Hi, I’m a first-time business buyer and need help understanding what counts as “assets” in this situation.
I work at a cafe in a rural Appalachian town, where the owner lives in CA, and his son manages the cafe poorly. Despite good sales and regular customers, they lost $26k last year. I’m experienced in the industry and confident I can turn a profit, as the son is mismanaging funds.
The building, with two 1-bedroom Airbnbs generating $35k annually, was appraised at $150k. The cafe equipment is worth $15k, and the liquor license is $25k. The owners invested $20k into a city grant project, but it’s not started yet.
They’re asking $300k, but the bank values it at $150k. Am I missing something, or are they overvaluing the business by $150k based on goodwill? Any advice would be appreciated.
When buying a business, you should only offer what it’s worth to you, regardless of other opinions. Since the business lost money, its value is essentially just the equipment, which is likely minimal. You’re thinking clearly but may be overvaluing it. Be cautious about whether the grant or liquor license will transfer, and consult your team. The bank’s valuation seems accurate, though offering an extra $20k to close the deal could be reasonable if you’re aware you’re overpaying and it still cashflows. Do an asset sale to avoid inheriting any problems from the son’s poor management.
Ensure you weigh both the potential gains and risks of this investment carefully.
The asset sale is likely going to be crucial in this case, but before doing so, the OP should make sure they understand whether or not they will have license issues. An asset-only transaction would take on a whole new meaning if a new corporate entity in that industry was unable to obtain a liquor license for a year or two.
This wouldn’t be the first establishment I turned around, only the one that I own. My main concern, I suppose, is whether or not I should let them sample the market and hope they return. It appears that the bank believes they will. In addition, before everything, I was friends with all of these people. Thus, there is a great deal of confidence. I was only looking for an outside viewpoint to assist me in better comprehending the mindset of vendors. The price seems very high.
EDIT: My pals are on my deal team, not the sellers.
Inform them of your financial situation and the things you can finance. Inform them that, given the circumstances and the lender’s assistance, this is the best you can do. They are more than welcome to search for alternative offers if they so choose. I would also inform them that, during the next few months, you plan to begin putting more serious effort into trying to find a cafe. It puts a bit of pressure on them to take your offer seriously and lowers their time to search around.
The manager is the owner’s son, who, as mentioned earlier, basically takes anything he wants. Additionally, the business’s cafe division lost $26,000. Thus, it’s already losing money there, and the revenue listed on the Airbnbs deducts 20% for the manager of each property.