When it comes to valuating your business, you’ve probably heard consultants say, “it’s 2-3 times your net”. While there is some truth to this, we at Delaney valuate businesses based off more than just your net operating income. We consider all factors to get a more accurate value of what your business is worth. This includes the economy, interest rates, the state of our industry, and liquor licenses, just to name a few.
The Economy and Interest Rate Effect
The economy is inversely affected by the interest rate. When the economy is booming and interest rates are low, consumers spend more money, because it’s not as expensive to borrow/lend. The more money that consumers spend, means there is a higher chance of profit and cashflow increases for business owners. These increases directly affect the value of that business in a positive way.
The economy can also negatively affect the value of your business. Let’s look at the current economy as an example. Because interest rates are high (prime rate = 8.25%), consumer spending has slowed. However, prices have increased to help mitigate this lack of consumer spending. So now, your restaurant is maybe grossing the same amount of money, but net, there is a loss. How does this affect your value? Unfortunately, even though you’re making the same amount of money, your value has decreased.
The State of the Industry Effect
The state of the industry also affects the value of your business. I’m sure you’ve heard some horror stories about how Covid completely decimated some businesses. No one really talks about the success stories that came out it. I am lucky to have met a lot of these owners. In a way, Covid made business owners smarter. The constant “pivoting” forced owners to get creative and make it work. Cocktails to-go, increased delivery, expansion of seats due to covid permitted outdoor dining…Owners were and are servicing more consumers at less hours, all while increasing profits. This post-covid state makes for a healthy industry, which positively affects the value of one’s business. New Jersey has another layer when factoring in the state of the industry to the value of a business – Liquor Licenses.
The Liquor License Effect
The threat of liquor license reform is a real problem right now in our state. This is a unique challenge that at the moment, has no resolution in sight. The idea that your investment in a license may be devalued if laws change, is not only affecting the market, also the value of businesses with liquor licenses. This threat makes buying a restaurant with liquor a higher risk.
For example, a restaurant we currently have for sale is in a town where pocket liquor licenses are valued at $1m. (The value of a pocket liquor license in a town is determined by the price of last license sold in that town). If a buyer decides they do not want to take the risk of buying the license in case the Governor reforms the law, the value of that business will change since now it does NOT include liquor. To keep numbers simple, let’s say the restaurant is doing $1m in sales and there is a 30% liquor to food ratio of those sales ( the most common food-liquor sales ratio is 70%-30% respectively). Without a liquor license, you’d have to eliminate about 30% of sales. Of course, when valuating a business, there’s more that goes into this, but for arguments sake, you are now looking at about $700,000 in sales without liquor.
The main take away from this article is that there are many ways to value a business. And it’s not a “one size fits all” model. Call me today to see what your business is worth.