What value would you put on this business?

Calum

Hi,

I am thinking of making an offer on a coffee shop and was looking for advise regarding valuation. So my question is given the details below what value would you put on the business:

Turn over (Net): £362k
Cost of Sales (26.5%): £96k
Gross Profit (73.5%): £266k
Overheads: £167k
Net Profit: £99k

This is a lease hold and has 12 years left on the lease. At the moment I have not seen a balance sheet so I don't know the value of tangible assets and fixture and fittings. I know the asking price but would like to ask anyone in the know what they think is reasonable to ask for a business with these figures.

I realise that more information would be necessary for an accurate figure but a ball park would be good.

Thanks,

Calum

COOLTRIKERCHICK

I would ask this question to your/a accountant.

as a normal rule of thumb its x times the annual profit.

Plus i would have an account go through the accounts with a VERY fine tooth comb...

Plus If you or anyone is having a loan etc to buy an existing business you them got to factor in the loan re-payments into the figures..( expenses etc). which alot of people do seem to forget...

plus with anybody buying an existing business, you could Lose customers, because of various reasons....


edit... just looked at those figures..... they do seem very 'healthy' figures for a coffe shop

plus dont forget... times are going to get tuffer with the local authority job loses etc... so you will have to factor a potential x% drop in sales over the coming months/years

steve1980

Calum wrote: »

Turn over (Net): £362k
Cost of Sales (26.5%): £96k
Gross Profit (73.5%): £266k
Overheads: £167k
Net Profit: £99k

The Net Profit is the most important figure you need.

For a coffee shop they seem to good to be true. Do they do outside catering as well? Is it in a very busy high street?

If the figures are true then the asking price would be around the £200k mark.

Are these the figures in their accounts or are these the figures given by the owner? If the owner then I would insist on seeing the accounts.

Don't forget if they are taking that amount of money then they'll be VAT registered as well.

Dave101t

i cant see anyone selling with those figures....must be something lurking in the balance sheet

Pennywise

A multiple of profits is a very blunt tool and can give very misleading results. It can only be used a "one" potential valuation method and even then the profit needs to be adjusted for other factors. Most usually, you calculate several values using different formulae and then take a weighted average of them.

3 times net profit is standard, as is one times gross profit. A further method is "break up value", i.e. how much you'd get for the tangibles if it closed down. Then you have discounted future cash flows, etc. You may getting varying values between, say £25k and £250k, and the answer lies somewhere between, but there is no "right" answer and it depends on whether you need to borrow the money, whether you want to pay a premium for "lifestyle", whether you'll pay a premium because you expect it to increase in value and therefore make you a capital gain as well as trading profits, etc. etc.

You/we need more information re it's staffing.

For a start the overheads won't include the owner's wages if it's a sole trader or partnership, so you can knock off £25k per owner/partner if they're working full time in the business before you multiply the net profit to arrive at a valuation. If it's husband and wife, then your £97k profit drops to £47k when talking valuations. The £25k is average UK wage and the logic for adjusting for it is that an average person can earn that without all the hassle and risk of running a business. Of course, you may want to pay more for lifestyle or because you can't earn £25k elsewhere, but that's personal to you!

Also, the value needs adjusting re staff. If it's a lot of casuals, students, part-timers, then you're probably not taking on much in the way of liabilities, but if there are any long standing employees, you're taking over their "history", i.e. for redundancy, holiday pay, etc unless you agree with the seller that they make them redundant and pay the redundancy etc and you then take them on as newbies with a clean sheet. Just 2 or 3 long standing full timers can accrue many thousands of redundancy entitlement so it does have a bearing on valuation.

Secondly, the lease.

What is your liability you are taking on - i.e. what rent increases are you likely to suffer, will you be liable for property repairs, can the landlord terminate and throw you out.

What benefits does the lease give you - i.e. can you terminate early if it all goes bad or are you locked in to paying rent for the full term? What happens at the end of the lease - do you have right of renewal on similar terms?

If it's a tenant's repairing lease (i.e. you), you need a full structural survey to make sure that there aren't any major repairs needed that you'll be signing up to be responsible for!

Third, tangible assets.

The balance sheet only shows depreciated values, it doesn't show current values, so is fairly useless. If material, you need a professional valuation or you can try to work it out yourself. Don't consider new prices, look at the second hand prices on say Ebay and in Exchange and Mart, to get a feel for how much it would cost you to replace on a like for like basis - probably only 25% to 50% of new values even if it's all relatively new (say under 5 years old) and maybe only 10% of new values if it's older.

Finally,

Do searches etc just like you would with a house. Find out about planning permissions, potential one way systems, long term road-works, potential pedestrianisations, car park changes, any new developments, etc., etc. There's many a good solid business been ruined by a one way street or pedestrianisation, just as there've been new opportunities for others as a result of the same. Even if you feel any changes will be good long term, they will probably decimate trade until they're finished due to disruption etc, so values can be downgraded quite substantially to account for potential risk and lost trade.

P.S. Also look to see what other similar businesses are selling for by checking the business sales websites, commercial estate agents, etc etc.

Calum

Thanks for the reply's folks.

These figures are from an extract of last years accounts for the business. I have only seen one years accounts yet but I am in the process of getting for information.

The net profit would be less as I would be taking out a loan to buy the business so would need to factor in these payments.

I have the same problem that has been mentioned, if these figures are accurate why would you sell the business. I have talked with the owner and he is selling due to other commitments. He appears to be a very succesfull business man and has recently opened up several other related business and says that he doesn't have time for it. My problem with that is that he pays a manager to run the business and doesn't actually do anything on the day to day side.

Oh and to answer a question above, yes this is on the high street of a very busy city center with a very large footfall, needless to say the rent reflects this!

Thanks.

Calum

Pennywise. Thanks for that in depth reply, very informative. Here are a few for details:

Lease:

Originally a 15 year lease (12 years left) with reviews every 5 years there is also a break clause in 2012. The landlords are looking for a years rent as deposit which they will hold for a year. This seems very excessive to me, thoughts?

Also i have a meeting with the landlords next week so not sure what the exact details are regarding the lease but I assume I will be liable for any repairs to the property.

History:

The shop was opened in 2000 by the current owners. It is a husband/wife partnership so the net profit does not include any drawings by them. I would be buying and running the business my self so there appears to be plenty scope for a salary for myself.

Staff:

1 x Manager (salary, worked there for 10 years)
2 x Supervisors (both worked there for the last 5-6 years)
3 x Full Time Staff
There are also a number of casual/part time staff.

Thanks.

chalkie99

You have had some great replies.

One other thing which I always think people neglect is to consider new competitors opening up and how you could react to new competition. I have seen this happen many times with small businesses although you are probably looking at figures which would deter many start ups.

I would be a bit wary of why it is for sale - according to the figures it seems like a good income stream for the present owner and if he has people managing it and producing those profits it seems he doesn't need to devote time to it.

steve1980

Do you need a manager, two supervisors and also 3 full time staff?

The deposit seems very hefty.


Pennywise - Out of interest are you a commercial agent? As 3 times net is NOT standard practise.

Calum

chalkie99 wrote: »

I would be a bit wary of why it is for sale - according to the figures it seems like a good income stream for the present owner and if he has people managing it and producing those profits it seems he doesn't need to devote time to it.

Exactly my thoughts, just can't get my head round that.

Calum

steve1980 wrote: »

Do you need a manager, two supervisors and also 3 full time staff

Hours of opening are:

Mon - Sat 0800 - 2000
Sun 0800 - 1800

I plan to manage the place myself so I would not require to pay a manager. This obviously raises the question of redundancy payments as they have been with the business for 10 years and I believe they are on a salary of £25k.