods.
1: Earnings Multiplier Valuation: This approach involves applying a specific multiplier to the company's earnings (e.g., EBITDA, net income) to arrive at its value. For the hospitality industry, the baseline multiplier used in most calculations is 2.5X.
Which means, for every $1 in NET INCOME your business shows, the valuation would be $2.5.
Where this method may become confusing is in how to deal with expenses that may be discretionary or have an owner benefit. In most cases, these expenses are considered an ‘add back.’
As an example, if we have $50,000 and another $50,000 in owner salary/owner benefit expenses, our net income for valuation purposes would be $100,000.
Which would give us a valuation of $250,000.
- Asset-Based Valuation: This method calculates the value of the business based on its net asset value. It involves summing up the fair market value of all assets (tangible and intangible) and subtracting liabilities to arrive at the net asset value.
In this method we would look at the value of the assets of the business, including equipment, fixtures, vehicles, as well as any intangible assets such as customer lists and recipes.
For this valuation method to be significant, I believe you have to do the legwork to SHOW the value of your assets. Your tax return isn’t enough. Afterall, for tax purposes especially in recent years, chances are your assets were depreciated using an accelerated method. Which means that the value of your assets on your tax return may be significantly lower than the true replacement cost of these assets.
I recommend putting together a detailed list of all assets and including your original cost as well as estimated replacement cost.
- Discounted Future Earnings Valuation: This method focuses on projecting the future earnings of the business and then discounts those earnings back to the present value.
This method is generally used if the business has struggled in recent years, but there is belief that the future will generate a better result.
In the hospitality industry, there is significant risk involved in looking only at future results rather than the past. Which is why this method is not generally used on its own but may be part of the valuation as a way to show the potential of the business in future years.
But what if the numbers I am calculating aren’t enough? What if I invested $800,000 in a buildout, not to mention my time and energy over the last 10 years, and my calculation is coming up with a number significantly less?
Regardless of the result of these calculations, the most important lesson in this exercise is the understanding that we are in control of the value we CREATE in our business every day.
Which means TODAY is the day to start taking back control of your bottom line. If your labor is too expensive. Today is the day we change it. Today is the day we set a target of what we know our business has the potential to be worth, and we accept NOTHING less than that result moving forward.
Here are the two things we can do RIGHT now to start to CREATE value in your business:
- Work through this calculation for finding the value of your business.
- Taking last year’s P&L (statement of profit & loss), what is the net income?
- Multiply the net income by 2.5.
- Calculate the estimated replacement cost of all assets of the business.
- Calculate any changes to be based on future growth.
- Set a target for 5% improvement by the end of 2023. What are the creative ways you could add 5% to your valuation?
Accelerator business has $100,000 in net income in 2022. This gives us a valuation of $250,000. With an asset value of $300,000. Which means that as a baseline the value of this business is currently $275,000-$300,000.
But as an accelerator I know the business can do better.
- Set the target of 5% bottom line growth. This is actually a very LOW target. Rather than $100,000, I want 2023 net income to be $105.000. That is a small change, but by adding $5,000 to my bottom line in 2023, I have just created $12,500 in additional value.
- Create a plan for 2024 for additional 5% growth. If our business isn’t accelerating, it is failing. As accelerators we must be creating value daily. In 2024 using our 5% growth target, we would have $5,250 in additional net income and another $13,125 in value. Which means just by being aware of how our net income CREATES value, in an 18-month period we created $25,625 in additional value.
In business, just like life, it doesn’t matter where we started. But it does matter where we are going. As accelerators, we must have the awareness of valuation, and the realization that our decisions CREATE value every day.
Are you ready to be an accelerator? Click here to learn more about our accelerator coaching method