Selling a Pizzeria... how much$$$?

[Integraoligist]

How do you determine how much to sell your pizzeria for?

Somewhere I heard it’s your last years Gross profit x’s 3… which i highly doubt is correct. :shock:

Thanks all!

 

[NicksPizza]

There seem to be a few different orthodoxies about sale price. The Think Tank FAQ has a couple of threads about this topic that could be useful to you.

Basically, you sell it for as much as you possibly can get in the marketplace

 

[bodegahwy]

Last year’s profit times three is a pretty good number for the high end of what you might get. 2.5X is more common. 2X is the low end. You do, however, get to add into that whatever you paid yourself as a wage and any benefits you take for yourself that are not required to run the business.

So, for example, if you took 40K in wages, 10K in health insurance for your family, and the business made another 50K above that the probable range of value would be 200K to 300K plus inventory at closing and any prepaid items like annual ad contracts pro-rated for the balance paid but not yet used.

All of this assumes that you have some significant life left in your lease. If there is less than 3 years you will take a hit on value unless the landlord is willing to write an extension or a new lease for the buyer. You can also add or subtract about 10% for especially new especially old equipment.

Getting to the upper end of the value range usually involves a solid story about sales growth. If your sales are flat or declining you can count on being at the low end. Stores that make $10-$20 per hour for the owner and nothing beyond that are worth the replacement cost of the equipment and that is about it.

 

[bodegahwy]

Some more comment: Be prepared to document the numbers. The ones you provide a buyer will have to match your tax returns and declared sales. Yes, they will ask for the tax returns and yes, you need to provide them if you want to sell the business.

Claims of sales that you pocket in cash are all but worthless. Low expenses that are not supported by the tax return are also so suspect as to be worthless.

 

[snowman]

2-3x last year’s gross profit is nuts. I don’t think anyone here would pay that. Figure out what the equipment and inventory is worth. That’s your starting number.

The equipment is used, and worth USED numbers. A Hobart mixer purchased yesterday is still used. Of course, if there’s a building involved, etc then you need to take that into account.

 

[thepassionofthecrust]

How much would you make…take home…in 2 and a half years if you worked it full time yourself.

Then add FFE.

 

[thepassionofthecrust]

I have used that exact equation in the past…but, in the end, the market will dictate.

I sold my last shop for 88,000, as an asset sale. Most people will only buy your assets.

Joeys pizza, will become Bobbys pizza…ect

 

[paul7979]

snowman:

2-3x last year’s gross profit is nuts. I don’t think anyone here would pay that. .

So at no point does a business increase in value above the equipment value?

I think 2-3 times earnings is pretty standard for a place that is actually making money. I would sure like to think my place is worth more that 25-35K.

 

[bodegahwy]

Snowman, maybe you are confused about what is being talked about? 2-3 times owner’s discretionary cash flow is a pretty typical approach. That price would include all the equipment but not the inventory.

If a typical shop earns 10-15% on sales (ODCF) the math might look like this:

Sales 500K

ODCF 75K (15%)

Probable range of selling price $150K - $225K

ODCF includes whatever form the owner takes income. Payroll, profit dividend, beneifts not directly tied to operations… paycheck to souse or kids that don’t really work there… If the owner does not actually work there, you can add the managers paycheck back in too. The idea is based on how much $$ the place produces or would produce for an owner-operator.

Depending on how hard and expensive it is to get started locally and whether the business is trending up or down the price could vary above and below that range as well. 3.5 X is about as high as I have seen and there certainly have been plenty of sales lower than 2X when the owner wants out or things are going badly.

Where I am, it would cost you 300-400K to open a place from scratch equal to mine and then you would still have to build the business.

Buying a ringing telephone is often worth the money.

 

[snowman]

paul7979:

snowman:

2-3x last year’s gross profit is nuts. I don’t think anyone here would pay that. .

So at no point does a business increase in value above the equipment value?

I think 2-3 times earnings is pretty standard for a place that is actually making money. I would sure like to think my place is worth more that 25-35K.

Yep, you sure would. If you’re making 100k+ in profit annually, then you would command a premium. Why would I pay you $300k for a job paying $50k? That’s where I’m coming from.

 

[bodegahwy]

Snowman, 300K for 50K ODCF would be SIX times. We are talking about half that at the high end.

50K earnings X 2 = 100K
50K X3 = 150K

Where does this 300K you mention come from?

 

[snowman]

bodegahwy:

Snowman, 300K for 50K ODCF would be SIX times. We are talking about half that at the high end.

50K earnings X 2 = 100K
50K X3 = 150K

Where does this 300K you mention come from?

New math, of course. Okay, paying $150k for a $50k job is nuts.

 

[Piper]

Something that needs to be taken into consideration when valuing a pizzeria is how active the owner is.

Is the owner THE business? Is he working 70 hours per week, open to close, and is the only one with the knowledge of how to run the restaurant? Then I’d say it’s worth the value of the assets. In that case you aren’t really buying a business; the “business” will be leaving and you’ll have equipment and a job.

But what if the restaurant is running on auto-pilot? There’s a solid GM in place that runs the entire operation. The owner never has to go in to cover shifts. All he or she does is the back-office work and the marketing. Now THAT’S a business. This could easily go for 3 times cash flow, depending on growth. A good operation where the owner is essentially absentee and has good growth prospects could easily go for 5 times cash flow. That’s normal for other businesses, and a restaurant isn’t any different. In this situation you’re really buying an income stream, and all the applicable laws of finance apply. You’ll buy at a price that provides an acceptable rate of return.

Those are, of course, the two extremes. Most of us probably fall somewhere in the middle where we may be putting in 20 hours per week at the store and have managers covering the rest. Well, I’d say that would fall somewhere in the middle of the valuation range of 0 - 5 times cash flow. That would be between 2-3 times cash flow. Maybe it’s just a coincidence, but that happens to be the exact range that is so often quoted on these boards for the going rate for pizzerias. I know for me, right now, that would be about right.

If you have a shop that’s cash-flowing 50K with an absentee owner and you want to sell it for $150, please let me know. I’ll buy it today. I’ll never pass up a 33% return on investment. But like snowman said, that would be nuts if you’re buying yourself a 70 hour per week job.

I think this is why there’s always so much confusion in these threads; rarely are apples being compared to apples.