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... their true market value. Modified Book Value this is the book value that is arranged to reflect the current market value of the restaurant assets. Replacement Value it lists the replacement cost of the assets less liabilities.
Since as a rule some assets in the business are new, this method can overstate the value. Liquidation Value it is net cash that would be received if all assets were sold and liabilities paid off. This would be the net cash result if the firm was going out of business and as such is probably the lowest value acceptable to the seller. Market Value it conducts the evaluation of the business by means of comparing it with the similar ones that have been recently sold.
This method lacks accuracy in calculation as similar businesses may differ in reputation, size, market and management. Another feature, goodwill, concerns the value of intangible things of the restaurant. It refers to customer lists, franchises, location, reputation, quality of personnel, supplier arrangements, etc. According to Buying a Business, goodwill can be thought of as the difference between an established, successful business and one that has yet to establish itself and achieve success. In this way, a restaurant that has been profitable for a number of years, has its asset value that is above its value over. The value of goodwill may be increased by sellers at the expense of adding the potential they anticipate for the future business.
This is the factor that can help the purchaser to decide if to buy the business and how much should be paid for it. Thus, the purchaser may clear out the price and the value of the restaurant he is willing to buy with the help of several methods: asset value methods, earning value methods, and combined methods. They also can help to set the range of prices the purchaser may use in his negotiations. In addition, the purchaser should pay attention to the factor of goodwill. This factor may have a great impact on the purchasers final opinion about the worth of the restaurant and influence his intention to buy it. 5) The peculiarities of restaurant business. Restaurant business as every kind of business has its peculiarities.
The person who intends to buy a restaurant should be aware of some kinds of marketing strategies and the division of restaurants into seven types. Thus, buying a business, the person can follow any of the strategies: -buy a resale. This is a secondary sale of a business originally purchased from a carrier. The organization Bell Canada - is a bright example of a resale. Resellers are usually Bell customers and are entitled to the same provision of company services under the same terms and conditions as any other customer. -buy a franchiser. This means that an independent entrepreneur buys the right to own and operate any unit of the franchise system.
Franchises are prominent in their industry and they are typified by a unique product, service, business method, trade name. McDonald's Corporation is one of the most famous examples of franchise organizations. It has its franchises all over the world. -open a new business (restaurant). This implies buying or leasing the location, choosing the contractor, planning layout and space design, finding suppliers of the equipment. Also there are some types of restaurants, which have their own characteristics, advantages and disadvantages.
So, the person who is buying a restaurant should chose among the following types: A traditional restaurant: it caters to a variety of customers. It has lengthy menus, and due to this, it must exceed in inventory control, service and food preparation. An ethnic restaurant: it attracts customers by its specific food from a particular region or country. Due to this, it must offer personnel service in addition to excellent cuisine. Specialty restaurants: they can offer one type of food or a variety of one dish.
They are considered to be the best in urban areas. But at the same time they demand a great amount of experience from their owners to be run in a proper way. Coffee shop: it offers a variety of pre-prepared dishes. The food is prepared quickly and as rule there is a high customer turnover that needs a heavy traffic flow. Fast food: as a rule they offer limited menu and have franchise operations. However, this kind of restaurants is attractive to beginning operators.
Cafeteria: it offers pre-cooked hot dishes, which are quite simple. It needs large transient population. And also it is difficult to control labor costs. Self service: it is characterized with small operations, which offer take-out or eat-in. Its efficiency, location, good food are critical.
This type of restaurants is the easiest for the beginner, because it needs low initial capital outlays and has minimal payroll requirements. In sum, the peculiarities of restaurant business determine the marketing strategies and type of operation that should be chosen by the entrepreneur. Buying a restaurant the person can either buy a resale, or a franchise, or establish a new one. The first two have already set market, brand, service, the circle of customers. This may be bad and good at the same time. While the process of opening a new restaurant, above all, does not hold the mistakes of a pervious owner and allows its entrepreneur a complete freedom in the choice of trade name, business method, layout and space design.
Though, it should be borne in mind that no of the strategies is ideal and can guarantee ones success. And there are many other factors that should be taken into consideration while choosing the best strategy for oneself. Among these factors are: the peculiarities of rural and urban areas, the population of the area and the location of the restaurant, the public policy, the rate of competition in that zone etc. The same concerns the variety of types of restaurants. This choice should be both individually and outwardly determined. Thus the restaurant should suit level of its owners professional abilities, the rate of his initial capital outlays, and also the number of outside factors mentioned before.
IV. Conclusions: Thus, in my essay I have come to the following conclusions: buying a restaurant is a high-risk and difficult thing because the number of its potential disadvantages prevails over its advantages; to make a right decision about a restaurant, it is important to estimate its price and value; the purchaser should be aware of all the peculiarities of restaurant business to make a right choice (the strategy, the type of a restaurant); no type in this kind of business can be ideal and guarantee ones success, thus the choice should be individual and consider the number of outside factors (if the area is rural or urban, the population of the area and the location of the restaurant, the public policy, the rate of competition in that zone etc. ). V. Recommendations: There are some of recommendations for people who intend to buy a restaurant and start their own business. They are the following: The person should buy a business knowing the industry very well and being comfortable with its product or service; The purchaser must investigate before he buys The person should take his time and verify the information he is given before committing himself; The purchaser should make his final decision on buying the restaurant only after estimating its value and taking into consideration the goodwill; However, goodwill should be paid too much attention; The purchaser should buy concerning the return of his investment not the price of the restaurant; The purchaser should be careful about using all the cash for the purchase in order not to run into cash flow problems. VI.
Bibliography: Buying a Business, Saskatchewan Industry and Resources, Business and Co-operative Services, Canada Business Service Centres, 2001, 14 Mar. 2005 < web > Encyclopedia Britannica, 2004, Deluxe Edition, Britannica Inc. Glossary of Telecommunications Industry Terms: O to S. Bell Canada. 1998. 14 Mar. 2005 < web > Kelly Robertson. Maximize your Maximizing Your Sales Opportunities. Melissa's Gift Wholesaler. 2005. 14 Mar. 2005
html> Richard Parker. How to Buy A Good Business At A Great Price, 2001, Diego Corporation. P. 400. VII. Appendix: The Appendix includes the methods of determining the price and value of a business and it is fully cited from the source mentioned in the Bibliography - Buying a Business, Saskatchewan Industry and Resources, Business and Co-operative Services, : Earning Value Methods A buyer is interested in the performance of a business not only its asset value. Therefore, earning potential is a factor that should be taken into account.
Capitalizing Past Earning - in this method the profits for a selected period of past years is adjusted for unusual items and an appropriate rate of return is divided into the average profit level derived. The rate of return (capitalization rate) is what return an investor would require on his money given the risk he sees in the business relative to other more secure investments such as bonds, GIC's, etc. Discounted Future Earnings - instead of using an average of past earnings, an average of the trend of predicted future earnings is used and divided by the capitalization rate. Combined Methods Since asset value and earning value are both important considerations there are a number of methods that combine both. One of the best known methods is the Bank of America formula that not only uses asset and earning value but addresses the difficulty of valuing goodwill.
The steps of this formula involve: 1. Determine the tangible net worth of the business (market value of current and long-term assets less liabilities). 2. Estimate how much the buyer could earn annually with investments in a comparable risk business. 3. Calculate a reasonable salary for owner / operator in the business under consideration. 4. Determine the net earnings of the business over recent years (net profit before subtracting owner's salary). 5. Establish the extra earning power of the business (step 4 minus steps 2 and 3). 6.
Try to value the intangibles, such as goodwill, of the business. This is done by multiplying the extra earnings (step 5) by what is termed the "years of profit" figure. To find out the "years of profit" multiplier consider: how unique are intangibles offered by the business? How long would it take to set up a similar business and bring it to this stage of development? What expenses and risks would be involved? What is the price of goodwill in similar businesses?
A larger multiplier, for example a maximum of five, would reflect a well-established business, which has a valuable name, patent, or location, whereas a younger firm might merely have a one-year profit figure multiplier. 7. Calculate the final price of the business, which equals the tangible net worth (step 1) plus the value of intangibles (step 6). Example: Business A Business B Step 1 $ 100000 $ 100 000 Step 2 10000 10 000 Step 3 18000 18 000 Step 4 30000 24 000 Step 5 2000 (4 000) Step 6 6000 None Step 7 $ 106000 $ 100 000 In Business A, the seller receives a value for goodwill because the business is moderately well established (years of profit multiplier of 3) and earning more than the buyer could earn elsewhere with similar risks. In Business B, the seller receives no value for goodwill because the business, even though it may have existed for a considerable time, is not earning as much as the buyer could through other investments.
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Research essay sample on Buying A Business Restaurant Part 2
