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What is the rule of thumb pertaining to price on purchasing an existing business with existing revenue?

In other words if an existing restaurant is asking $150k and they have gross revenue of $400k and cash flow of $115k, does that make sense?

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Answers (3)
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Inc. Magazine
Deputy Editor
NY

Hi Vincent, A few facts from our annual valuation guide, which was just published:

1. The recent average sale price for a restaurant (categorized as an "eating and drinking place") is $119,000 against annual sales of $330,000.

2. The most accurate valuation formula was 0.37 x net sales, followed by 0.58 x gross profit.
3. I agree with David and Don that you must do ample due diligence, but you probably already knew that.

Go to the website listed below and plug in the restaurant's numbers, and you can get a sense of what a proper valuation for this particular restaurant may be.

Jul 14, 2009
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Franchise Advisory Group
PA

Vincent,

Usually restaurants sell 2 times the cash flow, so in this case they are selling it below what would be considered fair market value. However I do agree with Don, the questions are can they prove it? Why are they selling? It is possible that they priced it low, to get a quick sale, but you need to be able to verify the numbers. Restaurants are a cash business, so they also maybe pricing it low, because they can't prove the numbers on paper. Feel free to contact me and I'll be more than happy to assist you. My office is in Huntingdon Valley, Pa. 888-241-6629 david@franchiseadvisorygroup.net

Jul 11, 2009
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The BAF Group LLC
MD

Can they prove it? Is it backed up by signed Tax Returns? What is the labor picture like? Is all labor being reported? Is all Income being reported? What are the Food Costs? Not enough information, but those are the first questions I would ask.

Jul 11, 2009

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