Starting your own business VS. Buying an already established one and other questions.

[Jeebus]

Mostly reffering to restaurant/ sports bar types of establishments. What would some of yall say is better? An established one seems like its already making money but at the same time if it were doing good I dont see why someone would sell it. Most of the places I look at have Pursue Other Interests as reason for selling but could be possible that business just isnt doing that good. Im assuming buying an established one would probably be cheaper, but maybe someone can shed some light on that to.


Also, can someone explain the following. This is just an example:
Asking Price: $99,500
Gross Revenue: $277,317
Cash Flow: $114,157


Of course asking price is obvious but what is the cash flow and gross revenue difference?

[E-BRAKE]

I suppose an established one would be better to start out with, because you already have reputation among customers and a bigger community pool to work with. On the other hand though, I heard that a lot of restaurant business fail.

[Drink Tapioca]

if that was a real number on an establish business, than thats a pretty good deal. and a great buy. lets just say of that gross revenue they profit is about 25% (depends on the business) so you roughly net $70k which is pretty good. basically one yr you almost paid for it. that is only if the numbers are correct, not inflated.

[Jeebus]

Those are numbers for a sports bar for sale somehwere in Houston. Not sure on exact location but I just wanted to use is as an example. Trying to do a little more research on starting your own business and things of that sort.

[infamous_ikon]

seems too good

[greenparrot]

Call up a local commercial real estate broker and find out what the cap rate for a establishment like the one your are interested in is these days.

Take the cash flow and divide by that cap rate. The number you get is how much you should pay for the property.


This is the formula: Capital Cost (asset price) = Cash flow / Capitalization Rate


Someone correct me if I'm wrong. Its been a while since I've done Finance.

[greenparrot]

But if you want to buy an existing establishment. You will definately need to check out their Income Statement, Balance Sheet, and Cash Flow Statements. Basically their Financial Statements.


You need to learn to read them so you can determine the health of that establishment and figure out what you can do to make money out of the property.

[greenparrot]

Oh and to answer your question:

Revenue = revenue is money that a establishment makes from normal business activities usually from the sale of goods and services.

Net Profit is basically Revenue minus Costs (or Expenses). This does not include tax.


Cash Flow = CASH that is spent or recieved during a set period of time. The numbers you posted is probably the last 12 months of cash flow.

[greenparrot]

Lol im a thread killer.

[Jeebus]

Nah that was good help thanks. Anyone else wanna chime in?

[Whitehead]

I think buying an already established business is better... I just recently bought a landscaping/ lawn care company from my former boss and did so instead of starting my own cause I already have customers and reputation with others... but I've been working with the company for over a year so I already knew the information i needed to know.

[HoldemPlayer]

you usually cant get all the balance sheets and cash flow charts until you are actually under contract, the person selling wants to know that you are genuinely interested and doesnt wanna give out all their financials to just anyone

[infamous_ikon]

I bought my business when it was 35 years old. I haven't lost money since grand opening. been goin on for 8 years strong . looking for another franchise now


woot. as far as franchise(s) go imo its better buyin a established one. but those generally cost more

[tit$]

for anyone out there who wants to buy a business, give me a shout! it's what i do full time :)

regarding the business you referenced jeebus - it probably has poor records to back up those numbers which is why its priced so low.

to whoever mentioned the CAP rate - that's generally used for commercial real estate, not for business valuation. call a commercial real estate agent to do real estate, call a business broker to buy/sell a business. commercial real estate agents are not trained in how to properly market an established business correctly most of the time.

[AXaznAX]

for anyone out there who wants to buy a business, give me a shout! it's what i do full time :)

regarding the business you referenced jeebus - it probably has poor records to back up those numbers which is why its priced so low.

to whoever mentioned the CAP rate - that's generally used for commercial real estate, not for business valuation. call a commercial real estate agent to do real estate, call a business broker to buy/sell a business. commercial real estate agents are not trained in how to properly market an established business correctly most of the time.

how does one know how much their business is worth? or know a good price to sell it for?

[longnguyen714]

Worth is so hard to price because there can be tangible and intangible components like: well this business is worth $X.XX because the real estate is worth X, and the supplies etc are worth X, revenues are X(all these can be express in real numbers); and then the intangibles are your opportunity costs, "brand" that adds value ie:franchising a known brand, synergy.(these are harder to put a number on except opportunity cost which you can calculate but what i was trying to express is that it can only be determined by you)

[tit$]

how does one know how much their business is worth? or know a good price to sell it for?

most business brokers will do a valuation for you for free. some people in my office charge up to $5k to do one, i do them for free on a gentleman's handshake that if they decide to sell they will use me. sometimes i get burned, but i don't mind. most of the time the people who don't use me go with someone else, they can't sell their business, and they end up calling me back anyway.

[greenparrot]

to whoever mentioned the CAP rate - that's generally used for commercial real estate, not for business valuation. call a commercial real estate agent to do real estate, call a business broker to buy/sell a business. commercial real estate agents are not trained in how to properly market an established business correctly most of the time.


That is what my Finance professor at the Hilton Hotel and Restaurant Mangement School taught me. I guess he was wrong? :gonk:

[tit$]

That is what my Finance professor at the Hilton Hotel and Restaurant Mangement School taught me. I guess he was wrong? :gonk:

not saying he was wrong, but your finance professor doesn't sell businesses full time for a living - i do

[longnguyen714]

That is what my Finance professor at the Hilton Hotel and Restaurant Mangement School taught me. I guess he was wrong? :gonk:

Good old professor Lattin eh? hahahahhahahahahha
Doesnt he own his own investing firm or was on the board of commerce somewhere? Could have been Jordan.

[Prelude92]

established businesses which i will refer to as "franchises" have the upper hand when starting up when compared to a business you are starting up.

for example, all the new mcdonalds that are being put in new places will automatically draw customers cause of their reputation. If you open up a burger joint of your own, you will already face the competion of McDonalds and will have to focus on promoting your burger joint.

Now, advertising/promoting is required for both established/new business @ the start up. It is the different amounts of efforts the each business demands IMO that influences whether to start a new business or join a franchise.

plz dont banz me. :)

just got done w/ a business class @ school. i'd like to build on my knowledge and hopefully it'll lead to something good ;)

[tit$]

franchises also take 7-12% of your monthly gross income whether you are making money or not. everything has an upside and downside.

[AXaznAX]

franchises also take 7-12% of your monthly gross income whether you are making money or not. everything has an upside and downside.

can't you think of that as an expense for advertising nationally?

[Prelude92]

franchises also take 7-12% of your monthly gross income whether you are making money or not. everything has an upside and downside.
is always like that or does it vary?


i thought the franchise took your earnings according to how much money you made. (is that the profit?)

i kinda confuse myself w/ "net profit" and "profit".

i know the term net is income after expenses aka take home money..

[AXaznAX]

is always like that or does it vary?


i thought the franchise took your earnings according to how much money you made. (is that the profit?)

i kinda confuse myself w/ "net profit" and "profit".

i know the term net is income after expenses aka take home money..

your confusing yourself with "net profit" and "sales".

net profit = sales - expenses

[koalaznbear]

Tits, to value the business do you use some kind of discounted cash flows model? i.e. what the business is worth now (net assets) + discounted future cash flows?

[tit$]

can't you think of that as an expense for advertising nationally?

the argument is, if you own a quiznos in Houston, TX how much good does quiznos advertising in Idaho do you?

is always like that or does it vary?


i thought the franchise took your earnings according to how much money you made. (is that the profit?)

i kinda confuse myself w/ "net profit" and "profit".

i know the term net is income after expenses aka take home money..

the rates vary, but the lowest total franchise fee i've seen is 5%. franchises take a total percentage of your income, not profit. whether you're losing your ass or making a shitload they take their percentage.

[tit$]

Tits, to value the business do you use some kind of discounted cash flows model? i.e. what the business is worth now (net assets) + discounted future cash flows?

discounted cash flows don't play a factor until you're talking multi million dollar companies. usually it is a multiple of their net earnings or the total value of the assets included. each business valuation is different based on the industry it falls in.