How much should we offer to purchase a Business
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:
Average Monthly Sales from last year * (Multiply by) 3 (Three Months) +
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.
($108,000 /12 ) * 3 *1.10 =$297,000
+ $160,000/2 =$230,000 based on last 18 Months profits
+ $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).
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