The True Value of a Professional Appraisal – Four Recent Case Studies

Yesterday I spoke with two owners who had recently had their businesses “valued” to get an idea of what their business might be worth.

Both calls had several things in common which is not unusual, the one thing that really worried me was that neither had been asked for a copy of their lease.

Whilst I don’t believe in talking down brokers or agents this kind of behaviour needs to be called out. I firmly believe it is not serving anyone and it reflects badly on the industry.

I noticed a post in our Facebook group recently where somebody was asking about how to sell a business without a lease. Before I could add my two cents there were over ten comments from other operators giving solid advice about how the business has little or no value without a good lease.

This is a real positive in my eyes, the more operators that truly understand where the value of their business comes from then the less likely it is that situations like the two above will be tolerated.

The suggestion that you can value a business without reading the lease and the lease disclosure document is almost unbelievable.

As the examples below will show the financials, fit out, location etc mean very little in comparison the impact of certain clauses in leases.

This knowledge and understanding is very encouraging and if you take nothing else from this post then please consider reviewing your lease well in advance of sell and ideally do it even if you are not selling.

The three case studies below were carried out by Tas Dasios from the GSE Sydney Office and show the value in engaging a hospitality professional to appraise your business.

The system that we use with business appraisals will show you not only where the value of your business is now but also how you can maximise the value and future sale price of your business.

If this sounds like something you would like to discuss then post in the comments below, DM us or email info@www.gsehospitalitybrokers.com.au

Client #1:         Eastern Suburbs Bakery Café

Findings:       Wages too high

COGS too high

Delivery App business proportion high

Rent increases were CPI only

Outcomes:

• Reduction in weekly wages of $1,296 – more involvement from owner (particularly weekends which were the busiest time for the business) and reducing incidental wages (cleaner) and also reducing shift timings by 15-30 minutes for staff, particularly at the end of the day.
• COGS was 31.2% – this was primarily attributed to the Delivery App business as the business had onsite baking capabilities which should see the COGS just below 30%. Mainly adjustment in Delivery App pricing as well as re-visiting serving sizes and quantities of ingredients. Savings/incremental margins of approximately $300 per week with further scope.
• Over 30% of the weekly revenue was Delivery App based. Reconciled the business model removing all the Delivery Apps but found that the reduction in turnover would drastically affect the sale price. Best course of action was to revisit the pricing and serving size (point above).
• With the pandemic, the CPI for June quarter was negative – this meant that his annual renewal of rent, which was calculated using the June quarter CPI, was a decrease in rent to previous two tear level. Approximately $50 per week saving.

Client #2:         North West Café/Patisserie

Findings:          Wages too low

COGS too Low

Review of Café/Bakery mix

Demolition Clause in lease

Outcomes:

• A Demolition Clause was discovered in the lease. Both the Vendor and the Landlord were unaware of this Clause. Communications between Vendor and Landlord removed this Clause via an amendment to the lease. Outcome placed value on the business of $269k whereas before the value was close to nil/unsaleable.
• COGS was 16% – this was adjusted to reflect industry standards to 27% and place the business in a reasonable and believable position to any prospective purchaser. Initial COGS were difficult to evaluate.
• Wages was 22% – this was adjusted to reflect industry standards to 26% and place the business in a reasonable and believable position to any prospective purchaser. Wages were low due to manager working well beyond her remuneration.
• Reviewed the business model to include the bakery and/or have the café as a stand-alone business (bringing in products from suppliers). Maintaining the bakery side of the business added $70k to the final value of the business whilst not adding significantly to the wages cost.

Client #3:         Lower North Shore Café

Findings:          Demolition Clause in lease

Outcomes:

• A Demolition Clause was discovered in the lease. The Vendor was unaware of this Clause. Communications between Vendor and Landlord removed this Clause via an amendment to the lease for the new 5 year term. Outcome placed value on the business of $600k whereas before the value was close to nil/unsaleable.

Client #4:         North West Café

Findings:          Wages too High

COGS High

Current month to month lease

Outcomes:

• The Vendor was on a month-to-month lease as they had not signed a new lease. This was in action for18 months. Had the Vendor approach the Landlord to provide new terms for lease, provide a new 3+3 year lease and have that new lease signed by the new Purchaser to save costs of assignment ($2k). A timeframe for completion of the sale was also communicated to the Landlord with a trigger for the current Vendor to sign the lease if no sale completed by then.
• Wages were reduced by $350 per week by removing a casual employee. This increased the business valuation by over $25k.
• Reviewed the COGS for the business and discussed the pricing/margins of the products served.