What's It Worth?

Adjust Cash FlowTo determine the profitabilitycombining the value of furniture, fixtures, and
value a business falls into, it is necessary toequipment (including consideration for installation),
determine the Adjusted Cash Flow of thatleasehold rights, tenant improvements, with some
business. The Adjusted Cash Flow is equivalent toconsideration for gross revenues. Break Even
its earnings before interest, depreciation, andMarket Value is sustainable only if the business is
taxes (EBIDT in accounting terms), plus additionsoperational, 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 aSaleThis category is comprised of closed
thorough analysis of the financial information hasbusinesses or businesses that are experiencing
been completed, and the Adjusted Cash Flowextreme circumstances. An extreme
determined, the category of Market Value iscircumstance may include a seller who does not
defined.In general, a privately owned single orhave the financial means to continue operating. It
small (1-3) multi-unit business will fall into one ofmay also be a secured creditor or landlord whom
the three profitability categories:Positive Cash Flowhas had to repossess a business, or it may include
Break Evena business owner being forced to sell for reasons
Asset SalePositive Adjusted Cash FlowThisbeyond their control. Any of these situations
category will generally represent the highestcreate a severe disadvantage to the seller, and in
Market Value of an on-going business. In thisturn 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 thevalue for the fixed assets, plus whatever
historical cash flow, fixed assets, operationalpremium might be negotiated for location,
assets (trade name, concept, menu, etc.) andleasehold rights, and the fact that the equipment
goodwill. The Market Value for businesses in thisis in place and operational.Other ConsiderationsIn
category is based on a multiplier of the Adjustedaddition to the cash flow, tangible and non-tangible
Cash Flow, that ranges between two (2) and fiveassets of the business will influence Market Value.
(5) times Adjusted Cash Flow. A second value isThese tangible and non-tangible assets may
determined by using a multiplier of Gross Salesinclude Furniture, Fixtures and Equipment;
(net of sales tax) between 30% and 40%.Leasehold rights; and Books and Records.
Business value is generally somewhere within theAlthough not quite as important as profitability,
range of these two numbers. A sophisticatedthese other assets will directly affect Market
buyer expects that the price they pay would netValue.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 $ 65,000business 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 ofthat the bottom line for determining the actual
approximately $250,000.Break EvenIn thisvalue of your restaurant business is the simple
category, the business is marginally profitable oranswer: what a willing and able buyer agrees to
losing money. In this type of transaction, thepay!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 thespecializing in business development and financial
existing business to their intended use. In Breakstrategies. You can reach Steele Development by
Even transactions, Market Value is determined bycalling 206.878.