Buying a Restaurant - Watch the Deferred Costs

I just went to a burger place that I haven't been to in 13 years. It's been there for 18 years. Burgers are great!  And the food in general is pretty good too.  

I estimate the business does $80,000 to $100,000 a month with a rent factor of perhaps 7% range. It resides in perhaps 2,800 Sq. Ft. So it makes money.  Probably about $200,000 a year.  It's value is in the $500,000 range based on my estimated cash flow. 

But one has to watch the hidden costs. First, it doesn't look like it is taken care of very well. I see this often in these successful restaurants where the owners fail to re-invest in the business. It is worn-out all over the place...seat, walls, equipment, menu board is from the 1980's!  It is messy and frankly looks dirty to me. It is a wonder how they do this much business, but the product is good!

This business would be priced for market at the $550,000 range.  But the deferred maintains and messy business does two things to the price.  

First, just like residential real estate, it is tough to find a buyer when the restaurant doesn't show well. Premium prices come with the restaurant is well maintained and clean. 

Second, the deferred maintenance in the eyes of a buyer is usually bigger than reality. Nevertheless, a buyer places a huge discount on the price as a result. It could be as much as 0.5 to 1.0 multiple on cash flow. In this example, it would be $100,000 to $200,000. 

So if you're thinking about selling your restaurant, reinvest in it on a regular basis. Don't allow it to get run-down because eventually every wants to retire so why not get top dollar...and you'll also improve the sales of the business as well.