Business Valuation Method
Owner Benefit: A Valuation Method for Small and Medium Size Hospitality Businesses
You are the owner and manager of a small restaurant, hotel, spa or other hospitality operation and you are thinking of selling your business. But, now, you are facing several dilemmas.
How much should I sell my business for?
Do I really know the financial benefits I receive from my business? Is it only the profits I get from it?
How do I determine its fair value?
Do I need to hire a consultant to do that?
A popular and simple method for the owner to establish a fair selling price for the business is the “Owner Benefits” or “Multiple of Earnings” method.
What are the Owner Benefits?
The Owner Benefits (sometimes also called Discretionary or Adjusted Net Earnings) gives an indication of the total benefits a restaurant or another business provides for its owner on an annual basis.
How Owner Benefits is calculated?
To calculate Owner Benefits you take the Net Income amount and you add back also noncash expenses such as depreciation and amortization expenses, since these expenses do not represent actual cash outflows or payments for the business. Then you add other benefits the owner may be receiving from the business such as: owner’s salary, personal insurance(s) charged on the business, other benefits the owner may be getting such as: mobile phone, transportation, entertainment and travel expenses that the owner charges on the business, interest expense since the business covers financing expenses for the owner and any other benefits the owner gets from the business itself.
Example of Owner Benefits Calculation (Table 1)
|
YEAR 20xx |
Amount |
| Net Income (After Taxes) |
70000 |
| Depreciation expenses |
7000 |
| Amortization expenses |
4000 |
| Owner’s salary |
25000 |
| Interest expenses |
1000 |
| Insurance expenses |
4000 |
| Transportation and Travel expenses |
10000 |
| Entertainment expenses |
5000 |
| Mobile expenses |
1000 |
| Total Owner Benefits |
127000 |
As we can see on Table 1 the total Owner Benefits go far beyond the business’ Net Income from $70000 to $127000.
Multiple of Owner Benefits (Multiple of Earnings)
The final step for estimating a fair selling price for the business is to use a multiplier of Owner Benefits. This multiplier ranges usually between 1 and 3. If you use a multiplier of 1 then the selling offered price based on Table 1 would be ($127000 X 1 = $127000).
However, it’s always a good practice for business owners to consider different ranges of Owner Benefits Multiples in order to establish a price range for their business.
