when is buying an existing pizzaria @ 3.5x cash flow ok?

[srl310]

I have read previous threads and am a little stumped. I am looking into a pizzaria that has been in operation for 60 years. the last owner has owned for 21 years. His cash flow is 110K/year.
sales average 800k for the past three plus years.
it is a takeout and delivery only, as far as I know it is independent
rent is $2154 on 1600 sq feet, lease is up in february
utilities average 1500/mo.
owner is 68 years old/ only open for dinner 4-2am daily.
Tons of opportunity for growth. lunch/advertisement etc.
I should be getting more detailed financials the next day or so
Thank you for any advise, Steve

 

[paul7979]

Make sure lease can be renewed. Nothing worse that buying a place then finding out you are homeless.

 

[boatnut]

Just a note… Cash flow normally refers to total amount of money deposited into business account in the year. In theory that should equal your total sales. I hope the owner isn’t looking for $2.8 million!! I think you mean 3.5 times net or retained profit of $110,000 ($385,000) . Depending on a lot of other factors, equipment etc etc, that might not be a bad price. Just my opinion.

 

[snowman]

Look at his age… he’s trying to retire. Also, if you can’t extend the lease, the business is almost worthless. $385k for an existing restaurant with no real assets other than “goodwill” seems way over the top TO ME. I wouldn’t pay that, but I’m cheap and such.

 

[bodegahwy]

110K on 800 sales is pretty lame performance which can be improved. If there is a good lease with a number of years on it, or better yet, you can get a new 10 year lease, this sounds like a good deal to me.

 

[Piper]

boatnut:

Just a note… Cash flow normally refers to total amount of money deposited into business account in the year. In theory that should equal your total sales.

No, it’s not. Cash flow is Net Income + Non Cash Expenses (such as depreciation and amortization) + Income Tax (if not an S Corp). This is usually referred to as EBITDA in accounting. Maybe this is where so much confusion comes from about valuing a business. Cash flow is not in anyway equal to your total sales.

 

[boatnut]

Ok, I stand corrected. I’ll have to point this out to my banker as he refers to my total annual sales as my “cash flow” as well! Maybe I shouldn’t…lol

 

[bodegahwy]

Owner’s discretionary cash flow is what I would use for value. For example, if the owner is paying for his car, cell phone and some travel which they can show is not needed to operate the business I would add those back in for valuation. A well prepared seller will have stopped paying for these things through the business though.