How much should we offer to purchase a restaurant

By
Real Estate Broker/Owner with Texas Five Star Realty, Plano Texas

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

 
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Topic:
Real Estate Best Practices
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Texas Collin County
Tags:
restaurant
commercial real estate
business real estate
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how much to purchase a restaurant
restaurant real estate

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Rainmaker
685,902
Hella Mitschke Rothwell
(831) 626-4000 - Honolulu, HI
Hawaii & California Real Estate Broker

Bahman: I'm selling a restaurant right now with prime land, but unfortunately the business was closed over a year ago. I'm going to keep your calculations just in case.

Dec 13, 2012 09:39 AM #1
Rainmaker
323,116
Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055
Texas Five Star Realty, Plano Texas - Frisco, TX
Homes for Sale in Plano, Frisco, Prosper, Allen TX

Thanks, Hella. Sorry for the restaurant being closed. Does your restaturant has all FF&E (Fixtures, Furnitutires, and Equipments)? or is just the space?

Dec 13, 2012 09:44 AM #2
Rainer
28,556
Greg Herbert
Northland Real Estate - Eugene, OR
CCIM SIOR
Hey Bahmam, You are asking a somewhat obscure and loaded question. So many factors that can influence this analysis. I would suggest that you have to explore the operating statements if available of the existing operation to determine if the returns are one of wages and salary for an owner operator, does it support adequately a manager if an offsite owner, after that determination, then does the return on investment equate with the investment required to purchase. Exploring the rental if not an owned facility is also a tricky piece, as the typical percentages are explored for food costs, labor costs and real estate costs, do they fall within any perceived market or national standards as per percentage of overhead/ gross sale/ inclusive or exclusive or real property taxes depending upon your state structure. Relating to the real estate owned status, after the owned vs lease analysis where a typical owner will pay somewhat over market for the opportunity to own if the financing and location are favorable among other considerations, one has to also consider the future potential of the location. We often refer to a first tier and second tier operation, where the second tier is a pick up after a first tier default, usually resulting in a significant reduction in base rental,potentially 30-50%, thus the equity requirement that lenders currently require is based on the second tier and not the first tier unless it is an extremely strong national signature. Cap rates vary not only based on signature, location, single purposed bldg and operation, track record making return on investment a tenuous calculation. Note these are just a few obscure and quick thoughts relative to your question - good luck and keep moving forward. Greg
Dec 13, 2012 10:58 AM #3
Rainmaker
323,116
Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055
Texas Five Star Realty, Plano Texas - Frisco, TX
Homes for Sale in Plano, Frisco, Prosper, Allen TX

Greg: Thank you very much for a detail and comprehensive information and process you provided. As you have pointed out carefully and completely and I had mentioned it at the beginning of my blog, to come up with the right pricing and decision making, a comprehensive analysis study must be performed that depends on many factors and requires a lot of complex Mathematical analysis’s. But, based on your extensive experiences in this area, Do you have or can you provide us a percentage of closeness or error from the suggested rule of thumb formula (described in the blog) vs. the actual real life story? Thanks, Bahman. 

Dec 13, 2012 11:53 AM #4
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Rainmaker
323,116

Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055

Homes for Sale in Plano, Frisco, Prosper, Allen TX
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