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THT Brain Trust Advice - Buying a Business?

Old 05-12-2015, 10:58 AM
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Looking for serious advice besides "You must be crazy!" Have signed non-disclosures and had a call this morning with the seller's financial folks to discuss basic numbers. They will be following up with actual tax returns and P&L statements. I can discuss the basic numbers in PM, but can't post them here.

I'll be honest - I have no idea what I'm doing or how to go about this, other than I KNOW I need some professional help to analyze the numbers and deal and see if it makes sense or I should run away screaming right now.

Here's the scenario:

Wife has managed small family-owned restaurant for several years. She has solid knowledge of running the business and has helped grow it (she's been in food service her whole life and always wanted to have her own business). The owner has reached the point where she wants to retire and is giving us 1st dibs on buying her out.

The business is well-established, has good name recognition, and is running at a profit (averaged over 5 years) I feel there's lots of opportunity to grow and expand. Breakfast/lunch place, open 6:00 to 2:00, and does catering for many local corporate offices/businesses. This is where I see the most growth potential, although they do a great walk-in business, too, and is a popular meeting place for bicycle clubs, kid's teams, and the after church crowd on weekends. No beer/wine license.

Anyway... all opinions welcome. Thanks!
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Old 05-12-2015, 11:07 AM
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First - Don't get emotionally involved. Look at the numbers. They should tell the story.

Your wife knows the business. Analyze the P&L statements, that's your overhead costs, which, I would assume would not change much other then the possible salary of the owner leaving and periodic distributions.

Look over the Balance Sheet and see the equity number as well as debts owed. This will also show the amount of distributions the owner has taken.

I would assume you will be financing the purchase, look to see if you can fit your debt service into P&L numbers and maintain a profit, then go for it, if the numbers don't work, then don't do it.

Don't be surprised when the owner gives you a number that's grossly inflated. Most small business owners think they own million dollar businesses.
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Old 05-12-2015, 11:12 AM
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I won't give and professional advice but I've got some background in food businesses. If you have the right personality a luncheonette can make a tidy income. Keep in mind there is no such thing as working it 6-2PM, you'll need to get in at least an hour early or have a dependable cook there to get things underway. The staff will take care of clean up but the books and reordering food, creating the next days/weeks menu's will take some time out of your afternoon too.

It's a largely cash business which can be good and bad at the same time, you or the Mrs. needs to be the one working the register or money will be walking out the door. You'll need eyes and cameras on the back door too or product will be walking out of it. Everyone steals, that's just a fact of life, it doesn't matter how much they earn or how little, they will take anything from toilet paper and paper towels to cases of burgers or steak as well as cash, then sit with you at your BBQ for the help once a year and smile in your face.

I know you didn't ask for that line of reply but thought it was important.

Not sure about things in your area but a good price for rent should be about 10% of gross sales. Lights, gas, insurance, uniforms, advertisements supplies will all fluctuate.
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Old 05-12-2015, 11:14 AM
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Originally Posted by pmichael View Post
First - Don't get emotionally involved. Look at the numbers. They should tell the story.

Your wife knows the business. Analyze the P&L statements, that's your overhead costs, which, I would assume would not change much other then the possible salary of the owner leaving and periodic distributions.

Look over the Balance Sheet and see the equity number as well as debts owed. This will also show the amount of distributions the owner has taken.

I would assume you will be financing the purchase, look to see if you can fit your debt service into P&L numbers and maintain a profit, then go for it, if the numbers don't work, then don't do it.

Don't be surprised when the owner gives you a number that's grossly inflated. Most small business owners think they own million dollar businesses.
Thanks! Yeah, there was a bit of "sticker shock" this morning when we heard her asking price -- it was nearly twice the number I had in my head. I also think the assets figure is on the high side, but this is just the first round of what I assume will be a few rounds of negotiation if we decide to proceed.
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Old 05-12-2015, 11:16 AM
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Been in the restaurant business and have bought and sold a few businesses. Now work in venture capital.

Long story short... You need to pay an accounting firm to help you with due diligence. Restaurants are notorious leakers of cash so tax returns and financial statements are almost surely not representative of the true picture.

Pm if you like.
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Old 05-12-2015, 11:27 AM
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I agree with the theft problem. A lot of restaurant owners will hide cash under the table as well. In my experience the business has never been worth the reward IMO. We don't have many restaurant clients and I've never seen one make any real money. Too much work and too much risk for too little profit IMO. If I had the money I'd much rather put it in an investment fund and earn the 10-15% return without working for it.

I helped with a few acquisitions and sells, usually on the seller's side. Most people that want to sell don't typically put a lot of money into the business in the final years so their equipment get's run down and the building may also get run down. You may find yourself paying for a ton of updates that you didn't anticipate. Not reinvesting in the business as needed also inflates the income statement. There are a lot of things you can do to inflate the balance sheet and income statement leading up to a sale. You can capitalize repairs and other items or leave on a bunch of old equipment that has been disposed of or is worthless. Don't assume a CPA prepared financial statement is going to resolve this, it won't. Unless the financials were audited or reviewed I would not give them a ton of weight. There are three assurance level's of financials - audit, reviewed, and complied. If the header say's compiled the CPA is only responsible for reviewing the balance sheet and income statement for reasonableness. He is not required to adjust the books or verify any accounts.
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Old 05-12-2015, 11:29 AM
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Originally Posted by nicecast View Post
Been in the restaurant business and have bought and sold a few businesses. Now work in venture capital.

Long story short... You need to pay an accounting firm to help you with due diligence. Restaurants are notorious leakers of cash so tax returns and financial statements are almost surely not representative of the true picture.

Pm if you like.
This guy is dead on.

Cept I would add that a good business attorney with extensive experience in acquisitions is also required.
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Old 05-12-2015, 11:32 AM
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Originally Posted by pmichael View Post
Don't be surprised when the owner gives you a number that's grossly inflated. Most small business owners think they own million dollar businesses.
And don't be surprised when their P&L's don't match up to their actual tax filing. Take it all to an accountant that can make sure they do. This happen when I bought my company and actually worked in my favor. Do not pay for what they say it dose profit wise but for what they actually claim to the IRS. 3x to 5x times annual earning averaged over the last 3 to 5 years. Go back minimum three years with all P&L and tax returns. If there is real-estate involved get a good and current real-estate appraisal done. If you are borrowing money your bank will likely want to oversee that. Good luck... exciting times... boat load of work and very stressful.



Edit... yep... what they said above
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Old 05-12-2015, 11:35 AM
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Originally Posted by TexomaPowerboater View Post
This guy is dead on.

Cept I would add that a good business attorney with extensive experience in acquisitions is also required.
Plus take this a step further: the owner will likely tell you the books are actually short of income. A lot of it was cash we didn't report… The inflation factor is always present. Seller always thinks it's worth more than it really is. The buyer always thinks it's worth less than it really is. Somewhere in the middle…
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Old 05-12-2015, 11:38 AM
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Originally Posted by Dulcecita Lures View Post
Looking for serious advice besides "You must be crazy!" Have signed non-disclosures and had a call this morning with the seller's financial folks to discuss basic numbers. They will be following up with actual tax returns and P&L statements. I can discuss the basic numbers in PM, but can't post them here.

I'll be honest - I have no idea what I'm doing or how to go about this, other than I KNOW I need some professional help to analyze the numbers and deal and see if it makes sense or I should run away screaming right now.

Here's the scenario:

Wife has managed small family-owned restaurant for several years. She has solid knowledge of running the business and has helped grow it (she's been in food service her whole life and always wanted to have her own business). The owner has reached the point where she wants to retire and is giving us 1st dibs on buying her out.

The business is well-established, has good name recognition, and is running at a profit (averaged over 5 years) I feel there's lots of opportunity to grow and expand. Breakfast/lunch place, open 6:00 to 2:00, and does catering for many local corporate offices/businesses. This is where I see the most growth potential, although they do a great walk-in business, too, and is a popular meeting place for bicycle clubs, kid's teams, and the after church crowd on weekends. No beer/wine license.

Anyway... all opinions welcome. Thanks!
Reach out to Jersus. This is what he did professionally.

The "food industry" is one I'd personally never get involved in.
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Old 05-12-2015, 11:46 AM
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My dream ! Having my wife workinng while I go boating !


Hope you can fix numbers and conculde bizz.
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Old 05-12-2015, 11:47 AM
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A very basic, and I mean VERY basic price for a business is approximately 1 years gross. It is a starting point, but there are so many variables involved in different business that it is only that, a starting point.
Good luck to you.
Mike
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Old 05-12-2015, 11:56 AM
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Originally Posted by beenie View Post
A very basic, and I mean VERY basic price for a business is approximately 1 years gross. It is a starting point, but there are so many variables involved in different business that it is only that, a starting point.
Good luck to you.
Mike
Basic, I'd do 35% of 1 year gross + inventory. If it were my money though, I'd do anything but basic.

Dulcy, how long would you see you guys owning this? Is it something you want to do into/beyond retirement? 10 years? 20 years?
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Old 05-12-2015, 12:03 PM
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i've done a fair number of restaurant deals.

agree with the cash issue and the theft of product issue.

what kind of POS system do they have, if any? good POS systems will tie in the purchase of the raw product with the sale of the product at the table so that you can track inventory. this is a helpful tool.

its not a bad business to get into, but you'll be there 50% of the time more than you anticipated.
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Old 05-12-2015, 12:09 PM
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Never heard of a small business that has been family run accurately valued by the seller at the beginning of the discussion, just human nature. When you put your blood sweat and tears in something you always think it is worth more. I would be willing to guess that the number in your head is closer to its net worth.
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Old 05-12-2015, 12:25 PM
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Originally Posted by Dulcecita Lures View Post
Looking for serious advice besides "You must be crazy!" Have signed non-disclosures and had a call this morning with the seller's financial folks to discuss basic numbers. They will be following up with actual tax returns and P&L statements. I can discuss the basic numbers in PM, but can't post them here.

I'll be honest - I have no idea what I'm doing or how to go about this, other than I KNOW I need some professional help to analyze the numbers and deal and see if it makes sense or I should run away screaming right now.

Here's the scenario:

Wife has managed small family-owned restaurant for several years. She has solid knowledge of running the business and has helped grow it (she's been in food service her whole life and always wanted to have her own business). The owner has reached the point where she wants to retire and is giving us 1st dibs on buying her out.

The business is well-established, has good name recognition, and is running at a profit (averaged over 5 years) I feel there's lots of opportunity to grow and expand. Breakfast/lunch place, open 6:00 to 2:00, and does catering for many local corporate offices/businesses. This is where I see the most growth potential, although they do a great walk-in business, too, and is a popular meeting place for bicycle clubs, kid's teams, and the after church crowd on weekends. No beer/wine license.

Anyway... all opinions welcome. Thanks!
Restaurants are tough. Notorious cash leakage business, coupled with other issues of brand recognition, location, fickle customers, etc.

A few things jump out at me from your post, in no particular order

1) If your wife has managed this place for a few years, a look at the numbers should immediately trigger in her mind if the rubber is meeting the road so to speak.

2) Is real estate involved?

3) Selling to retire? How long has she talked about this? Your wife should have some back story here having been there for a few years

4) Build vs buy - Valuation agnostic - what would it cost you to replicate this place (sounds more like cafe than anything to me) one block away. This should give you an inflection point as to the number.

5) What is your market sizing and how many establishments are trying to get a piece of that pie

6) from your post - "This is where I see the most growth potential" - why? What is the size of the market you want to expand to and what is your strategy to get it? You are already in a low margin business, so your customer acquisition on your expansion better be pretty darn low.

My first inclination, which may sound crude to you, is that you are buying your wife a job and not a growth potential business.
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Old 05-12-2015, 12:50 PM
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The most successful restaurateur I know (well it's a bbq joint) runs a small -- may12 table -- spot that sells BBQ pork, burgers, chicken fingers, etc.

He makes a ton of money. Has the best damn bbq in the area. Low overhead and a loyal crew. He and his wife run the place, with other family helping.

I would talk to someone like him if I were you. I've seen one guy own a very successful dive (gross 3k per nite) then try to upgrade and lost his arse. Find a successful owner and talk about your plans with him/her.
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Old 05-12-2015, 01:16 PM
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As to asking price versus what the books say.

In a lot of cases these mom and pop locations pocket a great deal of cash which is not reflected in the books but IS reflected in the asking price. I know a local BBQ joint that runs one register for debit/credit cards and one for cash. Your wife should have some insight in to this.

If the books dont support it - dont pay the purhcase price. The days of banks overlooking lost cash are over with...
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Old 05-12-2015, 01:19 PM
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Assuming no real estate, I would pay no more than 2x annual profit, plus inventory.

If their number is significantly over that, then politely decline the offer. Let that business sit for a year to a year and a half. The owners will learn the true value after they do several price cuts and even offer seller financing- and still nobody wants it!!!

Without seeing any of the financials, why does the amount $40,000 come to mind?

My main point is, why rush? Being in a hurry works against you in almost every way. Time is your ally.

Also, have a serious talk with your wife. I would ask her, how will you grow the business? If that conversation includes "I will get a beer/wine license" then she does not know enough about the restaurant business to own one.* I believe in entropy. If it's not growing, it's declining.

Also in that discussion, is she willing to accept the full responsibility of ownership? I know a bunch of restaurant owners. Sixty hours per week is a start. NONE of my restaurant friends boat. NONE! Bye bye, boating!

Is that what you want?

For starters, explore the possibilities of opening for dinner and offering delivery.

==>Rapi

PS Did I mention that NONE of my restaurant owning friends go out boating?

*Few restaurants do any alcohol sales during lunch and zero during breakfast.
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Old 05-12-2015, 01:31 PM
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P.M. sent
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