Truth be told, co-working business owners tend to be great at building up a business, getting it properly established, and making sure the space achieves success. From well-known co-working brands and chains like WeWork, Industrious, Serendipity Labs, Regis, Galvanize, and Venture X, to the countless streams of independent co-working brands across the United States – there’s a massive market for consolidating companies.
According to industry reports, a good number of co-working spaces are not profitable for two years or so after being open and will have limited profitability owing to the constraints of space and location. Because of that, it is vital to still assess the true worth of your company from time to time, so that you can sell your hard work at a fair price or understand the value of your existing business.
Variables that Determine the Value of a Co-working Business
For a buyer, co-working business valuations are dependent on several variables, and these variables include;
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Are you assuming responsibility for the co-working space debt or are you buying the owner out and the seller paying off the debt? Have it in mind that the easiest way is for the debt to be entirely paid out by the proceeds of the sale. Most often, the value of the business is determined and then any debt is deducted from the fair market value.
A strong community can be very challenging to measure, but it still remains the most reliable competitive advantage for a co-working space. Co-working buyers are expected to invest time to speak with current members to analyze community involvement. This will help determine the risk factors of competitors diving in and the potential pricing power of the space.
You need to understand that a co-working community takes time to develop, and it also takes time to build loyalty with members. So, it is less risky to acquire a co-working business that has been open for a few years and boasts of a strong community. Just note that you will have to pay a little more for it though.
Lease term and Renewal Option
In this line of business, there are two ways to look at it; 1) the more time you have to manage the co-working space in a precise location, the more it will cost. 2) The space could benefit from moving to a different location, so a shorter lease can be very suitable. When valuing a co-working business, note the longer a lease or option to renew, the better.
Brand and Marketing Materials Already Established
Note that if the space doesn’t have a strong brand, it can be easily molded or transformed into the buyer’s business vision. But a space with a strong brand can grow faster with recognition.
This remains one of the most vital variables buyers consider when valuing a co-working business. For instance, if the co-working business owns the building, then you should know if they plan on selling the business with a lease attached or the entire building.
Furniture and fixtures also tend to depreciate fast so this is an area that owners can get scorched, but it’s a fact of life. Have it in mind that if the space has a great marketing positioning, then the value of the business increases!
But if the owner did not do so well with the design, then a lot of it will need to be replaced as part of a turnaround plan. Also, note that most space owners will try to add the landlord’s TI (tenant improvement) budget into this, you should try to avoid this as a buyer.
Community Manager Or Other Staff
If you want a business that won’t require a whole lot of your attention, then a community manager is a necessity. You must ensure that the community manager will not change with the sale. If a space doesn’t have a community manager then you should find out if they actually need staff at the business, or they were just looking for ways to increase the valuation of the space.
Co-working Business Valuation Methods
To properly value a co-working space, here are the top methods used by experts.
Comparable Companies Method
If you want to know the value of something, one common way to do it is to find something similar whose value you know and compare it to yours. When it comes to businesses, it is more or less about comparing various important financial and operating ratios which would tell how good the respective businesses actually are.
These ratios might include standard financial ratios such as debt to equity, or interest coverage, or even industry-specific ratios like Revenues Per Available Workstation or REVPAW, a measure accredited by Regus ahead of its IPO, or even ‘community adjusted EBITDA’ made popular by WeWork.
Experts who carry out this sort of valuation professionally have financial models that they leverage to crunch the numbers and speed up the comparison. The process can be considered a scientific one especially since it is based on data analysis, but the result tends to depend largely on professional judgment.
Precedent Transactions Method
This second valuation method is most often used when it is nearly impossible to find a comparable company or to find enough of them to get good results. Have it in mind that you may not find a comparable company if the co-working business is unique, or if there are no quoted companies similar to the space in the business location.
Truth be told, there are not many quoted co-working businesses in the world and most countries have none at all, therefore it can be quite tasking or even impossible to find a comparable company whose market value is detailed.
To leverage this second method, experts or buyers will have to consider transactions rather than a company to use as a comparison. The transaction can be the sale of a business or an outside investment into a business. This method will also involve looking at the previous sale or investment transactions, even if in different fields of operation.
When leveraging the precedent transaction method, it is preferable to use the sale of a similar business as a comparison, rather than an entirely different one from a different industry, so there is a distinct connection between the comparable companies’ method and the precedent transactions method.
Discounted Cash Flow
Note that this method of valuation is based on the core principle of finance that any asset is worth the present value of all its future cash flows. When looking to use this valuation method, the first task is to put together some financial projections for the business, a profit and loss account, and a balance sheet for the next five years.
There are things you may not predict five years ahead, like loan repayments or rent payments. For most of those things, you have to make lots of assumptions to fill in the gaps. After you must have done this, you have to take the projected profit figure for 2026 and use that to estimate a value for the business.
Once you have all the profits figures for 2023-2026 and the estimated lump sum value in 2026, you also have to analyze what all these amounts are worth in today’s money. Experts and investors tend to be very conversant with both the logic of this method and also its potential disadvantages and will tend to use it with other methods to try and reach some kind of composite valuation.
Valuing a co-working space based on assets can be deceptive. Note that just like Apple Inc; there are certain businesses where the value of the business cannot be directly linked to the value of its assets. The performance of these businesses will have to be analyzed by their ability to grow their net asset value each year.
Note that a good number of operators of co-working space/serviced offices own the buildings from which they run their business and for these businesses, the value of the land and buildings will form the very core of the valuation process. Have it in mind that the value of the assets will offer a basis to the valuation in that even without the co-working business, the assets already boast of a market value.
It is can be encouraging to believe that a profitable co-working business is worth the value of the real estate in addition to the value of the co-working business on top. However, this is not always true because the income they would generate is most often hidden in the value of the property assets. The correct formula is more like the following:
Value of Co-working Business = Value of Assets + Value of Business – Value of Rent of Assets.
Starting or buying a co-working space can be quite rewarding. The emotional benefits associated with building a community are clear, but can also be hard to measure. However, what is clear is that unless your co-working space generates profit, none of the other benefits remain possible. Owing to that, you must understand the value and core business metrics of the co-working space first.