The add-back that flatters almost every café listing

Most café listings quote a profit figure. The owner is often working 50 or 60 hours a week, and the profit figure often includes the value of those hours as if they were free.

That is the single most common way a listing looks better than the business is.

What the seller's profit really contains

Say a listing shows $150,000 of annual profit. When you look closer, the owner is on site every day, makes the coffee on the early shift, does the ordering and the rosters, and takes no wage.

That $150,000 is part profit and part wage. The business is paying the owner by not paying anyone to do those jobs.

When you buy, you have two options: do the work yourself, or hire a manager to do it. If you hire, the manager's cost comes straight out of that $150,000.

Putting the wage back in

The scorecard assumes $85,000 a year for a manager to replace an unpaid owner. That is a placeholder, and the right figure depends on the venue and the market. Superannuation and other on-costs come on top of the base wage, so the full cost to the business is higher than the salary.

Run the example:

• Stated profit: $150,000
• Replace the owner with a manager: − $85,000
• Adjusted profit: $65,000

If the asking price is $450,000, the seller is asking for 3.0 times the stated profit, which looks sharp. Against the adjusted profit it is 6.9 times.

Same business, same price, and a very different picture. Using the scorecard's thresholds, 1.5 to 2.5 times adjusted profit is where I get comfortable, and over 3 times you are paying for a story.

Other add-backs worth challenging

The owner's wage is the big one, but sellers add back other items too. Some are fair. Many need proof.

• One-off costs. A genuine one-off, such as a legal dispute, deserves an add-back. A repair that happens every year does not.
• Personal expenses. A car, phone or travel run through the business. Fine to add back if you can see them in the ledger, and not fine if they are asserted.
• Family on the payroll. Either they work in the business, in which case you will need to pay someone to replace them, or they don't, in which case that is a different problem.
• Unrecorded wages. If staff are paid in a way that isn't in the accounts, the real cost of running the business is higher than the books show, and you have inherited a compliance issue.

The test for every add-back is the same: can the seller prove it, and will it really go away when I take over?

Owner hours matter on their own

Even after you price in a manager, the hours themselves tell you what you are buying. At 20 hours a week or fewer, the business runs mostly without the owner. At 60 hours a week, you are buying a job.

A job can be a perfectly good thing to buy, as long as you price it as one and are honest with yourself about the hours.

What to ask

• Who is on the roster, what is each person paid, and what does the owner actually do each week?
• Can I see payroll records for the last 12 months?
• What is profit after a market wage for the owner?
• Which costs are being added back, and can you prove each one?

A seller who has nothing to hide will answer all four in an afternoon. If you are told the add-backs are complicated, assume they are not in your favour.