For What It's Worth
This isn’t about the Buffalo Springfield song, but rather the value of a business. What I’ve observed over the years is that one of the most difficult steps to opening a brewery is finding a suitable location. I often suggest if all else fails, to try and purchase an existing business. This will give you a jump start on your own brewery, preferably by buying an existing brewery or a restaurant that can be turned into one. But how do you know that the purchase price is worth it? Let’s get down to the business of seeing how you could value a business.
The first method is to value a potential business by the street value of the equipment and the improvements to the building; all things you would have to do in your own venture. This would come into play if the business you are looking to buy is no longer in operation, therefore they do not have any “Blue Sky” (the value of the business name and reputation) that they are selling. Because of Covid, unfortunately there are plenty of these kinds of breweries or restaurants available. Your most important consideration will be the look of the place and its location, along with the value of the equipment.
The second way is to purchase a business that is still open to the public. To do this you want to see the businesses tax returns and profit and loss statements, going back as far as you can, but at least three years. Of course the three year timeline is difficult because it includes 2020, so kick that one out because of Covid and maybe 2021 also, and start at 2018.
First I like to look at total sales for the years and establish a trend, either going up, down or flat. This is why you should kick out 2020 and 2021. Next, placing a value on the business, follow this simple math. It will get you in the ballpark for negotiations.
Take the year end net profit
Add interest expenses
Add depreciation
Add amortization
Add any principals salaries if they are not actually working in the business
Add any expenses that have to do with the owner and not the business
Take this total and multiply it times 2 to 3 if the business is fairly flat. Times 4 if it’s growing, and times 5 if it’s really showing good steady growth.
Do that for every year of the profit and loss statements, then average them all out. This final number is a good indication of what the business is worth.
Beware the owner that say’s they actually make more money than what is shown on the profit and loss. They just hide this income - wink wink. That’s their bad. You only use numbers that can be verified.
Using this value you should be able to pay the owner back over a period of years out of the net profits if you run the business as the previous owner did. Of course you are going to make improvements so your numbers should be much better.
The other thing about buying someones business, is after a 20% down payment, or whatever you negotiate, the owner should carry the loan for you. They may chose not to, but it is fairly standard.
I looked on Probrewer and there are plenty of breweries for sale. BizBuySell is another good search place for finding restaurants and breweries and you can search according to location. Loopnet is another good place and bizquest also.
If you see something that looks interesting and you want a second opinion, drop me a line. This for me is fun stuff!