Catering companies are a major segment of the food and drink industry, classified under SIC 5812 and NAICS 72232. Successful catering businesses sell quite often. This is good news if you need to determine the fair market value of your company.
In fact, valuation multiples derived from recent sales of similar firms give you an accurate and highly defensible way to estimate what your business is worth.
For a catering business, the most commonly used valuation multiples are these:
- Business sale price to gross annual revenues.
- Business sale price to furniture, fixture and equipment (FF&E) assets.
- Business sale price to seller’s discretionary cash flow.
Typically, the value of business inventory is added to the value estimates.
We have listed these valuation multiples in the order of their accuracy. Since the multiples are statistically derived from a number of business sales, a key measure of their accuracy is the value spread. The closer the actual valuation multiples to each other, the more accurately you can predict your own business value.
Indeed, the business price to gross revenue valuation multiple shows a spread that is about 45% tighter than the discretionary cash flow based estimates.
Example – using valuation multiples to estimate the value of a catering business.
Consider a typical catering company that generates $500,000 in annual gross sales, owns $100,000 in fixed assets, carries $10,000 in inventory and throws off $120,000 in discretionary cash flow. To calculate the business value, we pick a set of reasonable valuation multiples as follows:
- 40% of gross revenues.
- 2.5 times the value of furniture, fixtures and equipment.
- 1.8 times the seller’s discretionary cash flow.
This gives us the following business value estimates, including the inventory:
- Based on business gross revenues: $210,000.
- Based on FF&E business assets: $260,000.
- Based on seller’s discretionary cash flow: $226,000.
Taking the average of the above numbers gives the likely business market value of $232,000.
Can your business sell for a higher price?
Each business is unique. In addition, the circumstances of each business sale are different. Hence, it is quite possible that your business can be worth more or less on the market. Some key factors that affect the business market value:
- Availability of financing, especially seller financing. All-cash deals tend to fetch lower prices than financed business sales.
- Specific motivations of the business buyer and seller. It is hard to get a fair market value for the business whose owners are compelled to sell.
- Timing and effectiveness of the business for sale marketing effort. The more qualified buyers are interested in your business, the higher the likely selling price.