We were engaged as Business Valuers to value a café in the inner city suburbs of Melbourne. The purpose of the valuation was to facilitate a share buyout from one of the partners. Each partner owned 50% shares of which one partner wanted to buy our client’s share. Whilst normally we would act independently for both parties, this case was interesting as we acted for one of the partners. Without divulging into too much detail, our client felt that her partner had made an offer below market value. Our client wanted to know what was a fair market value and thus could use that in her negotiations.
The café was located in a vibrant, ‘trendy’ and well known shopping strip with plenty of competition. However it was our opinion that this business thrived on this competition as it brought customers to the area in which the café was able to capture. The café started in 2005 with the current owners taking over in 2007. Both owners had done an excellent job in turning around the café that had a turnover of just over $600,000.00 for the financial year ending 2008 to a turnover of $1.7 million in 2010.
Due to the expenses in marketing, repairs and renovations the owners had to spend on the business to grow, it was a thorough process to determine the reasonable maintainable expense and thus profit for this business. The other limiting factor is that they only had two full year financial statements, of which both contained a lot of extra ordinary expenses due to re-furbishments of the shop and purchase of new equipment.
Our research at the time suggested that most good cafes sold on a Multiple of PEBITDA of 1.5 to 2 times. It was our opinion that given the amount of work by the owners, the strong growth in sales, the new re-furbishment and the new equipment that this café deserved a higher multiple. Initial thoughts were to use a multiple circa 2.5 but given the lack of history of sales at present levels and the uncertainty regarding what would be a recurring expense we reduced the multiple to 2.2. We were very comfortable with the final figure as it gave a fair representation to the value of the going concern when you looked at the break up of Goodwill, Plant & Equipment and Stock.