Time to Jump Into The Restaurant and Bar Business
Sometimes the best time to invest in a certain business is when everyone else is not investing in a particular business or industry. In this case, we’ve seen the pandemic scare people away from restaurants and particularly bars. As a result, revenues have declined for certain business while for other businesses, who’s business models have been take-out and delivery, have boomed. But nevertheless, the multiples for all restaurant businesses have taken a beating in the past 18 months.
Prior to the pandemic multiples for good business with good tax returns were fetching price multiples in the upper 2’s. Today we’re still trying to find were the market multiples are, but we know for sure they are now closer to the lower 2’s. Just to clarify, this is for a non-franchise business with just one unit. In other words, a mom and pop shop.
Think about it! Let’s say pre-pandemic and in 2019 the business earned $100,000 working owner cash flow. Multiples were 2.8 in January 2020. Today they’re 2.0. The value of the business declined by $80,000 due to buyers pressuring multiples down [($100,000 * 2.8)-($100,000-2.0)=-$80,000]. But the business is thriving and in 2020 it earned $150,000 and 2021 shows even higher earnings than 2020. Using the 2.0 multiple the business is valued at $300,000.
Multiples will return to normal levels someday, hopefully sooner than later. Let’s assume the business’s annual earnings remain at the $150,000 but it turns into a seller’s market and multiples return to 2.8 for good businesses. Then the value of the business is now $420,000.
In short, when every one is selling or failing, it is time to consider this as the golden opportunity to buy at bargain prices. Yeah, I know what you’re thinking…this guy is trying to sell me. Sure, but I know through my extensive experience in this and other industries, when it’s seemingly is the darkest outside and thunder and lightning is all around us, that’s the time to start getting the soil ready for seeding because when the sun comes out and the things look great, its too late to steal businesses.