Author Topic: Friend buying a business for less than the net operating income - windfall deal?  (Read 1013 times)

YoungStache

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I have a buddy who's been working at a Thai restaurant for several years. It's a mom and pops business in a popular location with nightlife, and the owner owns several other restaurants. She let it be known that she was selling it (tired from dealing with drunk customers), and my buddy jumped at the opportunity as he had already had aspirations of owning a restaurant. Because they had a good relationship, and he was willing to keep all the staff (pretty much turnkey), he got the offer for $300K.

The restaurant's financials for Jan - June 2018 showed about 650K in gross sales, and about 200K in net operating income. So annually it would be double that amount.

This seems like a crazy deal from the owner, who doesn't seem very business-savvy. How would a company be valued based on its gross / net?

runbikerun

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How much time does the current owner spend working there?

Does the current owner get a discount on supplies and other regular expenses thanks to her buying for multiple restaurants at once?

Is there *any possibility whatsoever* that the owner might turn around and open a rival restaurant nearby, poaching all the staff and undercutting your friend?

cchrissyy

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Rather than doubling this year's Jan-june figure, I'd be much more interesting in the july-dec of last year, and the year before, and before.  Or  really, the full years.  I sure hope your friend did his due diligence and does have those numbers instead of extrapolating out on just a 6 month period.

650k revenue over 6 months is about $3600 daily average. this must be a MUCH bigger thai restaurant than any of the mom and pop places I've been to.  Does it sound realistic to your friend? does it match the averages he's seen for number of customers per day and avg revenue per ticket or per customer?

BicycleB

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Might be very good, if the numbers are for real. However, learn to read the numbers very carefully.

Are these numbers audited? It wouldn't be the first time a business' accounting had innocent errors in it, or was faked, or was quietly presented in an overly positive manner. A good audit might catch the first, would have a good chance of catching the second, and might or might not bring up clues about the third.

Some articles about valuing restaurants:

https://totalfood.com/what-is-the-value-of-a-restaurant/

http://www.restaurantreport.com/features/ft_valuation.html

https://pos.toasttab.com/blog/how-to-value-a-restaurant-business-and-its-worth

Based on the first article, and the numbers you gave, it's possible that the price is very good. However, it's
possible that the correct numbers are not that high. Some articles describe the typical net profit of a restaurant as 6%, not the 15% implied. The real % might fall over time. Maybe make sure the price is ok according a price-to-sales ratio, not just a price-to-profit ratio.

https://smallbusiness.chron.com/average-profit-margin-restaurant-13477.html

PS. My most entrepreneurially successful millionaire acquaintances failed at running a restaurant. They succeeded in running every other business (real estate rental, liquor stores, campgrounds, storage facilities). Restaurant success requires excellent operation and takes a lot of time. Tread carefully, negotiate carefully, be willing to pass.


twe

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Small businesses are valued in ways that don't make sense when you first look at them, especially when you consider the S&P is valued at ~20X earnings. The lower valuations come because of volatility and greater risk. For small businesses, depending on the size and type of business, 2X cash flow is the starting point once a certain cash flow benchmark is reached, going up to 5-6X depending on total revenue and FCF. To go to 5-6X, I'd estimate it has to be in the 1.5 million+ FCF and a semi protected market. Paying 2X cash flow would be somewhere around 150k+ in yearly FCF. Caveat-restaurants are generally valued lower because they are a much more volatile market with greater risk.

Your opinion and valuation outcomes may differ.

The Beacon

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is that net income of 200k for your friend alone?  If it is, it seems too good to be true.  I 'd be very reluctant moving forward.

maizeman

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How many hours per week do mom and pop each work in the restuarant? Often the problem with looking at cash flow at small businesses is that you don't factor in just how many unpaid hours the current owners are logging to keep the doors open.

vaniasilva

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Personally, I would be suspicious of the numbers.  Has your friend gone through with the deal?

Financial records can be misleading and personal estimates can be outright wrong. Someone else already questioned if the numbers were being audited? One of the most important metrics of a restaurant’s profitability is real cash flow. Real cash flow is a figure adjusted for inflation and it better reflects the change in money value.

Did he also analyze labor costs? Are the same employees sticking around? Are the other restaurants they own further out? 

How about the lease? Each lease is different, so there are no hard-and-fast red flags to be aware of, but sometimes there may be provisions that could damper the deal.

Any potential liabilities he is unaware of? When you close on a business deal you will inherit everything — including its liabilities. These might include financial burdens such as debts and recurring fees. Also be aware that liabilities extend beyond mere financial obligations. Legal liabilities such as health code violations or labor code violations will also come along with the business.

There are countless factors that play into buying a restaurant. Even the most keen business people can encounter a lemon if the process is rushed. To me it sounds like your friend needs to do more homework, stay persistent, and ask the right questions during the process before signing anything. Wish him much success!
« Last Edit: October 10, 2018, 07:49:26 AM by vaniasilva »

tralfamadorian

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+1 what others have said.

In my anecdotal experience, a common model for Thai restaurants is to staff with extended family. As a result I would be looking through the financials with a very critical eye on staffing costs.

Padonak

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Lol about buying a business in Thailand. Unless your friend is Thai, if course.

Edit: never mind, if you mean a Thai restaurant in the US it's a different story. I would still be careful though.
« Last Edit: October 10, 2018, 08:22:54 PM by Padonak »

craiglepaige

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A mom and pop place making $3500+ a day is rather  dubious. I would carefully inspect those numbers.

former player

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A mom and pop place making $3500+ a day is rather  dubious. I would carefully inspect those numbers.


If OP's buddy has been working there for some years he should have a reasonable idea of what is going on from personal experience, and to be able to marry the figures he's been given to what he knows from personal experience.  Unless it's a hidden money-laundering business that he hasn't cottoned on to.

electriceagle

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+1 what others have said.

In my anecdotal experience, a common model for Thai restaurants is to staff with extended family. As a result I would be looking through the financials with a very critical eye on staffing costs.

Bingo.

Many restaurants are family businesses. What happens if you subtract the cost of hiring someone to do the job of the owner, plus all of the siblings, kids, cousins, etc who put in hours or lend expertise.

There's no point in buying a job. You can have one of those without risking capital.