The valuation of a bakery business is a precise science – the negotiation of a shop lease equally so. It’s time to explain, bluntly, how bakeries are valued and how a little forward thinking can boost the resale value of your business.
Bakeries, like all traditional bricks-and-mortar businesses, occupy premises leased or owned by, the business operators. This article is written for retail bakeries trading from leased premises.
A lease does not go on forever – it has a start date and an end date. Let’s start at the end. At the end of the lease bakery tenants are required to cease trade, vacate and de-fit the premises, strip-out all of the plant and equipment, make good the damage caused by the strip-out, remove redundant services and generally return the premises to the condition at the start of the lease. Needless to say, de-fit costs are substantial.
A bakery on a short lease or approaching the end date has little or no resale value. That means, without reaching a new deal with the landlord, the bakery will not be able to realise the capital investment in building the business. The problem is landlords may, and often, say no to a longer lease. A bakery without a lease cannot be sold.
The reverse is also true. A profitable bakery on a long lease can be sold quicker and for more. The reason is the way bakeries are valued and traded. Technically referred to as the Earnings Multiple Method, bakeries like most other retail food businesses are traded at a multiple of annual profit.
Bakeries looking to expand into new sites, or looking to renegotiate their lease therefore have the perfect opportunity to plant the seeds for a big payday.
To illustrate, say a bakery can be sold for a multiple of 2.5: that is, two-and-half-years of profit. If you were buying this bakery, how many years would ideally be remaining on the lease – at least two-and-half years? Wrong.
The lease must be long enough to allow the business to be sold, the buyer to trade beyond the break-even mark, and then resell the business. This is the natural cycle of a retail business. All things being equal, a profitable bakery with 10 years left on the lease will achieve a higher price than the same business with only three years left.
Bakery owners often underestimate the importance of the lease and its impact on the value of their investment in bricks and mortar retailing. Sadly for some, the financial risk and years of hard work amount to little more than a job. For others a sound investment in a strong lease is a real bonus.
I encourage bakery owners to find their lease, look over it and investigate the earnings multiple that applies to their business. Armed with this information they can take better control of their investment.