coffee shop - how to value, how many times nett profit ?

Hi

I know someone who is looking to buy a freehold coffee shop......

2 questions,

how would you value a coffee shop, how many times nett profit would be a fair price (assuming the coffee shop is achieving its maximum potential currently


If the seller says that the nett profit is X, how would you prove it ?
(Bank Statements ? Does a coffee shop need to publish accounts ?

All limited companies have to lodge a balance sheet with the Companies Office, but the information on this is useless.

If it's not owned by a limited company, they need only produce accounts for tax purposes.

If they are selling it as a going concern, they should produce audited accounts. If you are buying it as a going concern, you should get an accountant to do a due diligence on the accounts.


Are you sure it is freehold?

Freehold means that they will own the building and not have to pay any rent. If it is freehold, then the value of the business is not very relevant, as it's the value of the building which is most important.

If the existence of a coffee shop is going to add to the value of the building as a building, the coffee shop would have to be really thriving. They would need to see the accounts to verify this. They would need a commercial accountant to interpret those accounts for them. They would need someone in the business to suss out the competition. They would probably need to work for at least 6 months in another coffee shop to learn the trade.

They can accept that the turnover is not overstated. Some people reduce the real turnover through tax evasion - very few would overstate it.

They would need to factor in a market rent if it's a freehold building.

Did the owner pay himself a market rate salary? This is the key thing in determining the profitability of an owner managed business. For example, he might have had family members working for free to reduce the costs and increase the apparent profitability.

Brendan Burgess said:

If they are selling it as a going concern, they should produce audited accounts. If you are buying it as a going concern, you should get an accountant to do a due diligence on the accounts.

Click to expand...

Why do you suggest this Brendan?

Hi Tommy

Am I mistaken? I thought if someone was selling a business, that they would produce audited accounts or some form of accounts with a statement from their accountant?

Maybe "due diligence" is too strong a word for it for a coffee shop. But the buyer should not simply buy based on the accounts. Their own accountant should check them out.

Brendan

Hi Brendan

Maybe it is me who is mistaken, but I would never advise a client to disclose full accounts to a prospective purchaser. Certified turnover, yes; gross margin(s) achieved, perhaps; but that would be the height of it.

I reckon most auditors would be extremely wary of taking on an audit of an otherwise audit-exempt company or business that is being prepared for possible sale. The possibility of turnover/profits being artificially embellished accordingly is a textbook example of inherent audit risk.

Hi Tommy

You have more experience of it than I have, so it is I who is most likely incorrect.

I have seen the expression "certified turnover figure available". Who certifies it? The accountant?

Generally, yes. Exactly how much weight can be put on such 'certifications' is debatable, particularly if they contain the standard disclaimers and they are based on unaudited books & records.

what is the best way to educate oneself as to the pitfalls, such as mentioned above in buying a business?

rupert7 said:

what is the best way to educate oneself as to the pitfalls, such as mentioned above in buying a business?

Click to expand...

I think it comes with experience.

I am sure you can read a book about it, but being involved as a seller or a buyer is the best way. Next to that is having a good accountant.

Brendan

Brendan Burgess said:

... Some people reduce the real turnover through tax evasion - very few would overstate it. ...

Click to expand...

What about a drug dealing criminal, who launders his money through a coffee shop. The profits are thus artifically inflated, ensuring he can sell the coffee shop for more than it's worth, he also gets to launder his money (quite in-efficiently as he pays tax, but still laundered)

Is that too unlikely to have to consider?

JoeBallantin said:

What about a drug dealing criminal, who launders his money through a coffee shop. The profits are thus artifically inflated, ensuring he can sell the coffee shop for more than it's worth, he also gets to launder his money (quite in-efficiently as he pays tax, but still laundered)

Is that too unlikely to have to consider?

Click to expand...

Hi Joe. I suppose that is possible. Not sure how an auditor would pick that up though.

Brendan