Valuation of existing espresso cafe

[JR]

Any rules of thumb for assigning a price to an existing business?

The place we're looking at is in a revitalized part of town surrounded by mostly residential neighborhoods but within a few blocks of a small college.
Gross last year was $200,000. Monthy rent is $800, salaries $5,500, inventory $5,000. Furn, fix & equip book value is $20,000.

Current owners are asking $150,000 which sounds about $30,000 high to me?
Any input would be greatly appreciated.

 

[drrule]

Some value business by one years sales.

Some by 4X net annual profit. Which results in a 25% return on investment.

The true value of course is market value. That is what someone is willing to stroke a check for.

I am guessing your valuation of 120k is 200, running at a 65% margin, less rent. The thing you are not taking into consideration is the owners salary. You are buying a business, not a job. There is a big difference. You should subtract what it would take to pay a manager to run it. You won't get a balanced cost of doing business until you do, and that is what the value of the business should be based on, it's return, not what it will pay you to run it.

 

[barefoot]

valuation

A VERY touchy subject. Lots of opinions. From our experience in trying to buy a business here in CA. We looked at about 70 businesses over 1.5 years. Lots of range on valuation. But we also worked with a business broker specializing in restaurants and cafes. His rule was this:

Never pay more than 2x the NET profit to the owner.

You are NOT buying the revenue. You are ONLY buying the NET profit. If the cafe does $5 million in revenue a year but only nets $5000 a year it is not worth much. Unless you think you can cut out 10-20% of the current costs per month and you don't need any income.

If you buy a business that Grosses only $200k then it likely is only netting less than 10%. But being generous here is my valuation:
$200,000.00 revenue
$16,666.67 monthly

$5,500.00 salary 33%
$800.00 rent 5%
$5,833.33 product 35%
$1,500.00 misc 9%
$200.00 insure 1%
$450.00 utilities 3%

$14,283.33 total 86%

$2,383.33 net 14%

$28,600.00 annual net
$57,200.00 price
$20,000.00 equip
$5,000.00 inventory

$82,200.00 biz price

I am NOT NOT NOT a business broker so I could be WAAAAYYYY off here. But I would not over over $100k For sure! You are paying $100k to earn only $2000 a month or less per month.

welcome to the coffee business baby! Its gotta be a work of passion or you will not love it.

 

[Ellie]

I am not a business broker either, but I did work in large business acquisistion analysis in a previous life. What we were concerned with was the potential for future earnings. Are the fixed assets (espresso machine, grinders, etc.) going to really work for you, or will you need to replace them soon? Even tho we don't ordinarily think of employees as fixed assets, they are indeed assets, and I saw a coffehouse fail here when the employees decided they didn't like the new owner, and resigned en masse. How long does the lease contract at $800/mo go for (factor in a higher lease rate if the lease is up soon).

Do you have ideas for how you can increase sales, or do you think sales are about at the highest they can realistically get? Can you do a better management job, or reduce expenses?

Another question - $5,000 seems high to me for inventory for a coffeehouse that size. Does it to you?

After looking at all the factors, we actually did like they do in the textbooks, and discounted future (about 20 yrs out) free cash flows (after tax) back to the present. No, we did not add in the value of the assets. And then we used that as a jumping-off point in negotiations.

Hope this helps a little.

Ellie

 

[ElPugDiablo]

At $200K, I don't think they are very profitable. Unless you KNOW you can increase the revenues, I suggest you look elsewhere. Similar to Barefoot's method, I'd use 2 to 3 times positive cash flow which is net profit plus depreciation. Also, ubnless they are in like-new condition, I'd take a big discount on the equipment's $20K.

 

[celement]

McDonalds

are routinely traded between operators and to and from the corporation for 5x documented net;

Net before taxes but after all expenses including management;

I would not hesitate to pay for 4x net of this nature in my market (central California) as locations themselves are so hard to come by