Buying a Competitor

[celement]

One of the coffee drive through huts in my community is on the market....its price is silly right now. But I'm sure eventually it will get to a reasonable point because I have reason to believe the owner is "done" and ready to sell.

I've heard all kinds of theories and formulas for buying a business of this nature. When I bought mine just 10 months back it was priced by the seller based on the start up cost of a new business....I agreed to that and bought in...I have some regrets but I'm in the business which was hard to get into in this area.

Now this location that is for sale I'm told is doing $800 per day...I believe this and that means about $24k a month. This is current info, but here's the rub....a brand new starbucks opened right across the blvd from them. Actually it hasn't opened yet - its scheduled to in the next 2 weeks. It has a sit down and drive through, but it has terrible access. I even once looked at the location and chose not to use it due to the terrible access.

I believe this business has a 15 to 20% gross profit margin on the $800 per day...meaning about $3,600 to $4,800 per month...say $50k a year for the last 12 months....

What would you value this at?

 

[cafemakers]

I've heard all kinds of theories and formulas for buying a business of this nature.

Yep - and they're all pretty much wrong!

As stated before: not an attorney, only your attorney should provide you with legal advice. If I were in your situation, I would first request a set of financials from the target to substantiate their claims... review these with your accountant to ensure that they meet standard accounting principles (which you will later have your attorney write a representation and warranty from the seller guaranteeing that they do in your purchase contract -- along with "all taxes paid," "no litigation pending," "in compliance with laws," your attorney can write the list)

While doing this, probe the seller for their motivation. Why are they selling? Financial? Family problems? Scared of *$ (hehehe)? Gauge their urgency and you can use this to your advantage in developing your strategy to respond (or to not respond and wait until the stress level builds).

Next, based on the results on your financial inquiry (taking a CLOSE look at potential liabilities, as well as any trends that may appear in the revenues); determine the real cost and benefit to you of this acquisition; things like: what is their capital equipment really worth? their brand? will you retain and retrain their staff or hire new? Figure out how much YOU are willing to pay and then choose one of the valuation formulas that supports your figures; assuming that you decide that the acquisition is worthwhile, promote your valuation formula as the governing standard that should be applied in this situation (for whatever reason)... just like your first seller did.

The secret is that there's no magic formula to valuation in an acquisition - it's all about maximizing your reward for the investment while minimizing your risks.

 

[cafemakers]

Yep - and they're all pretty much wrong!

I suppose that they could also all be "right" depending on how you look at it.

 

[CCafe]

Man cafemakers, I don't think anyone could have said it better!

Celement, from personal experience nobody dumps a profit of $50,000 a year. I think most people would consider it their cash cow and continue to open more business or move on to different projects. Lets face it, 50K goes a lot farther then most people think!

 

[Coffee Guy]

Hello...hello...Is this thing on? :twisted: Keeping things in simple terms. Does the seller have a time line to sell? That is the most important thing to consider. Don't worry about how much they are asking for the business because everything is negotiable. Next does the property come with the business? If so, then play it as though you are interested more in the property, and place less value on the business (by playing this card you devert the sellers attention from the business and maybe get it for less). If the property does not come with the business, then do some due deligence and come armed with your own attorney and accountant as C.M. says. I trust my own people with the numbers and the research on someone elses business, not their people. Besides if you are serious about wanting to obtain this business, you will have to invest a few bucks with your people to check it out and make sure it checks out.

By the way, if Starbucks is opening across the street, they are going to affect your business. Fact is, they are going to get business no matter what, however, if this place has been there for awhile and already has a strong customer base, then you will keep some of the real loyal ones. See if there is something that the existing owner isn't doing effectively, and if you decide to buy the place, then plan your work, and work your plan...(sorry I just had to say that)

 

[javahill]

People dump profits of $50K. Sometimes much more. A lot depends on both their personal and business circumstances. There could also be information about new competitors, leases, traffic flows, development and other business issues.

But as previously noted, do your due diligence with and accountant and a lawyer (or at least qualified legal advice and do the books yourself if you feel up to it) to make sure it is profit of $50K. Then negotiate the price. Make sure you don't pay $50K to get $50K of profit.

 

[ddixon]

One of the coffee drive through huts in my community is on the market....its price is silly right now. But I'm sure eventually it will get to a reasonable point because I have reason to believe the owner is "done" and ready to sell.

I've heard all kinds of theories and formulas for buying a business of this nature. When I bought mine just 10 months back it was priced by the seller based on the start up cost of a new business....I agreed to that and bought in...I have some regrets but I'm in the business which was hard to get into in this area.

Now this location that is for sale I'm told is doing $800 per day...I believe this and that means about $24k a month. This is current info, but here's the rub....a brand new starbucks opened right across the blvd from them. Actually it hasn't opened yet - its scheduled to in the next 2 weeks. It has a sit down and drive through, but it has terrible access. I even once looked at the location and chose not to use it due to the terrible access.

I believe this business has a 15 to 20% gross profit margin on the $800 per day...meaning about $3,600 to $4,800 per month...say $50k a year for the last 12 months....

What would you value this at?

If you wouldn't mind me to be so forward - what was the start up costs/asking price? Thanks.

 

[FredChicago]

$50K in gross profit seems alittle high. Salaries, lease, payroll taxes, insurance, etc. Make sure you compare your expense categories with his and do a comparison to gross revenue since you are in the same business. Then have your accountant compare to yours to make sure there isn't something missing. Realize that it will take several years, assuming you can maintain or increase profitability, before you can really take money out of the business while your are paying off the loan to purchase it.

 

[cloudsipper]

Observations and questions...
Does the business require you to work the kiosk full time?
If not, I would *really* question why the current owner is selling it.
If you have to be there..
1) $50K profit ..but you work full time at it? Does this make sense?
Let's say you worked full time at McDonalds, Wal-Mart, etc for $8/hr plus benefits equivalent to another $3/hr. That's $22,000 per year and you haven't invested a dime! If you take what you would have invested in the coffee biz let's say $250K and just put it in the bank at 4% you would get $10,000/yr in interest. So by working in a dumb hourly job and making a single (very low return, but safe) investment you would make more money per year working the same hours.)Remember that your full time job has insurance, 401K, vacations, free weekends and NO RISK.

Profit is the reward for taking risk. Otherwise it's wages..regardless of how they're earned.
Back to the kiosk
If you want to compare apples to apples...add the cost of a full time employee ..again 2000 hrs @ a loaded rate of $11/hr and subtract $22,000 from the gross....starts to be a bit less thrilling, but is a more realistic starting point for whether it's a good business deal or not.
Now, with net profits at $28000 what is a good price?
Well, depending on what investment options you have currently, a 10% return on $280,000 would be $28000.
SO, if you had a choice between investing in say, a somewhat risky mutual fund or this business which would you choose? And If you have disposable amounts in the quarter million range, I would think there are hundreds of investment options which would seem more attractive. If you're borrowing money to buy this business it's just another business cost that comes off the bottom line. Hope this has been as much fun for you to read as it was for me to write..
BTW, I'm facing the same questions myself, looking to set up a kiosk here. My parameters are a bit different and of course the demographics for customers is pretty depressing, but what the heck, I love coffee, I love roasting it, brewing it and sharing it. It would be nice to make a few bucks along the way. Good luck.. feel free to PM me if you like.