Coronavirus has affected hospitality businesses dramatically.
From restrictions across the UK forcing many businesses to close their doors for months to letting go of invaluable employees and living in a permanent state of insecurity, the sector has been hit harder in the past year and a half than ever before. Across all industries, hospitality has borne the brunt of the pandemic’s wrath.
Recent reports paint a gloomy picture of valuations for pubs and restaurants, with businesses reportedly going to market at, on average, 20% less than they would before the pandemic began. Calculated on the profits the business earned in the past year, hospitality businesses are being undervalued due to the tight Government restrictions implemented to tackle COVID-19.
While the future may feel bleak for business owners hoping to sell, those wishing to purchase a new business or premises in the hospitality industry have ample opportunity to save some money while expanding their business. But where to start?
365 Business Finance is here to help with our handy guide on expanding your business. We’ll begin by explaining how businesses are valued, including the most popular approaches and frameworks used to estimate their worth. We’ll then discuss the unique factors that determine the value of hospitality businesses and argue why expanding your business is the ideal way to add maximum value.
We’ll finish by presenting our top tips on how to expand your business in the hospitality sector and get the most from your investment.
How do you Value a Business?
A business valuation is the process of determining the economic value of a business.
If you plan to buy a business in the hospitality sector, understanding its worth and how you can make it more valuable is crucial to getting the best possible deal. Business valuation is dependent on how much profit a potential buyer stands to make versus the risks involved in the investment.
To get the most accurate estimate, business owners will usually turn to professional business evaluators for an objective assessment of the value of the business.
The Different Approaches to Valuing a Business
There are several different approaches a business can take when seeking a valuation. Below are some of the most commonly used methods to determine how much a hospitality business is worth.
If a business has significant assets, an asset valuation will help determine the overall value of a hospitality business.
Assets are categorised in two ways: tangible and intangible. Tangible assets are the physical things belonging to a business (for example, business premises, stock, land or equipment). Intangible assets are non-physical assets (brand, reputation or intellectual property such as copyrights and patents).
To discover the Net Book Value (NBV) of a business, you must subtract the costs of the business liabilities (such as debt and any outstanding credit) from the total value of the tangible and intangible assets.
Price to Earnings Ratio
For businesses with an established track record of profit, a price to earnings ratio (P/E) can be ideal for valuating a business.
The P/E ratio is worked out by dividing the profits after tax by the earnings ratio. The higher the ratio, the better rated the business.
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to past trends.
As P/E ratios often differ considerably, there isn’t necessarily a ‘standard’ ratio used to value all businesses. However, in general, a high P/E suggests a business is expecting higher earnings growth in the future compared to businesses with a lower P/E.
A low P/E can indicate a business is currently undervalued.
An entry valuation framework determines the value of a business by working out how much it would cost to establish a similar business from the ground up.
The best way to gain an accurate estimate using this model is to create a list detailing the start-up costs, the price of acquiring the tangible assets, the employment and training of staff, developing goods and services and building a customer base.
Once the list is finalised, business owners then consider how they could be as thrifty as possible when starting their business. For example, they may be able to save some money by setting up their business in a cheaper location or by opting for more affordable equipment.
After working out these savings, business owners then subtract them from the projected start-up costs and voila, you now have the value of a business based on the entry valuation cost.
Discounted Cash Flow
The discounted cash flow method is one of the more complicated ways of valuing a business.
This is an income-based approach centred on estimating how much a future stream of cash flow would be worth today. This framework is used primarily by established businesses that predict stable cash flows for the years ahead, so may not be the best option for hospitality businesses at the moment.
To work out the present value of future cash flow, you apply a discount interest rate, usually between 15% to 25%, to cover risks (such as unforeseen costs or bills) and the time value of money. The ‘time value of money’ is the concept that £1 earned today will be worth more than £1 gained tomorrow due to its earning potential.
To reach the business’ valuation forecast, add the projected takings for roughly the next fifteen years, including a residual value at the end of the period.
Endorsed by Forbes as a simple and straightforward approach to valuing a business, the market method entails assessing the value of similar businesses that have recently been sold or whose business valuation is currently public knowledge.
The market method grants an estimated value for a business based on what competing or similar companies are currently worth.
Understand a business’ worth is key when purchasing a business in the hospitality sector, but with so many frameworks and models of valuation to choose from, finding the right approach can be tricky to do alone. The Entrepreneur’s Handbook suggests hiring a valuation expert to help guide you through the process and ensure the true profitability of a business shines through.
(Understanding the valuation process is crucial to getting the most bang for your buck.)
How to Value a Hospitality Business: Unique Factors
When it comes to valuation, not all businesses are created equal. For some industries, the buying and selling of businesses may be more common than in others.
In retail, for example, where business turnover, customer volume and annual profits are high indicators of value, guidelines are available to help potential sellers through the valuation process with ease and ensure they get the best possible deal when their business goes to market.
So, what characteristics determine the value of a hospitality business?
These businesses often have several factors that can drive or decrease value for this specific industry. Such as:
- A hospitality business is both a business and real estate investment.
- Capital requirements for these businesses are often very high.
- Repeat and referral business is often critical to revenue generation.
- For hotels and B&Bs, room rates are flexible and can be adjusted seasonally to help drive profit for the business.
- Proactive and continuous advertisement is essential.
- An engaging and functional online presence is vital, including the automation of the customer experience (for example, the booking/buying journey).
- Hospitality businesses demand competent, hands-on management and staff.
Is it Time to Expand Your Business?
Beyond buying a whole new premises in the hospitality industry, what can you do to boost the current value and output of the businesses you already own? Expanding your business is a guaranteed way to increase its value, secure your future and provide more streams of revenue.
The hospitality industry continues to feel the effects of COVID-19 over a year since the pandemic began. With the potential job loss of the hotel and tourism industry projected to be at 50 million, businesses will need to adapt in order to survive.
Clever business owners know that their company needs to expand to boost profits and reach new customers. But, with limitless possibilities, it can be challenging to know where to start. So, how can you expand your hospitality business?
(Beyond buying a new premises, try to brainstorm ways you can boost the current value and output of the businesses you already own.)
How to Expand Your Hospitality Business
Leverage Automation Tools
Automation tools can streamline internal operations and speed up your business’ response rate, offering a better customer experience and freeing up your staff’s time. Automation tools can be used for everything from communicating with guests to managing employees, reservations, pricing, and even payments.
Engage With Your Consumers through Social Media
Many businesses with a social media presence fail to engage with their customers through their online channels successfully. Utilising social media, with staff dedicated to regularly maintaining these platforms, is a great way to make your hospitality business more visible online. Today, tech-savvy, always-online consumers expect businesses to be readily available 24/7 and have little time for brands operating solely through their bricks and mortar.
Create Multiple Revenue Sources
Besides granting your business more income streams, building up, multiple revenue sources can help mitigate potential risks, providing your business with more security. Why not try increasing your food and beverage offerings, growing your additional services or create new, bespoke ones to encourage new clients?
Apply for a Merchant Cash Advance
Expanding your business takes significant time and money. Give your hospitality business the boost it needs to explore new opportunities and add real value with a merchant cash advance. By partnering with a direct financial provider like 365 Business Finance, you can raise between £5,000 and £200,000 in unsecured finance for your business. Repayments are simple and mirror a small percentage of your monthly credit and debit card sales, meaning you don’t repay until your customers do. A cash advance allows you to invest in growing your business without the pressure of large monthly instalments and high-interest loans.
Expand your Hospitality Business and Thrive in the Post-COVID Era
If the last year has taught us anything, it’s that the hospitality sector is resilient.
As restrictions gradually ease, the industry is poised for considerable growth, with widespread demand for domestic and international travel as people rush to holiday destinations wherever they can.
We are confident that hospitality businesses will soon be bouncing back from the brink as we glimpse the light at the end of the long, dark tunnel that is the coronavirus pandemic.
That being said, many businesses will still find themselves closing their doors for the last time and are looking to sell their businesses at the best possible price. With valuations in hospitality businesses an estimated 20% lower than average since lockdown in March 2020, smart businesses owners looking to add to their portfolio have the opportunity to grab a bargain. Understanding the valuation process is crucial to getting the most bang for your buck.
Additionally, beyond buying a whole new premises, expanding your current business is a guaranteed route to increasing its value. With limitless possibilities for growth, business owners can easily offset the dark picture painted in the media regarding the health of the hospitality industry.
But expanding your hospitality business can be costly and require a significant investment in time, energy and most importantly, money.
That’s where we come in.
How can 365 Business Finance Help your Hospitality Business Expand?
At 365 Business Finance, we offer a merchant cash advance product to small and medium-sized businesses across the United Kingdom as a direct financial provider.
A merchant cash advance is designed as a quick way for any business that accepts credit or debit cards to raise capital without the need for a bank loan or hefty overdraft.
We offer £5,000 to £200,000 in unsecured cash advances for hospitality businesses in the UK with no APRs, hidden costs or fixed monthly payments, letting you focus on running your business.
Our merchant cash advance product can help provide your business with the resources it needs to expand and add real value.
Contact us today to see how we could help your hospitality business reach its full potential.