How to Value a Coffee and Snack Shop
Coffee and snack shops took a hit during the COVID-19 pandemic. With renewed growth and increased competition, coffee and snack shops are fighting to see who will prevail in the industry. A coffee and snack shop needs to know how to maximize the value of their business. Obtaining a business valuation is the best way to learn how to increase the value and grow a coffee shop. A business appraiser at Peak Business Valuation is here to help you understand how to value a coffee and snack shop.
In this article, we discuss how to value a coffee and snack shop. A business appraiser often values a coffee and snack shop using two approaches. To better understand the value of a coffee and snack shop, receive a business valuation. Peak Business Valuation, business appraiser, values coffee and snack shops across the country. We are happy to answer any questions about valuing a coffee and snack shop! Get started today by scheduling a free consultation.
How to Value a Coffee and Snack Shop
When valuing a coffee and snack shop, a business appraiser at Peak Business Valuation, often uses the market approach and/or the income approach. A business appraiser determines which methods are best for valuing a coffee and snack shop. The business appraiser may use a combination of valuation methods, depending on the purpose of the valuation.
Valuing a Coffee and Snack Shop Using the Market Approach
The first approach a business appraiser may use when valuing a coffee and snack shop is the market approach. The best way to understand how to value a coffee and snack shop using the market approach is to think about how a real estate appraiser values a house. The real estate appraiser analyzes similar properties that recently sold. This helps them determine a fair market value for the property they are appraising.
When a business appraiser uses the market approach to determine the value of a coffee and snack shop they compare the coffee and snack shop to similar coffee shops that recently sold. For private companies, a business appraiser uses private transaction databases. A business appraiser uses the multiples at which other coffee and snack shops transacted at as guidelines to value a coffee and snack shop. Through analyzing the financial statements, key value drivers, and risks the business appraiser determines appropriate multiples for the coffee and snack shop. In the following paragraph, we describe the multiples a business appraiser uses.
Multiples for a Coffee and Snack Shop Using the Market Approach
A business appraiser at Peak Business Valuation uses the NAICS code or the SIC code applicable to the business to determine the appropriate multiples for a coffee and snack shop. A business appraiser utilizes multiples when valuing a coffee and snack shop under the market approach method. Below we discuss the basics of multiples for a coffee and snack shop.
REVENUE or SALES Multiple For a Coffee and Snack Shop
- Using a revenue or sales multiple to value a coffee and snack shop involves applying a multiple to the company’s revenue to determine an estimate of its total value.
EBITDA Multiple for a Coffee Shop
- An EBITDA multiple for a coffee and snack shop measures the return on investment one can expect to make from the business.
SDE (Seller’s Discretionary Earnings) Multiple for Coffee and Snack Shops
- The SDE multiple for a coffee and snack shop is a common method to rely on because it assesses a company’s cash flow by multiplying its SDE by the multiple to estimate a fair market value.
Often a business appraiser weights each method and multiple depending on the business transaction and reason for the valuation of the coffee and snack shop. For more information, see Valuation Multiples for a Coffee and Snack Shop. If you have questions about how to value a coffee and snack shop, schedule a free consultation today with Peak Business Valuation.
Valuing a Coffee and Snack Shop Using the Income Approach
Another common method to determine the value of a coffee and snack shop is the income approach. This method is most suitable for established and profitable businesses. The income approach analyzes the risks of the coffee and snack shop. Below are some of the common risks associated with buying or selling a coffee and snack shop. A business appraiser will analyze these when valuing a coffee and snack shop.
- Competition Risk: A business appraiser will analyze what makes your coffee shop different from competing coffee shops.
- Location: The key to maximizing the value of a coffee shop is through a prime location. A prime location can increase customer demand and traffic.
- Customer Demand: Repeat customers are extremely valuable to a coffee shop. In addition, the amount of disposable income customers have in the current economy impacts how often they purchase at coffee and snack shops.
- Management and Key Personnel: This is one of the largest risks to a coffee shop. The less dependent a coffee shop is on the owner, the more valuable it becomes. See Reducing Owner Dependence.
- Financial Risk: As a business appraiser is valuing a coffee and snack shop, they will analyze financial risks. This includes meeting revenue expectations, cost increases, and sustainability of profits, among others. These impact the long-term growth of the business.
Methods to Value a Coffee and Snack Shop Using the Income Approach
Under the income approach, the two most commonly used methods when valuing a coffee and snack shop are the capitalization of cash flow method and the discounted cash flow (DCF) method. Read on to better understand what these are. For more information see Methods to Value a Business.
Capitalization of Cash Flow Method
- A business appraiser most commonly uses the capitalization of cash flow method to determine the value of a coffee and snack shop if the business has a long and stable history. The analyst estimates an appropriate measure of economic income for one period. This period, or time frame, before or after the valuation date is then divided by an appropriate cap rate. The capitalization rate or factor reflects a reasonable rate of return an investor can expect. It also assesses risks the buyer may be exposed to, to meet expected earnings. We highlighted some of these risks above.
Discounted Cash Flow Method
- The discounted cash flow method uses 3-5 years of projections to estimate the value of future cash flows. The valuation analyst then discounts the future cash flows to present value using a discount rate rather than a cap rate. When looking at how to value a coffee and snack shop using this method, keep in mind it is most applicable for a business with a strong financial history. And companies that have built reliable forecasts in the past. However, know that this method is less reliable because it is limited to future cash flow estimates which can be extremely subjective.
When performing a coffee and snack shop valuation a business appraiser may use the market approach and/or the income approach. These approaches determine the coffee and snack shop’s fair market value. A business valuation report also provides details on maximizing a coffee and snack shop’s value. It is best to obtain the services of a business appraiser when learning how to value a coffee and snack shop. They have the expertise and experience to provide an accurate valuation for a coffee and snack shop.
To get started with a business valuation for a coffee and snack shop reach out to Peak Business Valuation. We love determining the value of a coffee and snack shop! Questions about valuing a coffee and snack shop are also welcome. Schedule a free consultation by clicking the link.
See also Valuing a Coffee and Snack Shop and Value Drivers for a Coffee and Snack Shop.
Schedule Your Free Consultation Today!