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I am interested in purchasing an existing business-a small deli or restaurant. How do I determine it's value?

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Answers (8)
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Hello!

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Jun 1, 2017
Julie A. Barnes, CPA
Small Business Exchange, Inc.
Travis County, TX

Whoops - sorry, Jan - I meant "Hello Jan" (not Jasper)

Nov 15, 2009
Julie A. Barnes, CPA
Small Business Exchange, Inc.
Travis County, TX

Hi Jasper,

Determining the value of a business is an extremely subjective process - regardless of all the advice you've read about multiples of gross, net, cash flow, ad nauseum. Much depends upon the potential buyer - some folks arbitrarily use an 'acid test' - others recognize how they can make a smashing success of a poorly performing company.

I realize that this phrase is unpopular but "it all depends"

Please visit my blog: htttp://AustinBusinessesForSaleBlog.com for a comprehensive discussion of valuation. If you have any questions at all, please feel free to comment on this blog.

Good Luck!
Julie A. Barnes,
President, SBX, Inc.

Nov 15, 2009
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Co-Owner
Wyoming County, PA

Depending upon where you want this business to be, I have a small deli/cafe in a busy residential/office area right outside Pittsburgh, Pa. Contact me if you have further interest.

jsb06@yahoo.com

Nov 15, 2009
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Try a deli and/or diner. It's hard work, but good rewards and fun. Plus in the right area it is an excellent investment that will grow. And you can do this anywhere there are people. We doesn't like to eat great food? Also, know of 2 possible locations in Florida under a different name that may be available together or separate.

Nov 8, 2009
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Try a deli and/or diner. It's hard work, but good rewards and fun. Plus in the right area it is an excellent investment that will grow. And you can do this anywhere there are people. We doesn't like to eat great food? Also, know of 2 possible locations in Florida under a different name that may be available together or separate.

Nov 8, 2009
Cory Hogan
P.C. Hogan & Associates
Helping the Small Business Buyer
CA

I think Eric has made some very good comments here, and I'd like to add just a bit more advice, which could apply to a restaurant or almost any other business.

When valuing any "main street" business (less than $10M in revenue), the most accepted and useful method is based upon available profit. This "adjusted profit" is known by many names, including Seller's Discretionary Earnings (SDE), Adjusted Net, Adjusted Cash Flow, Discretionary Cash Flow. Like EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization), SDE includes adjustments to the net profit of a company for non-cash expenses such as taxes and depreciation, but unlike traditional EBITDA, it also includes adjustments for other expenses such as interest and owner's compensation - in various forms. Such personal, non-essential expenses might be seen as salary, insurance, and personal vehicle use. Upon calculating SDE, a industry multiplier is applied to approximate the company's value. Multiples are designed to incorporate the "typical" assets of a company within the industry of interest. Most commonly, those multiples are in the 1.5 to 3.5 range.

However, those multiples are only rules of thumb, and because no company is "typical," these methods are only so helpful. Unfortunately, many business buyers are led to believe a price for a company is fair because it is based upon standard multiples. This is dangerous. First, SDE itself is subject to misstatement and manipulation, and the consequences can be severe. As an example, if a single adjustment for $5000 is erroneously made (and it happens all the time in the small business world of unaudited financials) and the valuation multiple being used is 3, that business is now over priced by $15,000. Alternately, if the subject company has outdated equipment, declining revenues, figures below benchmarks, or any variety of intangibles, the selected multiple of 3 could be twice what it should be - and so follows the value.

Sadly, the practice of caveat emptor or "buyer beware" is alive and thriving in the business buying/business brokering world. So it's not surprising when some estimate as much as two-thirds of all small business buyers regret their purchase. Get the facts before you buy - before it's too late. Buying a business can be very exciting and rewarding, but it must be done right.

For additional business buying advice, I encourage you to download our free list of Top 10 Business Buying Mistakes, found at:

http://www.businessbuyhelp.com/Top_10_Mistakes_When_Buying.html

Good luck in your search!

P. Cory Hogan
p.c. hogan & associates
Helping the Business Buyer
www.BusinessBuyHelp.com
435-674-6653

Sep 1, 2009
Eric Gagnon
We Sell Restaurants
Fulton County, GA
Premium Broker

The Income Valuation Method is is the most favorable and trusted method used to value a restaurant by nearly all buyers. It is the method most commonly used to secure financing on a business. Evaluate the Profit and Loss statement along with tax returns to find all the owner’s discretionary cash flow or “Owner’s Benefit” that is customarily accepted by lenders to value the business. This includes net income PLUS reasonable and customary add-backs such as:
• Owner’s Compensation (1099 or W-2 income)
• Owner’s Health Insurance
• Owner’s Auto Expense
• Owner’s Cell Phone Expense
• One Time expense that is extraordinary or non-recurring
• Non-Cash items such as depreciation and amortization
• Travel and Entertainment
• Donations

What is not allowable for “add-back” purposes are efficiencies a new owner could potentially achieve that the current operator hasn’t. It should factor in your decision to buy but should not be calculated in the pricing. Remember, the entire purpose of the add backs is to calculate owner benefit and ultimately pricing of the business. The sum of the "owner benefit" is then applied to a multiplication factor of between 2.25 and 3.0 times earnings to get the pricing. The higher the earnings and stronger the books, the higher the multiplier, the weaker the books and earnings, the lower the multiplier.

Aug 27, 2009

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