What’s Your Pizzeria Worth? Hard to Say – But These Guidlines Will Put You in the Ballpark…
Here’s how it works…
SPECIAL REPORT
What is Your Pizzeria Worth? And Why You Should Care
By David Scott Peters
Smile Button Enterprises, LLC
Have you ever wondered what your Pizzeria is worth? I mean really, have you ever thought about the day when someone wants to buy your Pizzeria? What if that day was today? What would you tell them it is worth?
I want you to think back with me for a second… Do you remember what was going through your mind when you first decided to follow your dream and open your own Pizzeria? I bet it was a really exciting time.
Soon excitement was translated into solid planning and then action. The next thing you knew you were knee-deep in paperwork before you could actually start doing much of anything. Among the many stacks of papers you needed to complete, from loan applications to business licenses, you had to form your business entity.
Before you researched S Corporation, C Corporation, Limited Liability Corporation, and so on, you hopefully met with your Certified Public Accountant and possibly your attorney as well to learn what entity was right for you. During this meeting your CPA asked you a lot of questions. And most peculiarly, he or she focused on one major issue before guiding you: “What is your exit strategy?”
Your exit strategy had a major impact on what form of business entity you chose because of the potentially large tax ramifications when it came time to actually sell or transfer the business to someone else.
Without going into the advantages of using each entity (mainly, because I’m not a CPA), your exit strategy should guide almost every major business decision you make in your Pizzeria on a daily basis. Why? Because your job in operating your Pizzeria is to maximize the value of your business—not only for immediate gain, but for future gain as well. Now let’s look into why it is so critical.
How Much Can I Get for My Pizzeria?
The easy answer is whatever a buyer is willing to give and a seller is willing to take! While there are a number of ways to find that magic number, the method you use doesn’t matter. It still always comes down to two parties agreeing to agree.
As I mentioned, there are a number of options many Pizzeria owners, bankers and business brokers use to determine the value of your Pizzeria for sale. With my experience, both as an independent operator and franchisor, I find that there are two calculations that seem to be used most often, a multiple of cash flow and replacement value.
The Cash Flow Method
The Cash Flow Method of determining the value of your Pizzeria is exactly as it sounds. You are going to determine what kind of cash flow your Pizzeria produces over a 12-month period. Then the cash value of your Pizzeria is determined as a multiple of that projected cash flow. Sounds difficult? It’s not. It’s actually very easy.
The calculation we’re going to use is EBITDA (Earnings Before Interest Expense, Tax Expense, Depreciation Expense and Amortization Expense). All of these numbers are easily found on your Profit & Loss statement.
Open your accounting software and print a P&L statement for the last running 12 months. So if it were December 15th today, you would run the report for December the year before through this past November (the last 12 months). The reason the last 12 months are used is because this time frame more accurately takes into consideration sales and profit trends your business is experiencing.
From this 12-month P&L, gather the following 12-month totals: Profit/(Loss), Interest Expense, Income Tax Expense (this does not include any sales taxes collected and paid), Depreciation Expense and Amortization Expense. Add these numbers. This total represents your actual cash flow for the past 12 months, without any debt service from business loans.
For example: Earning Before – Profit / (Loss)
$135,454
Interest Expense
27,031
Tax Expense
33,863
Depreciation Expense
33,500
Amortization Expense
8,984
Total Cash Flow
$238,832
The next step in the process is to multiply the Total Cash Flow by what the market trends are today. For instance, in the early 1990s, Pizzerias were selling for a multiple of as high as eight. Then, soon after there were a lot of Pizzerias going out of business and the banks were left taking over a large number of them. This ultimately reduced the multiple.
In today’s marketplace, buyers are finding that depending on a number of factors, they are seeing multiples of three to six. Most likely, a Pizzeria with good cash flow and positive sales trends will be in the four to five multiple range. Let me show you what exactly I mean by a multiple:
Total Cash Flow
$238,832
Value of the Pizzeria
Multiple of 3
716,496
Multiple of 4
955,328
Multiple of 5
1,194,160
Multiple of 6
1,432,992
Based on this example, this Pizzeria is most likely going to be able to sell for approximately $1,000,000.
The Replacement Value Method
As a franchisor of 30 sports bars in Arizona for many years, I have seen the highs and lows when it came to what franchisees were able to resell their Pizzerias for. But all too often I would see a Pizzeria trying to get top dollars for their business when it actually had a negative cash flow or the cash flow projection method showed a value of less than what the real estate the building was sitting on was worth.
In these instances, consider the Replacement Value Method to determine what your Pizzeria is worth. In a nutshell, what would it cost someone to open your Pizzeria today on the same piece of dirt you built it on originally (assuming you own the land and building)?
For example, if the land you built your Pizzeria on is now worth $500,000 and it would cost someone $750,000 to build the building and add furniture, fixtures and equipment, then the value of the Pizzeria would be $1,250,000 minus the cost of replacing any old equipment and basic renovations that need to be done, such as painting, replacing surfaces, etc.
Why these Methods are Most Commonly Used
You have probably already asked yourself, why are these two methods most commonly used? You might have even found yourself saying, “Well my business broker said you determine the value of your Pizzeria using tea leaves, or the equivalent.”
The truth is that these methods are most commonly used by lending institutions, banks and investors. And unless the buyer is going to self-fund their purchase, the banks are going to dictate what you’re going to ultimately get for your Pizzeria.
Plus, it’s no secret that Pizzerias already have a tough time getting funding due to the fact that 61 percent of all Pizzerias fail within their first three years of business (which is frightening to a bank that is going to lend you money on a 10-year term or longer). And the fact that the average Pizzeria only makes a nickel on every dollar they bring in.
What the lender is trying to determine is whether or not you can pay back the loan.
Why Skimming Your Business is Very Short Sighted!
If you want to get the maximum dollar value out of your business when you sell, then the practice of skimming is very short sighted.
What is skimming? It’s the practice of skimming cash from the top of the pile from your daily receipts. I know many Pizzeria owners who have vending in their Pizzerias, video games, pool tables, crane games, etc., and they are skimming regularly.
They know that it is next to impossible for any government taxing agency to come into their Pizzeria and audit the revenue their video games generate. There is no real way to verify just how many quarters have been put into each machine.
So what they do is empty out the quarters, dump them into the change machine, take out the bills, put some in the bank as reportable income and a lot in their favorite bank, Left Hip Pocket Savings & Loan.
While this is only one example of skimming, there are many others, all of which are very short sighted. Sure it’s always nice to have tax-free income, especially when no one would ever know about it. But this short term gain in unreported cash will cost you three, five, even eight times that amount when you sell.
Think about it. For every single dollar you skim from your receipts (using the Cash Flow example above), it represents approximately five dollars in real money you won’t get when you sell your Pizzeria.
I find it very hard to talk with a Pizzeria owner who is complaining that they can’t get top dollar for their business after I find out that they have been skimming for years. You just can’t have your cake and eat it too!
You never want to find yourself saying to a potential buyer, “We’ll even though the P&Ls show the business made this much, it’s really this much more because we skim this much off the top.” Remember your buyer can’t take a wink, wink, nudge, nudge to the bank and get funding. Banks want real reported numbers.
Small Change Equals Big Gain!
What does it take to increase the value of your Pizzeria? Really small victories!
Over the years, I’ve found myself engaged in a similar conversation to one that I have had dozens of times with other Pizzeria operators who are all looking for the home run change in their operations that will net big cash. While in some Pizzerias the home run is possible, the reality is you make huge financial gains one small victory at a time.
Most often we don’t find that gaping hole in our operation that when corrected saves or makes us $80,000 a year. Most of the time we find a way to reduce our food cost by one percent, reduce our paper costs by $500 a month, reduce our utilities by $200 a month, etc., and the next thing you know you are hitting that proverbial home run.
So the next time you hear yourself saying you’re not willing to change the cheese you are using with a brand that is of like quality or better just to save two cents an ounce, you’re missing the picture. All of those little victories are what will win you the battle.
Maximizing the Value of Your Pizzeria
Now that you know how to calculate what your business is worth, what do you do next? Look for all the small victories you can in your Pizzeria and take action today!
You are now armed with the knowledge that for every dollar you increase your bottom line profitability, you increase the value of your business by approximately five. How many investments do you know of with that kind of return?
And better yet, as you increase your operations efficiencies one dollar at a time, you’re putting that cash in your pocket right now.
So start identifying some of the things you could be doing to increase the value of your Pizzeria. For starters, you need to implement systems and controls for every aspect of your business. Doing so ensures that everyone is doing the same processes, shooting for the same goals and has a chance to achieve them.
Implementing systems for everything you do in your Pizzeria not only increases your profits, but makes it so that you’re not the one actually doing the work. Rather, you are working on your business, not in your business.
Just remember, everything you do in your business ultimately affects its worth.
David Scott Peters is the founder of Smile Button Enterprises, LLC an Independent Restaurant Coaching and Training Company and is known as the SMART Systems guy who can walk in to any Restaurant in the U.S. and find you $10,000 in undiscovered cash before he hits the backdoor…Guaranteed! www.smilebutton.com
