What goes into the price of a coffee shop?

[findingforever]

What goes into the price of a coffee shop? I am looking into purchasing a small successful coffee shop in an excellent location (downtown small city) with loyal customers in a tourist location. It is a very quaint spot inside of a bookstore. The revenue is 230k and nets 60k. I had a business teacher take a look at it at she said she would not pay over 10k for it. Is this unreasonable for a successful coffee shop. I do know there are a lot more factors that play out in deciding a buying price but from the info does 10k seem right??? What goes into the price of a coffee shop?

 

[Alun_evans]

Maybe your teacher does not have more than $10k in her back pocket? I would say that a business T/O $230k, netting $60k (so a NP% of around 25%) the owner would probably be looking for between $55k-$85k for the sale. I am assuming its the business only not any property. Generally pricing a cafe for sale is not as easy as it may seem. Using a schedule of depreciated assets may estimate the tax man's estimate of the businesss worth but does not take into account all the work which has gone into building a business (ie Goodwill) or the fact that $230,000 dollars currently does go through the owners hands (meaning if they are paying bills on 30days+ they have some opps to earn interest on the money etc). A going concern, profitable trading business will always demand more than a business n teh rocks. Although times are still a wee bit tough, the numbers I am indicating would be todays buy estimate In my opinion... as times improve I am sure the owner would be looking for a lot more.

 

[findingforever]

Thanks for the detailed reply evans. I had doubt the price could not be that low. So you are saying that if the hard costs are 10k then I'm paying 45k-75k for the goodwill, location etc. Just trying to clarify. I've got 15k to put down. From experience, would you wait till you have more capital so that the loan payments are less. At this point, I am guessing I would have to take out a 100k loan at least. If it helps, my cost of living is very low and I do not see there being a problem paying it back but 100k is a lot of money...

 

[ElPugDiablo]

For a business that is doing 230K a year, I can't imagine it nets 60K (EBITDA?). I am guessing the 60K includes owner's pay. If so, how many hours does the owner work there? Hypothetically speaking, let's say the owner work 50 hours a week and is paid 30K a year, you really net 30K. Using 1.5 ~ 2.5 times EBITDA, you are looking at 45K ~ 75K.

If you have 15K to put down, how much you have in reserve? You can never assume you are in the plus from day one.

 

[John P]

A broker I know once told me, "If the asking price is below $100K, the value of the business is zero."

Aside from that, don't believe anything they tell you until AFTER you see actual financials. Last three years filed tax returns, and same for the owner if he files separate. Most businesses will inflate and exaggerate when they are trying to sell. And if you are seriously looking, have a professional assess it for you.

 

[Tophie2]

Have Lots of money

 

[Alun_evans]

Thanks for the detailed reply evans. I had doubt the price could not be that low. So you are saying that if the hard costs are 10k then I'm paying 45k-75k for the goodwill, location etc. Just trying to clarify. I've got 15k to put down. From experience, would you wait till you have more capital so that the loan payments are less. At this point, I am guessing I would have to take out a 100k loan at least. If it helps, my cost of living is very low and I do not see there being a problem paying it back but 100k is a lot of money...

Yes, I would not risk starting a business (even buying an ongoing one) with $15k in your pocket. It would be far bette to use some of that money to make sure you are ready when the time comes, and you have finance, to buy a business. Barista courses etc could be an idea. I know every business model is different, but I think you really, really want to be avoiding borrowing when going into your first business if at all possible.

JP is also correct in saying a seller obviously has a vastly over inflated view of what their business is worth- partly due to sentimental reasons, partly due to the fact that they figure the sweat and tears they have put in is worth something.