How To Value A Hospitality Business

The hospitality industry is one of the most dynamic and competitive sectors, including restaurants, hotels, bars, event venues, and accommodation services. When valuing a hospitality business, it’s not uncommon for you to run into unique challenges because of its operational complexity, reliance on customer experience, seasonality, and sensitivity to economic conditions. There’s plenty that can influence the valuation beyond financial figures, such as brand reputation, location, and staff quality, which can heavily influence market value.

Key factors influencing hospitality business value

When valuing a hospitality business, valuers and investors look at much more than just profit margins. Here are the most important elements that can increase or decrease your business’s worth:

Location and foot traffic

In the hospitality sector, location is everything. Positioning your venue in a high-traffic, desirable area usually means you can instantly get a premium on your valuation. Visibility and accessibility to transport hubs and neighbouring businesses can also factor into the overall value of your business. The better your location, the better your turnover, making you more attractive to buyers.

Lease terms

Whether your business owns its premises or operates under a lease directly affects its valuation. If you have long-term, favourable lease terms with reasonable rent increases and transfer clauses, you can boost your valuation by claiming security for your new buyer. On the other hand, short leases with no renewal options can significantly reduce your market value. We recommend negotiating these before valuing your business, or, better yet, buy the premises so your buyers don’t need to assess the risk of lease terms.

Brand reputation

In the age of social media and websites like TripAdvisor, your online reputation can make or break your hospitality business. Strong customer ratings and a positive media presence boost your business’s value. This is an intangible but vital factor in hospitality valuations, so don’t underestimate the power of review incentives and social media marketing!

Licensing, permits, and compliance

Compliance with local regulations is essential when running a hospitality business. Liquor licences, outdoor dining permits, hotel accreditations, or event licenses that are transferable or renewable without posing issues to the new owner can boost the value of your business. Any restrictions or compliance concerns might put potential buyers off and lower the market value.

Staff retention rates

A business with highly trained, loyal staff and a competent management team in place is far more valuable than one heavily reliant on an owner-operator. A common issue in the hospitality sector is high staff turnover rates, so buyers are often particularly stringent about looking for this. They’ll look for stability in operations and staffing to hopefully end with a seamless transition after the sale has gone through.

Revenue diversity and seasonality

Venues with multiple income streams, such as a hotel with a restaurant and conference facilities, or a bar with takeaway options and event hosting, tend to hold higher value thanks to a lower diversified risk. Moreover, businesses with less seasonal revenue dips can be better valued with higher multiples as buyers won’t have to weigh up the pros and cons of ‘peak’ and ‘off’ seasons.

Valuation methods specific to hospitality businesses

Hospitality businesses often require a mix of valuation techniques thanks to their variable income streams, reliance on location, and intangible assets like goodwill and brand equity. Here are the four most relevant methods you could choose from:

Multiple of earnings (EBITDA) method

The EBITDA method applies a multiple derived from the market to a business’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation). The multiple reflects risk, profitability, market demand, and business structure to the best of its ability. The general rule of thumb for hospitality businesses is that they sell for 1.5x to 4x EBITDA. However, premium venues, multi-site groups, or those with property ownership can achieve higher multiples. The hospitality industry is more volatile than others, so multiples can fluctuate for several reasons.

The advantages of this method are that it focuses on operational profitability first and foremost, and it accounts for non-cash expenses like depreciation. This makes it more appealing to potential buyers than other methods as it utilises exactly what they want to know. However, it might undervalue early-stage or cash-heavy seasonal businesses.

Revenue multiple approach

The revenue multiple approach is where you apply a multiple to the business’s annual turnover, making it best for high-turnover, lower-margin businesses like bars, restaurants, or fast-casual venues. Multiples typically range from 0.2x to 0.7x annual revenue in Australia, although this can depend on size, location, and market positioning. While this isn’t often considered the best valuation method for most sectors, it actually works well for the majority of businesses in the hospitality industry.

Pros of this approach include that it’s simple and effective for turnover-driven models, and that it reflects brand and location influence on sales. However, it doesn’t account for profitability or debt levels, which can skew the results and lead to potential buyer dissatisfaction.

Discounted Cash Flow (DCF) method

The DCF method requires an accurate projection of future net cash flows over several years. You’ll discount these to present value using a risk-adjusted discount rate, which helps you work out your business’s present and future value. This method is particularly useful for hotels, resorts, or venues with contracted future bookings, as not all hospitality businesses utilise many future bookings.

The DCF approach requires extensive knowledge of your business beforehand and the ability to accurately predict your cash flow forecasts for the future. If these numbers turn out to be inaccurate, the entire valuation will be in jeopardy. This isn’t always a good thing for hospitality businesses, as future revenue can be very unpredictable and influenced by many external factors.

Net profit approach

The net profit approach is another simple one, where all you need is the net profit of your business (the total profit earned – working costs). A multiple will be applied to the normalised net profit, adjusting for owner benefits, one-off costs, and non-essential expenses. This works well for small hospitality businesses where EBITDA adjustments are too difficult or complex to work with.

The highlights of this method are that it’s straightforward for the majority of small to medium business owners to work out, and that it highlights the underlying profitability, which can draw more potential buyers and investors in. However, it might overlook intangible assets like your brand strength or goodwill, making it less accurate if you rely heavily on these aspects.

Common mistakes when valuing hospitality businesses

Given the complexities of the hospitality sector, it can be easy to misjudge your business’s worth. Here are some of the most common mistakes we see made during valuations:

Overlooking the impact of your lease agreement

Many businesses in the hospitality industry overestimate their value without considering the terms of their lease. While you might think you have a great venue to boost your value, it can be overshadowed by adverse lease terms like short leases, steep rent reviews, non-transferable agreements, and more. Potential buyers might not want to deal with tricky landlords or venue changes, so this has the power to dramatically reduce buyer interest and value.

Ignoring seasonal revenue fluctuations

Some hospitality businesses experience large revenue peaks during holiday seasons, events, or tourism booms. If you choose to value your business on peak-season performance without averaging it over a year, it can lead to inflated figures that don’t truly reflect the business’s profitability. Your buyers and investors will more than likely spot this error, leading to difficult sales negotiations and potentially a lower deal than you were hoping for.

Failing to factor in unofficial or undocumented revenue

Cash businesses, or those with unrecorded income streams, might look less profitable on paper than they actually are. For this reason, it’s incredibly important that you document and justify all of your revenue streams before valuing the business. Without all revenue documented above board, your formal valuation will be lower, which will then reduce your sale price.

Neglecting forward bookings and event contracts

For businesses in the hospitality industry, like hotels, function centres, and restaurants with events, future bookings are incredibly valuable assets. Not including these in your valuation reports ignores the fact of guaranteed future income streams, which can be very appealing to buyers and valuers as it highlights your business’s stability and reduces the risk of revenue fluctuations.

Enhancing your hospitality business’s valuation

If you’re looking to increase your business’s value before a sale or restructure, here’s where we recommend you focus:

• Secure long-term, favourable lease agreements: Lock in options and rent terms that will appeal to potential buyers.
• Invest in online reputation management: Consistently collect positive reviews and maintain high ratings on key platforms to make your business more appealing to buyers.
• Diversify your income streams: Add catering, events, takeaway services, or merchandise to reduce your reliance on a single revenue source.
• Document forward bookings and client contracts: These guarantee future income and boost goodwill value, therefore improving your overall valuation and appearance to investors.
• Retain and train key staff members: Loyal, skilled staff reduce operational risk for new owners, instantly enhancing your valuation.
• Implement modern POS and booking systems: These streamline operations and make reporting more transparent and trustworthy, so it’s easier to calculate a more accurate valuation.
• Regularly audit and document financial records: Clean, accurate books can improve buyer confidence and speed up due diligence.

FAQs

What multiple do hospitality businesses typically sell for?

Hospitality businesses in Australia generally sell for 1.5x to 4x EBITDA or 0.2x to 0.7x annual revenue. However, this can depend on a number of factors, including your venue type, location, business size, and much more.

Does owning the property increase business value?

Yes, property ownership removes the uncertainty of lease agreements and rent increases. This often attracts higher multiples and a larger pool of buyers, which means you can influence the selling price higher as more people begin bidding on your business.

How important are online reviews when valuing a hospitality business?

Online reviews are extremely important to hospitality businesses. A strong online rating average can directly impact foot traffic, bookings, and brand reputation – all of which factor into your goodwill valuation. Online reviews are more important in the hospitality business than in most other sectors, which is why they’re often overlooked.

Is seasonality a problem for valuation?

Not always – if you properly manage your business, seasonality doesn’t have to be a big deal. However, seasonality needs to be factored into average earnings and forecasts to avoid over- or undervaluing the business.

Do future bookings add value to a sale price?

Yes, forward bookings and confirmed event contracts represent guaranteed future income. This should be documented and included in the valuation process to show potential buyers and investors that you have future revenue projections. Buyers are more likely to show interest when hospitality businesses have future cash flow predictions, so this can be a huge plus in your favour.

Get in touch with a business valuation expert near you

Valuing a hospitality business requires specialist industry knowledge and an understanding of both tangible and intangible assets. Our valuation professionals work with hospitality business owners across Australia, offering accurate valuations that can be used for sales, acquisitions, partnership restructures, and investment planning.

We have business valuation experts across Australia, and you can get in touch with them by following the details below:

• Get in touch with our business valuation experts in Brisbane
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