How much should we offer to purchase a restaurant
How much should we offer to purchase a Business restaurant?Being a candidate of Certified Commercial Investment Member (CCIM), I am familiar with process and User Decision Analysis and Investment Analysis of real estate side of different types of commercial properties. However, I have some clients that are interested in leasing or purchasing an existing restaurant business and they want my input as how much they should offer for the business itself. During my research, I encountered some successful restaurant owners that they gave me their inputs as how much the buyer/lesser should offer to buy or lease an existing restaurant business and I want to share those with you and get your opinion or comments on those. They are explained below:
Without the Real Estate (Building): If the existing tenant does not own the building or premises:
Yes I know the right pricing depends on many factors and conditions such as: Location, Condition, Traffic, Accessibility, Services & Customer Satisfactions, the types of foods and neighborhood, and many more. However, Talking to several restaurant experienced business owners in Dallas Texas area, they have some rules of thumb to start offer and purchase an existing business restaurant, where the owner is leasing the premises and not owning the place, as follow:
1. Average Monthly Sales from last year * (Multiply by) 3 (Three Months) + 10%
2. Profits for last 18-24 Months.
For example, if a restaurant’s annual sale (before Tax) is $1,080,000 ($90,000/Month) and annual profits for last two years (as shown in Tax returns) are $150,000 and $160,000, their starting offer would be in the range of (1) $297,000 and either (2) $230,000 or (3) $310,000.
(1) ($108,000 /12 ) * 3 *1.10 =$297,000
(2) $150,000 + $160,000/2 =$230,000 based on last 18 Months profits
(3) $150,000 + $160,000 =$310,000 based on last 24 Months profits
I was wondering if any of you have come cross such a formula or any other rule of thumbs formulas that you can share with us.
With the Real Estate (Building): If the existing tenant owns the building or premises:
Then we are talking about purchasing an Income Produced Property and along with many techniques and formula, there is a simple rule of thumb known as Purchase Price= $Annual NOI/(Cap Rate), where:
NOI (Annual Net Operating Income) before income tax liability (=Annual Profit)
Cap Rate: is the investor’s rate goal. This rate varies for different types of businesses and is different from one location to another location. Currently, this Cap Rate for a particular location in Dallas Fort Worth Texas area is about 8%.
With the above example, Purchase price of the business including the real estate should be around $ .
Suggested Purchase Price= $160,000/.08 = $2,000,000 (Please note that that includes real estate property).
To see complete description, analysis and requirements for each different types of commercial properties, please visit www.TexasFiveStarRealty.com/commercial.asp