What is my most valuable asset?
When it comes to valuing a hospitality business, often people are shocked to hear that the most valuable part of the business is not the fit-out, reputation or even profit - it's the lease!
The lease is so important for 2 main reasons.
1. Cost. In your cafe or restaurant there is really only one major fixed cost - rent. Unlike sales, cost of goods and wages, rent does not fluctuate. Rent is always the same amount regardless of other factors. For that reason you need to be sure your rent will be as low as possible.
2. Time. If you try to sell your business with 1 year remaining on your lease you are going to find it very hard to sell. Why? A buyer needs time to pay back their initial investment.
Let's say the net profit of your cafe is $50,000 per year. If you want to sell your cafe for $150,000, it is going to take the new owner at least 3 years to pay back their initial investment. If the lease has only 1 year remaining there is no way for the new owner to recoup their investment.
If however you have 10 years remaining on your lease, then suddenly the new owner has 7 years to profit after they have paid off their initial investment - A much better scenario!
In general, the lower your rent and the longer your lease the more appealing your business is to buyers and therefore, more valuable.