What multiple should you pay for a café?

Brokers tend to explain a café's price with a story: the location, the growth, the potential. The more useful way to look at it is as arithmetic. How many years of the business's real profit am I being asked to pay up front?

The multiple

Divide the asking price by adjusted annual profit. That is the price multiple.

"Adjusted" matters. It means profit after paying a market wage for the owner's work, and after removing add-backs the seller can't prove. If you use the seller's profit, the multiple will always look better than it should. The owner add-back shows how big the difference can be.

The scorecard bands are:

• 1.5 to 2.5 times. A reasonable range for a small owner-operated café.
• Over 3 times. You are paying for a story.

These aren't laws. A site with real strategic value, a long secure lease and clean books can justify more. A café that depends entirely on the current owner, on a short lease, deserves less. The point is to know what you are paying, and what for.

Payback is the same number, from the other side

The multiple and payback are the same arithmetic. If you pay 3 times adjusted profit, payback is three years, assuming profit holds.

I like payback as a way of thinking because it is concrete. Three years is a figure most buyers can relate to. Over four years is a long time to wait in an industry where margins are thin and trading conditions change.

Compare it with the lease. Payback of three years on a lease with eight years left is a very different proposition to payback of three years on a lease with four years left. See lease term versus payback.

What the price usually includes

Asking price in a café sale typically covers some mix of the business's goodwill, plant and equipment, fit-out, and stock. Ask for a breakdown.

• If most of the price is equipment, check its age and condition. Dying equipment is a cost that isn't in the P&L, and the scorecard flags capital spending needed in the next 24 months.
• If most of the price is goodwill, ask what the goodwill depends on: the owner, the location, the lease or a particular staff member.
• Check what is actually being sold. Some items on the equipment list may be leased or owned by someone else.

How to push back

If the multiple is high, avoid a general argument about value. Go through the specific reasons it is high.

1. Replace the owner with a market wage and show the adjusted profit.
2. Remove the add-backs that can't be proven.
3. Apply a realistic rent and lease position.
4. Price the capital works the business needs in the next two years.
5. Show the resulting multiple and payback, and ask the seller to justify the gap.

Done that way, the conversation is about evidence, not opinions. Sometimes the seller has answers that move your view. Sometimes the price drops. Sometimes the right call is to walk away, and you are better off knowing that before settlement than after.

What to ask

• How did you arrive at the asking price, and which comparable sales support it?
• What would profit need to be for me to be paid back in three years, and where would that extra profit come from?
• Can I see a breakdown of the price between goodwill, plant and stock?

Always run the final numbers past your accountant before you make an offer. They will know your tax position and your finance options, and I won't.