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Valuation on gross sales

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nymark

New member
Hi,

I’ve been looking at shops in NYC and came across one whos books are a mess (which I appreciate is a red flag but I’d clean it up)… I was able to confirm via bank statements that they are taking in about $1,100,000. They sell pizza, pasta and burgers with a small bar with seating for about 30 people. I have two main questions I can really use help on…

When talking annual sales - should that number include sales tax, tips, and delivery fees? In NYC fees can go to 30%… so in the 1,100,000 about 100K is sales tax, 150K is tips and 200K in fees - chunky right?

Once I figure the proper gross number to use… how would you calculate a value? Do I figure 8-10% profit off that and then use a multiple of 1.5 to 2.25? Any other thoughts?

Thanks so much! This site is great - so much useful info… I recently joined and have been searching, reading and learning so much.

All the best,
Mark
 
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Your best bet is to talk to Bodegahwy. He is a business broker and he wrote a post talking about how to value a business for sale. You may be able to search to find it, he may wander in here on his own or you can try sending him a pm.
 
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nymark said:
When talking annual sales - should that number include sales tax, tips, and delivery fees? In NYC fees can go to 30%… so in the 1,100,000 about 100K is sales tax, 150K is tips and 200K in fees - chunky right?
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No on Sales Tax

No on Tips

Delivery charges: For the purpose of valuation I would lean toward not counting them as “sales” if they are passed through directly to the driver as many stores do. However, in my own business, we charge a delivery fee that I show as sales. Drivers who drive their own cars receive a commission on delivery that is unrelated to the delivery charge. Drivers who drive our cars do not receive this. Either way we keep the fee and declare it as sales.

Find my old post. The multiple you mention would one that would be used on an earnings stream. Basically you use either sales or a properly derived seller’s discretionary earnings as a starting point and then apply the appropriate multiple. In any case, you DO NOT use an sales plus an assumption of profitability.

The most commonly used multiple is the one on Seller’s Discretionary Earnings. It has a tighter Coefficient of Variation in the data for pizza restaurants but the multiple of sales is not bad either and in a case where the books are a mess might be a desirable starting point.

Any multiple you choose to use is just a starting point. In the other post you will find discussion about it but fundamentally, I like to use a median multiple derived from comparable sales and one standard deviation above and below as a range. For a particular business, where it falls in that range will depend on a number of factors.
 
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nymark said:
Hi,

I’ve been looking at shops in NYC and came across one whos books are a mess (which I appreciate is a red flag but I’d clean it up)… I was able to confirm via bank statements that they are taking in about $1,100,000. They sell pizza, pasta and burgers with a small bar with seating for about 30 people. I have two main questions I can really use help on…

When talking annual sales - should that number include sales tax, tips, and delivery fees? In NYC fees can go to 30%… so in the 1,100,000 about 100K is sales tax, 150K is tips and 200K in fees - chunky right?

Once I figure the proper gross number to use… how would you calculate a value? Do I figure 8-10% profit off that and then use a multiple of 1.5 to 2.25? Any other thoughts?

Thanks so much! This site is great - so much useful info… I recently joined and have been searching, reading and learning so much.

All the best,
Mark
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Be very careful. I’m outside of New York City. I believe minimum wage currently is $11/hr going to $15/hr by 2018. Also , I believe you are required to pay sick time in NYC. One other thing, the rents are astronomical there. I hear some places pay $20,000 a month!

Sent from my iPhone using Tapatalk
 
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RobT said:
Be very careful. I’m outside of New York City. I believe minimum wage currently is $11/hr going to $15/hr by 2018. Also , I believe you are required to pay sick time in NYC. One other thing, the rents are astronomical there. I hear some places pay $20,000 a month!
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Rob T is right. If you are using gross sales for value you would have to look for cost structures that are out of the ordinary that would tend to decrease or increase costs and move up or down in the value range as a result. This is why the multiple of SDE is a more reliable approach.
 
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bodegahwy said:
No on Sales Tax

No on Tips

Delivery charges: For the purpose of valuation I would lean toward not counting them as “sales” if they are passed through directly to the driver as many stores do. However, in my own business, we charge a delivery fee that I show as sales. Drivers who drive their own cars receive a commission on delivery that is unrelated to the delivery charge. Drivers who drive our cars do not receive this. Either way we keep the fee and declare it as sales.

Find my old post. The multiple you mention would one that would be used on an earnings stream. Basically you use either sales or a properly derived seller’s discretionary earnings as a starting point and then apply the appropriate multiple. In any case, you DO NOT use an sales plus an assumption of profitability.

The most commonly used multiple is the one on Seller’s Discretionary Earnings. It has a tighter Coefficient of Variation in the data for pizza restaurants but the multiple of sales is not bad either and in a case where the books are a mess might be a desirable starting point.

Any multiple you choose to use is just a starting point. In the other post you will find discussion about it but fundamentally, I like to use a median multiple derived from comparable sales and one standard deviation above and below as a range. For a particular business, where it falls in that range will depend on a number of factors.
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THANK YOU SO MUCH! I had a good base off your prior posts on how to value of SDE… but again this was gross… so I’m just using 8% of gross. I thought I should remove tips, tax and the huge delivery fees but was not sure. I really appreciate this. I believe I’m going to have a tough time as I would run it legit which makes less money (atleast in the short term). Thanks again!
 
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bodegahwy said:
Rob T is right. If you are using gross sales for value you would have to look for cost structures that are out of the ordinary that would tend to decrease or increase costs and move up or down in the value range as a result. This is why the multiple of SDE is a more reliable approach.
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Thanks guys… I think I’m gonna pass on this one as there just seems to be too many risks… fortunately a smaller shop just came on the market who vibe I like even more. I take a look this afternoon. Rent in NYC seems to be at about 10%… and I know you like to stay below 5%… but seems to a factor that I need to work with. A legit and increasing payroll will likely be my biggest issue.
 
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I grew up in Queens and Manhattan.
My sister is still on the Upper West Side.
When I visited 8 or 9 months ago I was amazed at the number of empty stores in her area- Broadway, maybe?
Haven’t lived in the City in may years.
There were BLOCKS that were nearly vacant- I was surprised. Not because of any one reason but simply because that was not the case when I was in the City though, again, that was many years ago.
Anyway… I am rambling… my sister is a RE broker and I mentioned the vacancies and my surprise and she mentioned that the rents have simply become unaffordable. Not “stupid” crazy, not “this sucks” crazy and not “I won’t make much money” crazy but simply “there is no way” crazy and people won’t even think of opening, trying it, etc
She said that the landlords will simply not lower rents and so the storefronts remain vacant.
 
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URNUTS said:
I grew up in Queens and Manhattan.
My sister is still on the Upper West Side.
When I visited 8 or 9 months ago I was amazed at the number of empty stores in her area- Broadway, maybe?
Haven’t lived in the City in may years.
There were BLOCKS that were nearly vacant- I was surprised. Not because of any one reason but simply because that was not the case when I was in the City though, again, that was many years ago.
Anyway… I am rambling… my sister is a RE broker and I mentioned the vacancies and my surprise and she mentioned that the rents have simply become unaffordable. Not “stupid” crazy, not “this sucks” crazy and not “I won’t make much money” crazy but simply “there is no way” crazy and people won’t even think of opening, trying it, etc
She said that the landlords will simply not lower rents and so the storefronts remain vacant.
Click to expand...
https://uploads.tapatalk-cdn.com/20170409/e150fee72b9cd738b6b688b6df79dafc.jpg

Here’s a pizza shop for rent. $125 per sq foot in the city.

Sent from my iPhone using Tapatalk
 
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So… $8300/month? Probably close to my sister- she’s on West End Ave by 70th, I believe.
 
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Yup… I did a lease for 5000 square feet in Soho 10 years ago at $125 per foot.

In the end it comes down to what sales you can do there whether the rent makes sense.

The above lease is 100K per year. If you can do a million in sales out of that 800 square feet it is worth looking at (net sales, after discounts, not counting sales tax, not counting pass through money like tips or delivery charges passed through to the delivery employees. If you can do more than that (1.2m?, 1.5?)it certainly works.
 
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