FEATURED BUSINESSES

ASK PRICE: $1,095,000               CASH FLOW: $348,000              GROSS REVENUE: $1,830,000

ABOUT

This northern Illinois business is a highly-rated Italian full-service restaurant and bar established in 2007, featuring home-made traditional Italian meals and handcrafted pizza. They also serve a variety of other foods, such as salads, appetizers, burgers, sandwiches, and desserts. They provide a catering service, along with dine-in, delivery, and carryout service. Very good location situated on leased property. There are 22 full and part-time employees.

QUICK ANALYSIS & COMMENTS – 2-19-2022

Based on the latest financials, this business generates a 19% margin. Restaurants are a bit tougher to evaluate for pricing purposes because of the involvement of the owners. Many of those owners are highly involved, and put in very long hours, many times doing all of the cooking. Others have hired a full staff, and provide only management direction. With that said, the documentation states that the business is owner-operated. I will assume that the seller is not the chief cook and bottle washer, having well-trained staff to relieve some of the pressure, but is still significantly involved.

The asking price is high. My valuation puts it closer to $870,000. Based on my evaluation at the asking price with leased real estate, the FRE (Forecasted Real Earnings) is $161,000 based on the latest financials. This value is what you should expect to keep (put in your pocket) after accounting for all major expenses, less taxes on the earnings.

WHAT I LIKE

• The cash flow is good, providing a good debt ratio if you are borrowing money for the purchase.
• Restaurants are popular. People like going out to eat.
• Margins are good, but not spectacular.
• Great reputation with high ratings
• Business longevity. They started the business in 2007 (during the crash!), and survived through Covid

MY CONCERNS

• As with all existing businesses, make sure the KEY employees plan on staying with the company when sold.
• The real estate is not available for purchase.
• The lease expires in 2023. As stated in my previous blogs, the owner has less control over their business. There is always some risk if the real estate owner decides to not renew the lease at expiration
• If the seller is also the main cook, the quality of the food could dramatically change once the business has sold. See more detail below.
• As we had discovered during Covid, many restaurants shut down. Some never reopened. They should be considered higher-risk businesses to invest in.

CONCLUSION

I was invited to go to a higher-priced restaurant with some friends not long ago. People loved going there, and said that the food was fantastic. The staff was friendly. I ordered a steak cooked medium, it came back well done. The meal came with roasted red potatoes. They were essentially raw – was hard to poke my fork in them. I complained to the staff about the meal, and they gave me a free dessert. They said that the cook that they had for many years took another job, and a new cook was recently hired.

I am not a big proponent of buying restaurants, primarily because of issues cited above in statements 4 and 5, and my own personal experiences. I think my number one issue of concern is the seller’s role in the business. If they have well-trained cooks that are willing to stay with the business once it is sold, then I’d be more interested. However, if the main role of the seller is “COOK”, I would move on and look for another business to buy. Once the seller/cook leaves, the total reputation of the restaurant now rests in the buyer’s hands. If the buyer or their hired cook/s do not provide as good of quality as was done when the seller had owned the restaurant, it wouldn’t take long for the word to spread, and the restaurant would lose business. The staff may be fantastic at customer service, but if the food is no good, the friendly staff won’t matter over time. Of course, if the buyer happens to be a fantastic cook, the quality of the food could actually improve. And that is the BIG question that needs to be answered. For this business, I will assume that the quality of the food and service will remain the same after new owners take over.

So, based on these reasons, assumptions, and financial data, I believe this business is over-priced. However. as stated in recent blogs, if a buyer decides they like the business enough to pay the asking price, the business still looks to provide solid cash flow compared to the investment made. If the seller is completely passive (not involved in daily operations), the value would be higher. But that does not appear to be the case.

ASK PRICE: $945,000                 CASH FLOW: $286,000                GROSS REVENUE: $1,060,000

ABOUT

Established in 2010, this is a North Carolina commercial bakery that primarily specializes in the category of wholesale specialty/healthy snack food. The Company sells its own brand, but also sells through private labels for grocery store chains and other specialty brands. The facility is designed well, with a convenient location in an industrial park. There are 5 full-time employees. The real estate is available for purchase, with an estimated value of $380,000.

QUICK ANALYSIS & COMMENTS – 2-12-2022

This business generates a healthy 27% margin. The asking price is high. My valuation puts it closer to $860,000. Based on my evaluation at the asking price, and leasing the real estate, the FRE (Forecasted Real Earnings) is $111,000 based on 2021 financials. This value is what you should expect to keep (put in your pocket) after accounting for all major expenses, less taxes on the earnings. If the real estate is purchased with the business, the annual FRE increases to $177,000.

WHAT I LIKE

1. The cash flow is very good, providing a good debt ratio if you are borrowing money for the purchase.
2. Good solid margin. Focusing on specialty products can potentially keep the margins higher than ordinary snack food, as healthier lifestyles continue to be of growing interest in our culture.
3. As per the advertising, they have established relationships with larger grocery store chains. This is huge, as it is usually very hard to get a personal product marketed in a well-known chain store that already has shelf space devoted to their own brands, or other brands that the store has had much longer relationships.
4. The barrier to entry would be higher (discouraging new start-ups from being a competitor), as most new start-ups would likely not be able to market to major grocery store chains
5. Seller financing offered at 10%
6. The real estate is available for purchase

MY CONCERNS

1. As with all existing businesses, make sure the employees plan on staying with the company when sold.
2. They are in a niche market with a specialized product. While that is good for keeping higher margins, it may be an issue when trying to grow the business for volume sales.
3. While they have achieved a significant milestone in gaining grocery store shelf space, continuing to grow as a wholesaler marketing to national chains may be difficult. Marketing efforts will need to be diversified.

CONCLUSION

Based on my calculations, this business is over-priced. With that said, if a buyer decides they like the business enough to pay the asking price, the business still looks to provide solid cash flow. Sellers usually would be interested in selling the real estate along with the business. This may give a buyer a bit more negotiating room on the overall asking price (real estate included).

I am a big proponent of purchasing the real estate when available. This allows the buyer to maintain full control of their facility and property. I only consider leasing an option if:

1. The buyer does not have enough money for the down payment when financing, as the overall business package price could significantly increase by the value of the real estate.
2. The business cash flows very well, and the potential for growth is good

Real estate is a hard asset with value, so bank financing should be easier to get, and with more favorable terms. That would also improve the debt ratio. This is the main reason for the difference in the FRE values. Obviously in this case, if a buyer is able to purchase the real estate, they should do it.

ASK PRICE: $795,000                                  CASH FLOW: $281,000                            GROSS REVENUE: $1,000,000

Located in the Texas panhandle, this company provides glass service from Lubbock to Amarillo. It has been in business for well over 20 years, claiming a great reputation due to quality and integrity. There are 7 employees.

QUICK ANALYSIS & COMMENTS – 2-4-2022

At the asking price, this business generates a good cash flow, showing a very good margin of 35%. It is priced fairly, with my valuation coming in just slightly under the asking price, at $787,000. The price includes all inventory. There is no real estate included in this deal. Based on my evaluation at the asking price, the FRE (Forecasted Real Earnings) is $69,000 when the seller’s note is over 3 years. This value is what you should expect to keep after accounting for all major expenses, less taxes on the earnings. Once the seller’s note has been completely paid, that should add about $28,000 to the FRE, for a total of $97,500. The bank loan will likely be for 10 years, so this value should be expected for another 7 years. Of course, once the bank is paid off, you can add to you pocket, as well. I have estimated a leased value of $6,000/month, as that was a piece of data that was missing. You will to do your due diligence on that to get a more complete picture.

WHAT I LIKE

1. The cash flow is very good when considering the ask price. For financing, the debt ratio is good, which should help secure a loan.
2. Longevity. Businesses with a long history are usually very sound. Sellers of businesses that have been around for a long time have seen just about everything, so stability is the result.
3. For the length of time this company has been in successful operation, I would expect the reputation to be stellar, as is claimed.
4. The 35% margin. This is above average in the small business world.
5. Seller is offering 10% financing, which makes getting a loan easier, and could lower the down payment requirement for the buyer to as little as 10%. At that rate, the down payment be around $80,000.
6. The seller’s claim that there is potential of a significant competitor closing down by year-end. Also, seller’s claim that frequently turn down work.
7. I believe that there is a decent barrier of entry. In other words, I think it is not likely that anyone would not want to start up a new glass company. As compared to a house cleaning business, which are mostly profitable businesses, but a potential competitor would basically just have to buy a mop, broom, and vacuum, and they are in the business.

MY CONCERNS

1. This will always be a concern prior to purchasing an existing business. Make sure that most of the employees (7) plan on staying with the company when sold.
2. There is no real estate in the deal. This keeps the purchase price lower, but there are risks when you don’t have ownership. The property owner has leverage on you, which includes increasing the yearly lease rate, or the owner deciding not to renew the lease at expiration. This could be an issue. You will need to do your due diligence.
3. Real estate also can make a difference in your bank loan terms. Since the real estate in not included, your loan term will be shorter (payments will be higher). Try to purchase the real estate – many times it is available, but not advertised.

CONCLUSION

Looks like a nice business. The asking price is fair, the cash flow is good. And it should be relatively easy to get financing because of the seller financing.

ASK PRICE: $3,390,000                                   CASH FLOW: $965,000

This is a flooring, remodeling and design business based in northern California. They sell and install a variety of flooring, including engineered hardwood, laminate, tile, carpet, and also sell customized surfaces, such as quartz and granite. They do kitchen and bath custom designs. The business was started in the area in 1986, and carries a very good reputation in the community. There are 2 locations, each featuring a showroom in high-end markets. There is also warehouse storage, and offices located close to each design center. All real estate is leased. There are 8 employees.

QUICK ANALYSIS & COMMENTS – 1-28-2022

The business generates a 15% margin, with a healthy cash flow. It is priced fairly, with my valuation coming in just slightly under the asking price. Based on my evaluation at the asking price, the FRE (Forecasted Real Earnings) is $479,000 for 2020. This value is what you should expect to keep after accounting for all major expenses, less taxes on the earnings.

WHAT I LIKE

1. The cash flow is very good, providing a good debt ratio if you are borrowing money for the purchase. Your banker should like this.
2. Longevity. This business has been around for a long time (over 35 years!), which you should expect to to have many loyal, repeat customers.
3. A good reputation

MY CONCERNS

1. As with all existing businesses, make sure the employees plan on staying with the company when sold.
2. A fair amount of competition, so quality of service must be maintained.
3. The real estate is not part of the deal. This keeps the purchase price lower, but there are risks when you don’t have ownership. The property owner has leverage on you, which includes increasing the yearly lease rate, or the owner deciding not to renew the lease at expiration. This could be a very serious issue, especially for a larger company. It’s hard to change locations once you have established your reputation in an area. You will need to do your due diligence to make sure that a potential move can be done in the same area with little difficulty.
4. Real estate also can make a difference in your bank loan terms. Since the real estate in not included, your loan term will be shorter (payments will be higher).
5. With no real estate, the bank MAY require a minimum down payment of 20% (or more). At the asking price, your down payment will be around $700,000. Most non-corporate buyers do not have this kind of cash available, so the deal would be dead at this point. However, if the real estate was included, the bank would be more open to extending the loan term, and it could be possible to get a smaller down payment requirement.
6. There is no indication of seller financing. This is important when financing, and should be part of your negotiations.

CONCLUSION

If the prior years performance shows stability and/or growth, I think this is a very good business to pursue. It is priced fairly, with a nice cash flow value.