My business loses money, is it worth anything?
That depends on many things but our industry specific experience enables us to recognize the marketable value of infrastructure, licensing, lease, FF&E etc. Restaurant and bars have very high infrastructure costs such as grease trap, plumbing, electrical and hood not to mention licensing costs. We refer to this as “conversion value”. In tight retail markets such as what we are currently experiencing in Denver, conversions are very strong.
What is conversion value?
We defined the term in order not to confuse the term asset sale or asset value and is used primarily businesses with heavy infrastructure such as restaurants and bars. When a business is purchased, it is usually an asset sale as most buyers do not want the potential liability of purchasing the stock of the company. When a business is not profitable or cash flowing, a buyer may purchase the assets privately or by auction etc., but either way it is usually an asset sale. Conversion value is the purchase price of a restaurant or bar that is not profitable but it is either operating or capable of operating. It is based on the assets; FF&E, licenses in place, lease value and infrastructure. Basically, conversion value is the price a buyer recognizes for the business in order to convert to their concept.
What are discretionary expenses or “add backs”?
These fall into the category of non-operating expenses but both buyers and sellers should be very careful when defining these. Some examples are; interest expense, owners life insurance premium, one time or extraordinary expenses, auto expense, charitable contributions etc. Add backs are legitimate and important when estimating the true earnings of the business but the evaluator needs to do his research and not take for granted what the owner tells him. A good example of a non-legitimate add back is 100% of the auto expense for a pizza shop with delivery.
What does a business valuation cost?
That depends on your needs and we have several options available to fit your needs.