Part One – Price Valuation
When you are searching for a restaurant, bar or club business opportunity, you should generally focus on the price valuation, lease terms, and location. Choosing a trusted professional to avoid making costly mistakes in a highly specialized market is a smart move. After all, you’ll be making a large investment and you want to do it right!
We can be a valuable partner to help you determine if a particular restaurant, bar or club is a good business opportunity or not. We always have your best interests at heart and stay focused on what is best for you throughout the buying process.
If you’re ready to start looking for the right restaurant, bar or club business opportunity, this article is a good place to start. In Part 1 of this series, we will focus on price valuation. Part 2 will cover how to evaluate the location of the business.
Price Valuation
There are two methods for determining if the price of a business is reasonable, Assets in Place Method of Valuation and Going Concern Method of Valuation.
Assets in Place Method of Valuation
Buying a business that is only marginally profitable or unprofitable is known as an Assets in Place purchase. In most cases, you will be looking at the fixtures, equipment, the lease, leasehold improvements and licenses associated with the business. If you already have your own menu and a new theme or concept in mind,this is the best option for you. Even if you have experience buying a restaurant, club or bar, you may not know the criteria for pricing an Assets in Place business and the ratio between the sale price and sales. To better help you understand it at different price points, here are a few examples.
—A business generating $300,000 in yearly sales, or less, typically sells for 35% of yearly sales, so $105,000. ($300,000 X .35 = $105,000)
-Business doing $350,000 to $1 million in yearly sales generally sell for 25% of yearly sales
-Businesses bringing in $1 to $2 million in yearly sales sell at an average of 17%
$1.5 million in sales X .17 = $225,000 sale price
-A business with profits of more than $2 million in yearly sales typically will have a sale price of 15%, around $375,000
If you are like most buyers and not familiar with these ratios when considering a buying opportunity, our team can help. We’ve been in the local market long enough to have developed an innate sense of value based on how the business we are evaluating compares to other comparable businesses. This is valuable information we will share to save you time and money.
Going Concern Method of Valuation
The Growing Concern Method usually means the business being evaluated is making money and will continue to do so profitably for the foreseeable future. This is the type of business you want if you plan to operate it in a manner similar to how the seller. For example, perhaps you plan to maintain the name, menu, operating systems and personnel. We’ll nail down these details with you before you begin your search for the right business opportunity.
With this method the lease, leasehold improvements, fixtures, equipment, name menu, concept, goodwill and cash flow will all be included in the sale.
The primary valuation method used for a Going Concern Valuation is the yearly adjusted cash flow method or discretionary earnings. The net profit on the tax return or year-to-date income and expense statement is adjusted by adding back the following:
Net income
One working owner’s salary and payroll taxes
Personal expenses the owner charges the business
In some cases, extraordinary expenses like legal or accounting bills related to a lawsuit, for example, or another unusual situation would be added back to the net income, too. We can review these expenses to help you decide if this is the right opportunity for you.
After the yearly adjusted cash flow is determined, a sales price multiplier is used to determine the value of the business. The sales price multiplier for independently owned, non-chain, non-franchised food service operations will vary one to three times the yearly adjusted cash flow depending on the following factors:
An example of a Growing Concern Valuation is:
$75,000 yearly cash flow multiplied by 2.5 = $187, 500 sale price
Jim Pate and his team will be more than happy to discuss the information in this blog.
Feel free to give us a call at 530-209-4267 or click here to set up an appointment.
We will go over with you the differences in operating ease versus more difficult, the lease value, what the businesses’ future potential might be and growth opportunities. Everyone interested in a restaurant, bar or club business opportunity should have an experienced restaurant broker on their side.
