How do you evaluate a businesses cap rate? - Posted by john

Posted by Rick (CA) on November 06, 2007 at 20:25:47:

I’ve been involved in both selling my business and in handling some due diligence in some restaurant companies (from $100M to $200K).

Depending on the industry, it is usually done as a multiple of the EBIDTA (Earnings Before Interest, Depreciation, Taxes & Amortization). In restaurants, it’s usually anywhere from 6-10 times EBIDTA. It will vary widely on the credit market and the desireability of a particular industry, but that is a good rule of thumb to use.

We’ve never used Cap rate to define the price. If a business owns real estate, than that comes into the factor as well (usually separately).

Hope this helps.

How do you evaluate a businesses cap rate? - Posted by john

Posted by john on November 05, 2007 at 21:19:05:

We all know about the cap rate on Real estate. For example: A prime property that is Triple net lease will be valued somewhere between a 6-7% cap.

If you were to buy a business what is an acceptable cap rate? Whether it’s a dry cleaners, burger king, etc. What are your thoughts on how this is analyzed.

Re: How do you evaluate a businesses cap rate? - Posted by Merez(IA)

Posted by Merez(IA) on November 06, 2007 at 10:33:59:

The real quick and dirty way is to look at comparable sales or at least asking prices of similar business(both regional, if not state and city and the type of business). There are multiple paysites with a listing of sales prices (though membership is usually expensive, but then they’re usually used by M&A people and business valuators). There are also many free sites with listing of businesses for sale, you can try or type in your location and businesses for sale into google.

The slightly longer answer is that most small, privately held businesses sell at the price of the real estate (if any), inventory and other assets and a small multiple of cash flow (1x-10x depending on a lot of factors). Some of the factors that can influence a sales price is the type of business, how that industry is doing, where it is located, if there is a management team in place (if not, you’re buying a job), or if the owner is the person that drives the business (be very careful about personality driven businesses), if there are employees, the type of assets, if there is financing in place, if the owner will finance, the possible liabilities of the business, how clean the records and books are, etc.

Basically, it is highly dependent on a wide range of factors that are beyond a posting here (there are many different books on just valuing a business and another realm of them that deal with buying or selling a business).