| Adjust Cash FlowTo determine the profitability | | | | combining the value of furniture, fixtures, and |
| value a business falls into, it is necessary to | | | | equipment (including consideration for installation), |
| determine the Adjusted Cash Flow of that | | | | leasehold rights, tenant improvements, with some |
| business. The Adjusted Cash Flow is equivalent to | | | | consideration for gross revenues. Break Even |
| its earnings before interest, depreciation, and | | | | Market Value is sustainable only if the business is |
| taxes (EBIDT in accounting terms), plus additions | | | | operational, and the owner has the financial ability |
| or subtractions for owner's salary, discretionary, | | | | to continue operating until the sale is closed.Asset |
| single occurrence, or non-cash expenses. Once a | | | | SaleThis category is comprised of closed |
| thorough analysis of the financial information has | | | | businesses or businesses that are experiencing |
| been completed, and the Adjusted Cash Flow | | | | extreme circumstances. An extreme |
| determined, the category of Market Value is | | | | circumstance may include a seller who does not |
| defined.In general, a privately owned single or | | | | have the financial means to continue operating. It |
| small (1-3) multi-unit business will fall into one of | | | | may also be a secured creditor or landlord whom |
| the three profitability categories:Positive Cash Flow | | | | has had to repossess a business, or it may include |
| Break Even | | | | a business owner being forced to sell for reasons |
| Asset SalePositive Adjusted Cash FlowThis | | | | beyond their control. Any of these situations |
| category will generally represent the highest | | | | create a severe disadvantage to the seller, and in |
| Market Value of an on-going business. In this | | | | turn has a dramatic effect on the Market Value. |
| situation the business is profitable and established. | | | | In these situations, value drops to that of auction |
| The buyer is purchasing a combination of the | | | | value for the fixed assets, plus whatever |
| historical cash flow, fixed assets, operational | | | | premium might be negotiated for location, |
| assets (trade name, concept, menu, etc.) and | | | | leasehold rights, and the fact that the equipment |
| goodwill. The Market Value for businesses in this | | | | is in place and operational.Other ConsiderationsIn |
| category is based on a multiplier of the Adjusted | | | | addition to the cash flow, tangible and non-tangible |
| Cash Flow, that ranges between two (2) and five | | | | assets of the business will influence Market Value. |
| (5) times Adjusted Cash Flow. A second value is | | | | These tangible and non-tangible assets may |
| determined by using a multiplier of Gross Sales | | | | include Furniture, Fixtures and Equipment; |
| (net of sales tax) between 30% and 40%. | | | | Leasehold rights; and Books and Records. |
| Business value is generally somewhere within the | | | | Although not quite as important as profitability, |
| range of these two numbers. A sophisticated | | | | these other assets will directly affect Market |
| buyer expects that the price they pay would net | | | | Value.Whether you are evaluating a purchase |
| an annual return on investment between 20% | | | | price, planning for succession or positioning your |
| and 50%.EXAMPLE:Adjusted Cash Flow $ 65,000 | | | | business for sale these other assets should be |
| x 3.75 = $243,750Gross Sales 725,000 x 35% = | | | | considered. But is should always be remembered |
| $253,750This business would have a value of | | | | that the bottom line for determining the actual |
| approximately $250,000.Break EvenIn this | | | | value of your restaurant business is the simple |
| category, the business is marginally profitable or | | | | answer: what a willing and able buyer agrees to |
| losing money. In this type of transaction, the | | | | pay!Written by Monte Zwang of Steele |
| buyer is more interested in fixed assets, location, | | | | Development Corporation, a consulting firm |
| lease terms, and the cost of converting the | | | | specializing in business development and financial |
| existing business to their intended use. In Break | | | | strategies. You can reach Steele Development by |
| Even transactions, Market Value is determined by | | | | calling 206.878. |