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Not all of existing restaurants have terrific records. And not all are truly profitable. To begin with, one must have a common understanding of what is meant by profitability. Owner benefit, seller’s Discretionary Earnings (DE) or Adjusted Net generally refers to the amount of money that a single owner who actively manages the business on a full time basis could take home yearly.
While accountants arrange tax returns so that business owners can show a small bottom line allowing the owner to pay the minimum taxes legally, determining owner benefit or DE often requires adding back optional deductions that are used to minimize net profit of the business. It is important to do this consistently when comparing different businesses so that you can make a fair and accurate decision on the quantitative aspects of the business.
A copy of the formula that we use to determine sellers discretionary earnings or DE, can be found on our website, BuyBizUSA.com. However your accountant is probably also well aware of calculating this factor.
But now imagine two similar restaurants making about the same amount of money. Would there be other factors that you would consider
Besides the quantitative aspects of the restaurant, scrutinize the qualitative aspects of the restaurants you are considering.
- Have the sales been going up or down over the last few years?
- How likely will the business run without a hiccup if a new owner takes over?
- Is new competition coming into the marketplace?
- Does any one particular customer make up a significant portion of the profitability of the business?
- Will the seller sign and abide by a good non-compete clause?
- Does one have a more stable and established team of employees?
- Are there changing neighbor or competitor factors occurring near one of restaurants you are considering?
- How long does the lease run?
- Is there training and support?
- Is this restaurant is a good fit for your skill set and passion points.
See table below for an example of how answers to some of the above questions can influence you decision.
Imagine two nearly identical businesses that have both been around about 15 years, grosses $1MM and provided $150 in benefit to the owner last year. They sound similar but what if: