Looking to buy existing Subway shop, help in evaluating the price

[newtothis]

How are you,

I am looking to buy existing subway that has been in business for more then 3 years.

This is 100% absent owner, that has employees and manager in place.

I have converted all of the numbers in to %, so that i can share them with you.
I decided the income or expense by the net revenue to get that percentage.
If i made a mistake or it doesn't make sense, let me know.


I am trying to figure out how much to offer for this business. Lets assume that net sales are 100k, for easy counting. Lets say, i will not touch net income and leave it in the business, and only keep officer compensation, its only 6%, and if taking 100k as a base, that's only 6k to me.

The current asking price is 3 times the income. However, that income includes ( loan amount that owners is paying, total net income, and office compensation ) I think its too much, but trying to figure out how to evaluate it correctly and make the right offer. does anyone has any experiance in Subway franchises or advice on how to price the business and my offer????


Loans - amount that current owner is paying, if i buy this, i will probably be paying the same in loans.
Officer compensation - amount that current owner is taking from the business.

Net Revenue (Sales)	100%
Cost of Goods (Purchases & Supplies)	29%
Gross Profit	71%
Operating Expenses
Loans	5%
Officer Compensation	6%
Total Operating Expenses	68%
Net Income/Loss	3%
Rebate Income (estimated)
Total Net Income/Loss	4%

 

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[awjt]

I am wondering what the upside is here. A huge outlay, for a trickle, and a constant headache of dealing with unskilled laborers and their myriad problems and flakiness. NO THANKS.

I would rather... come up with a cool new kind of food with a new kind of preparation and dining experience. Something a little different than what's out there, but not something totally wacky. Just a shift... say... a build-your-own taco bar. Or a dessert shop where people come in and construct their confection, similar to a Chipotle. THEN, go about putting the pieces in place to open my first shop... and THEN figure out how to franchise it.

Sure, it could fail. But if I'm going to spend 12 hours a day babysitting some restaurant, I want it to at least be something new and cool that nobody's ever thought of. The LAST thing I'd wanna do is worry about adhering to a corporate standard recipe, buying pattern, employee training regimen, and see most of my profits fly out the door for all that upkeep.

I'd rather risk it all for something creative. But that's just me.

Good luck. I hope you make a killing!

 

[deepestblue]

My only thought was a 4% operating margin sure seems thin. Sure that's $400M ($400,000) on a $10MM/year store but seems that there isn't much room for error there.

 

[DeletedUser2]

To skinny

walk.

4% ROI? any fluxuation, (business goes out of business around you, someones lease is up in the office down the street, ) and you have a -4% fast, and unless you can hang with that for 6 months, while a new biz goes into the bld ect, you could be hung out to dry.

if you do some shopping you can find good businesses that sell for 2x or 3x EBITDA

we just turned one down that was had a nice 30% EBITDA to it. it didnt fit our model well enough was the reason.

go shopping first. find more to compare. and dont worry, there is ALWAYS another deal

 

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[newtothis]

If you add up loan and Officer compensation it's 11% plus the 4% net income that adds up to 15% of revenue.
I don't count 4 net income, I would live that in a business. 5% loan would be paid out in 5 years for instance. That's leaving me with 6%.

If using 100k as net revenue/sales. What would you offer for something like that?

That with not working at it at all bc it has managers in place.

Also anyone knows anything about subway franchises ?

 

[Kung Fu Steve]

What is your goal?

Own a business? Make the highest ROI you can?
Have a small cash flowing business?

I guess you didn't really ask us if you should "do it
or not" but... I came to give you more and I'll never
give you less! ;-)

For the ROI on this, I don't think it would make
much sense to offer more than 1x earnings. Or...
in your example 100%.

 

[biophase]

Sorry, I can't make sense of the numbers. But from my minimal experience in sub franchises, are you basically saying that if the owner is taking home $4k (after all expenses and being 100% absent) that he is asking $12k for the business?

What do you mean by live in that business?

 

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[Excalibur]

I believe he is saying he would leave that income in the business, not live.

I can't but help think you're buying a job. It might be mostly hands off, but the managers still have to report to you and the managers I've known in my time, a few needed to be babysat.

 

[socaldude]

I can't but help think you're buying a job. It might be mostly hands off, but the managers still have to report to you and the managers I've known in my time, a few needed to be babysat.

i agree, this is something very time consuming and stressful based on my observation with people who own these.

but if you wanna buy someones franchise, you have to understand VALUATION. is the price/earnings justifiable? in other words: is what i'm paying for this business worth for what the business is going to produce? i would suggest to look at the balance sheet and git rid of all the "worthless assets" such as goodwill and inventory like the food leaving the most liquid assets. the most liquid assets will always be on the top of the balance sheet. this will help valuing it(this is your margin of safety). look at the location, is there a sustainable client base? is there a healthy cash flow? but beware if there is a lot of debt, congratulation you now owe it. and based on my experience debt is a huge red flag. avoid it at all costs. again it all depends on what YOU are willing to pay for what the business produces(gives back to you). for example some people are willing to buy a business such as amazon.com for 90 times earnings! that means it will take you 90 years to get your initial investment back!!

oh and dont forget franchise fees, carrying the name "subway" is not free. good luck!

 

[newtothis]

Steve, (others)


Here, i used numbers instead of %.

Net Revenue (Sales) $100,000
Cost of Goods (Purchases & Supplies) $29,000

Gross Profit $71,000

Operating Expenses
Loan Repayment $5,000
Officer Compensation $6,000
Total Operating Expenses $68,000

Net Income/Loss $3,000

Other income $1,400
Total Net Income/Loss $4,400


If this is the current situation, and if i buy it, and keep everything the same. how much is it worth it ?
I would have to put money down and finance the rest, so the loan that you see in my calculations now, would be probably how much i would pay for my loan, and Officer Compensation how much i would keep for my self.
the rest i want to keep it in business.

What is the right way to evaluate something like this ?

Please keep in mind, that it has been in business for more then 3 years with steady sales.

Thank you

 

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[Kung Fu Steve]

So that means it was approximately worth 250k-300k depending on the loan?

Or is that 5k still at percentages? 5k sounds right for a loan that size..

I think what we are all getting at here my friend is that it just doesn't seem like
a good deal. Even if you were to pick it up for 1X earnings 100,000 you are still
only getting a 3% return on your money... You are arguing that you would also
take the "officer's compensation" at $6,000 you are still only making 9%.

This is fine for Rich Dad, Poor Dad - but our mentality is a little different here. We
are looking for exponential returns on investment so forgive any of us that are
saying "Don't do this!" (me included)

I had a sneaking suspicion that those sandwich shops were running thin - how the
hell can you sell THAT many sandwiches to cover rent each month?

 

[bernieshawn]

I used to go to a Subway often that was right next to my job - same person worked there every day, the whole day. I never asked but it's pretty safe to assume that that was the owner of the franchise. They, as MJ says, 'bought themself a job' and couldn't hire anyone to run it for them from the looks of it.

 

[newtothis]

this numers are only estimated. they are +-.

also, i am just using 100k as an example.

What i am trying to do here is to learn how to evaluate a business and see if its worh buying, and if not why.

if one to look at this.

do i use net sales number to estimate it or net income times x1,x2 or x3 ?

I was thinking if i add:

Loan Repayment $5,000
Officer Compensation $6,000
Total Net Income/Loss $4,400

it would give me $15,400, total return. Lets say x1.5 =$34450 to offer for it ? and i would put 30% down from that and finance the rest (which would be that loan repayment that i have in there)

still not worth it ?

 

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[Kung Fu Steve]

Actually businesses are usually sold on gross earnings, not net.

So if the business grossed "100k" if you were to buy it at 1X earnings (1-times earnings)
you would purchase it for 100k.

If you were to buy it for 2X earnings, 200k, etc. etc.

Most businesses have something called a multiplier that business sellers use.

For instance, I know in the health and fitness industry most businesses go for 1-3x earnings
(meaning 100-300% of the gross yearly income)

Other industries vary but can range up to 10x earnings.

 

[Kung Fu Steve]

p.s. ultimately a business is worth what someone will sell it for

 

[newtothis]

If we assume that asking price is 50% of the Gross Profit ($71,000*50%) = $35,500

any thoughts ?

 

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[biophase]

You will be putting time into this no happen what. How much of your time is worth for $15k? If you get a loan you will still put the same amount of time to make $10k?

I would be paying $15k-$25k if this were an online business. Although I'd never buy it, if I had to put a number on it, it would be $5k-$10k as a brick and mortar because I would actually have to spend time there.

 

[newtothis]

What is sales are 300k ?

As i mentioned, i am using above numbers just as an example. Try to figure out purchsing price, and alsonegotiation leverages when talking with the seller.

I am not looking to get rich from this business, just looking at it as a cash flow.

 

[Kung Fu Steve]

We have given you a few example of what you could offer for a business such
as this. If sales are 300k, then 1X earnings would be 300k.

Absolutely no one around here would ever pay 300k for a business like this.
The margins are just waaayyyy too small. You can do a LOT of stuff for 300k.

If you want cash flow, you could buy lots of businesses for that much money.

(but you also have to be skilled in knowing how to value the business and what
it would take to increase revenue).

Business is not necessarily a fairy tale - you don't just buy something and it
makes money for you.

Biophase is completely right offering such a low price - but I'll up the ante and say
I would not offer anything, they would have to pay me to take this business,
but then again I'm at a little different station in life these days...

I have heard of a few local people who have the cash who have purchased
several subway locations and are doing well. But the keyword there is "well" not great.

Why don't you tell us what YOU think it's valued at? What would you be willing
to pay for this shop?

 

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[Pete799p]

In my experience I would be leary of any sub franchise that is doing less then 500k in gross sales. Any less then that and it will be difficult to hire a manager and still make enough money to deal with the headache. If it is grossing around 750k to 1m then it might be worth it as your ability to hire a good manager will be much hire. In the world you often get what you pay for and if you only have enough to pay a manager 36k instead of 50k+ then you will not get or retain as good of a manager.

It is hard to value the business because based on the gross revenue numbers will dictatea reasonable multiple. So a store doing 1m will often have a higher multiple because it will be much more of a business then a job plus the extra revenue leaves more room to absorb any decline in business. Since many sub shops have similar fixed costs as the gross revenue goes up your take will be drastically increased.

Example if you look at a subfranchise that is doing 500k gross it might only be netting 100k-150k. However if that same store is doing around 750k it will bring home around 200k. So a 50% increase in gross revenue can lead to a 100% increase in net income becuase of the fixed costs.

Hope this helps.

 

[jganz]

Pete gave very good advice regarding a small cafe type business.

Of course the best advice you got in this thread was Do not buy it

I think you could get much better advice on this topic if you were to post some actual numbers.

Take this for what it is worth.. any small business like this doing less than 350k gross, the owner is praying someone will just come and take over the lease. They would probably walk away from it if you could get it leased over in your name.

The only numbers that are really relevant to me as an investment are gross sales and rent.

From that you can extrapolate your profits.

Gross sales minus

1. cogs (30%)
2. payroll (20%-25%)
3. Rent including CAMS
4. Insurance
5. Utilities (phone, electric, gas)
6. Advertising
7. Royalties
8. Taxes
9. Leasehold Improvements
10. Bookkeeping/Attorney Fees

I am sure there are a few i forgot but you get the point

Also the lower the gross sales the more you will be working in it (as pete pointed out)

if you have sales in excess of 750k etc... you will have a well paid manager whose job it is to live there.

if you have sales of 200k you will have 2 employees working for $8.50 per hour. And when one decides not to show up or quit it is your job to live there.

thats all for now.. getting a headache..

good luck

 

[Otter]

Did not read all the replies so if this was covered sorry,But DO NOT BUY IT! I was in the Food Biz for 15 years owned a number of small independent delis,Diners,Pizzeria etc.After the sale of my last one Wife has a video of me saying "I will never do another food business" In order to make a living you have to live IN the business.
Just my two cents!

 

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[awjt]

The arguments are pretty convincing that these shops run too thin. I mean, how else could they if they are selling $5 footlongs? So I won't go into that again.

But I wanted to comment on the management aspect. I wonder if the OP has management experience. Maybe he stated it in the thread somewhere, but I don't recall. If not, have you ever managed people? If you've managed people, what kind of people? Skilled team players, or unskilled, inexperienced people?

And if you've managed people before, have you ever managed managers? I've done both. (Not at a Subway shop LOL). Actually, I've done all of the above. Managed both skilled an unskilled, laborers as well as other managers. I have to say that directly managing people is easier than managing managers. Especially when they compete.

Managers feel like they are in a position to make decisions. Their egos inflate, and they try to make decisions that really their managers should be making. Hands-off doesn't work. You cannot manage anything in absentia.

Therefore, I'd take a pass on the Subway shop for that reason alone. Even if the bottom line was fat, I would think very carefully about spending my Monday morning at the Subway shop. And my tuesday, and my weds, thurs, friday, saturday and sunday... either doing the round-up, counting inventory or filling in on the front line. Oh man... what a drag.

That's why I say it's better to come up with something creative and start it from the ground up. That way every single aspect of it is interesting and real. I'd be on the front line of my dessert bar helping customers and also simultaneously thinking about how I can make a better dessert, streamline my process, give the customer a better experience, cut waste, lower prices but increase profit, etc etc etc.

If I were at my subway shop on the front line, I'd be saying, "Why didn't that friggin GERALD come in to work today? That bastard. That bastard. That bastard." I would not be thinking about, "How can I improve this meatball sub?"

Two totally different states of mind. I don't think this Subway idea is conducive to happiness. I think it's a setup for misery. Sorry to be so harsh, but that's my opinion.

 

[ositaability]

look for better deals if you really need to buy a job......but my honest contribution is that this no fast lane venture mate!


think again before going ahead.