buy-outI’ve seen quite a few businesses for sale that say they make a profit of X per month, but are selling it for Y.
How do companies come to the value when they are selling?
For example a licensed restaurant.
Asking Price:£35,000
Furniture / Fixtures and Inventory / Stock included
Turnover:£200K - £500K
Net Profit:£50K - £100K
Take the non-liquid assets (furniture, inventory, the building, liquor license, etc.), lets call this “A”. Subtract “A” that from the selling price, originally identified as “Y”.
Y - A = Ya
“Ya” is the cost is sellers perceived value of the running restaurant.
You will then want to balance if “Ya” matches your investment and risk expectations are all aligned.
Their running profits are only an indication of potential business. It does not directly correspond to the sell value, unless you are taking over the active restaurant, because you may modify the menu, style, and marketing - all of which will directly effect the future success of your new business.
If you are buying the restaurant as “new management” only, then “Ya” should represent somewhere near the previous years annual value of the restaurant. There, you can take the monthly earnings, multiple that by 12. You will also want a perspective of the monthly costs to make sure you have enough liquidity or credit available to purchase the initial running supplies and staffing. This is necessary because you can’t turn a profit with first selling something, and you won’t be selling anything if you can’t buy the ingredients to make the food.
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