Discussion:Business Valuation - Coffee Shop
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Discussion Forum Index --> Basic Tax Questions --> Business Valuation - Coffee Shop
Discussion Forum Index --> Tax Questions --> Business Valuation - Coffee Shop
| 7 January 2008 | |
| I have a client that wants to buy a coffee shop. I have done some searching and I am not coming up with a whole lot of answers regarding business valuation for that industry. Does anybody know of any information that would be helpful. | |
| 7 January 2008 | |
| He can start with EBITA and GP of the coffee shop's past 3 Fiscal Years. | |
| 7 January 2008 | |
| I have all of the pertinent information. What I want to know is how much is the company worth - two, three, four times revenue or some other valuation method. Any info would be helpful. | |
| 7 January 2008 | |
| probably a multiple of the net earnings shown on the average of prior 3 year's tax returns | |
| 7 January 2008 | |
| I have generally found that, with small businesses like this, buyers will pay 3 times net earnings. Or in other words, they want to recoup their investment in no more than three years. This is very general, and simple - no time value of money or fancy return on investment calculations. Buyer just wants some assurance that the P & L bottom lines for the past at least three years are accurate - with your help of course - and voila. | |
| 7 January 2008 | |
| For a "restaurant" - type business this small, it is most appropriate to use a multiple of gross revenue based on your local market, subject to caveats for favorable/unfavorable lease, equipment value, and any other unusual items. Earnings are generally a poor indicator of value in this case because earnings are highly "managed" in this business. In most cases they are minimized, and in a few cases they are maximized. Revenue, however, is what it is. Try to dig around your region for multiples for similar businesses, pose as a buyer with other shops for sale, call brokers for assistance (they usually won't help). -former equity appraiser | |
| 8 January 2008 | |
| I have purchased in this segment before and paid two times a 3yr weighted average owners discretionary cash flow (ODCF). ODCF is EBITDA with add-backs for all of the items small owners run through their P&L that are unnecessary and/or that will not survive the ownership transfer. I negotiated seller financing of 50% which is pretty much standard in my market.
When I a client asks me about valuation of a small biz, they are usually asking me a whole lot more than what is the FMV. I try to ensure that my client understands financially what they are buying. Some don't. I start with my clients earnings expectations or the CF he needs to maintain his lifestyle. From the targets ODCF deduct that amount plus taxes (Marginal, State, and SE), then measure the remaining ODCF against the financing payments required if purchased at the assessed value or sellers offering price. More than once I have seen this calculation snap a client out of a blue sky daydream to a hard-nosed assessment of the value to him and what is possible. Will | |
| 8 January 2008 | |
| Will, great summarization! I am currently "valuing"/evaluating a business client wants to purchase and this will help tremendously in my attempts to show him whether he can really afford the business. Thanks. | |
