How do I value a hospitality business?

A restaurant, bar, café or similar hospitality business can be valued by looking at what it earns. BDC, the Crown-owned business bank, says earnings-based methods are commonly used for established businesses that generate reasonable returns and whose value is greater than that of their assets alone; a valuator reviews forecasted earnings or cash flow and past results. A second question for a hospitality owner is whether the earnings can be handed to someone else.

Where the multiple comes from

Under market-based methods, BDC says the multiple may be based on EBITDA (earnings before interest, taxes, depreciation and amortization), revenue or other metrics. It adds that the figure and type of ratio vary with factors such as industry and size of the company, market conditions and the multiples used to buy or sell comparable businesses. So a hospitality multiple depends on those factors, including comparable sales, not on a general rule. For the wider method, see how to value a business in Canada.

Licences and permits sit behind the earnings

Rules differ by province, so take Ontario as one example. The Alcohol and Gaming Commission of Ontario says a transfer of a liquor sales licence is required if there is a prescribed change of ownership of a business carried on under a licence, if the licensee changes, or if a different person wishes to acquire the licence; it also describes cases, such as an officer or director leaving a corporate licensee, where notice to the Registrar can replace a transfer. Ontario’s food premises regulation, O. Reg. 493/17, says a person who gives the medical officer of health notice of an intention to commence to operate a food premise, under the Health Protection and Promotion Act, must include their name, contact information and the location of the food premise. Ask which equivalent steps your province and municipality require.

What to check before you rely on a figure

BDC’s due diligence guidance says to make sure key contracts, such as leases, regulatory agreements and customer contracts, can be assigned to the buyer if necessary. For a hospitality business, confirm whether the lease can be assigned and on what terms, and whether the licences and permits can move to a new operator. Also ask how much of the sales comes from a few customers, such as a regular catering client.

A CBV (Chartered Business Valuator) is one professional who can prepare a formal valuation. The price a buyer actually pays can still differ from the valuation, because BDC notes that eagerness to sell, financing and due diligence all influence the final transaction price.