Catering companies make up a major segment of the food and drink industry. They fall under the SIC 5812 and NAICS 72232 industrial classification.. Successful catering businesses sell quite often. So if you need to determine the fair market value of your company, you should have plenty of market evidence.
In fact, valuation multiples derived from recent sales of similar firms give you an accurate and highly defensible way to estimate you company’s value.
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.
- Sale price to seller’s discretionary cash flow.
Typically, the value of business inventory gets added to the value estimates.
We have listed these valuation multiples in the order of their accuracy. Now the multiples come from a statistical analysis of a number of business sales. As a result, the value spread constitutes a key measure of their accuracy. In other words, the closer the actual valuation multiples cluster 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 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.
- Calculated from 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.
Interested in business market value assessment?
Recent sales of similar catering businesses give you the proof you need to determine the value of your company. You can assess the fair market value of your business based on its gross revenues, net sales, net profit, cash flow, EBITDA, and assets.