How much?

J

Johnson

New member
Let's switch things up from the usual Q & A here.

Take a cookie franchise business that's for sale:

Grosses $250k/year.
Prime location in a large popular mall - $65k year lease
7 PT employees plus manager
$1,500 in inventory
Cash flow is $20k
Asking price is $60k

How much would you say the business is netting is roughly?
 
I would say 27320.00 Here is the breakdown. If I left something out just subtract from net.
Sales250000
Cost of Mdse-25000
Gross Profit225000
Throw Aways-25000
200000
Rent-65000
PT Wages-52780
Mgr Wages-20800
Franchise Fee-25000
Insurance-2000
Repairs/Maintence-1200
Taxes-3500
Supplies-2400
Profit27320

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Chad, it's a total loser because for a retail operation the rent is way too high in comparison to sales.

Rent should not exceed 5%-7% of sales. Since it's in a prime location, allow 7%.

Actual rent is $65K and sales are $250K.

Against actual rent the sales should be: $65,000/.07 = $929,000

Sales shortfall = $929,000 less $250,000 = $679,000

Against the actual sales the rent should be: $250,000 x .07 = $18,000

Rent overage = $65,000 less $18,000 =$47,000

So, as you can see the sales don't come anywhere close to supporting the rent. Based on the evidence at hand this deal is DOA.

For many years I was an Oregon State Certified Commercial Appraiser and I know of what I speak.

IMHO the business is worth nothing.
 
Rapid HotClean said:
Chad, it's a total loser because for a retail operation the rent is way too high in comparison to sales.

Rent should not exceed 5%-7% of sales. Since it's in a prime location, allow 7%.

Actual rent is $65K and sales are $250K.

Against actual rent the sales should be: $65,000/.07 = $929,000

Sales shortfall = $929,000 less $250,000 = $679,000

Against the actual sales the rent should be: $250,000 x .07 = $18,000

Rent overage = $65,000 less $18,000 =$47,000

So, as you can see the sales don't come anywhere close to supporting the rent. Based on the evidence at hand this deal is DOA.

For many years I was an Oregon State Certified Commercial Appraiser and I know of what I speak.

IMHO the business is worth nothing.
Click to expand...

More Great Advise.......Great insight Ted!!!
 
Usually the cash flow is what the owner is taking home. For a business like that, I would not dream of paying three times the annual net.
 
Guy Blackmon said:
More Great Advise.......Great insight Ted!!!
Click to expand...

Thank you Guy, I appreciate that!

Commercial Real Estate 101 Test Question

In a real real estate transaction sale or lease transaction, which of the following does the broker represent?

A. The seller or lessor.

B. The buyer or lessee.

C. Both A and B.

D. The commission.
 
Chad, I keep thinking about what's wrong with this 'rent picture'. The only conclusion (albeit) speculative conclusion I can come to is that the space is much too large for the cookie shop operation. A typical cookie shop would probably operate in 1,000 SF tops.

Annual rent/SF = Annual Rent Per SF

$65,000/1,000 SF = $65.00/SF

Here in Portland the very best side shop mall space rents for about $30/SF. To allow for nnn expenses I'll adjust that up by 10% to $33/SF. This amount would represent front of mall end cap space and/or space that's in good proximity to a strong anchor tenant.

How many SF is the space? How far away is it from an anchor tenant? What are other rents in the center?
 
Thanks for the insight guys.

Ted, great information!
The store is located in a large mall next to the food court. I think it's neighbor is a Cinnabon. 700 sq.ft.

I saw the $20k cash flow and thought something wasn't right. That's why I brought it up here.
I never to knew there could be that much overhead in a cookie shop.
 
I remember Sam Walton talking about when he was a trainee for JC Penny that he was wrapping a purchase (they use to wrap purchases in paper and tie with a string) that JC Penny himself was in the store and was watching him. He didn't like the way Sam was doing it and came over to show him how it was done. He then told Sam that " We don't make money on the sale of a shirt, we make our money on the string that we save".
 
Good point Phil. I still don't think it's worth it.

CL Scott, no experience at all. The owner didn't really play a huge roll in the business because there's staffing and management in place. They own multiple businesses. But still not worth it for $20k
 
Rapid HotClean said:
Thank you Guy, I appreciate that!

Commercial Real Estate 101 Test Question

In a real real estate transaction sale or lease transaction, which of the following does the broker represent?

A. The seller or lessor.

B. The buyer or lessee.

C. Both A and B.

D. The commission.
Click to expand...

Gonna take D on that one Ted.....but should be A I guess....:)
 
Most would be surprised how small the margins are for retail. I have a friend who we helped negotiate a horrible lease that left him at $18k per month for a 900 square foot space. It was prime space though.

This is a yogurt shop that is a franchise. His was the highest lease rate off any other franchisee so he took it upon himself to raise his rates to 35 cents an ounce the first year hoping to generate some income. The first year (not counting startup costs) he grossed 1.1 million and profited 90k.

The next year they caught him and forced him to drop his price down to 30 cents an ounce, even sued him till he gave in.
The next year he grossed 1.4 million and profited only 60k.

Pretty sad.

We need to count our blessings in this industry.
 
Tony Shelton said:
Most would be surprised how small the margins are for retail. I have a friend who we helped negotiate a horrible lease that left him at $18k per month for a 900 square foot space. It was prime space though.

This is a yogurt shop that is a franchise. His was the highest lease rate off any other franchisee so he took it upon himself to raise his rates to 35 cents an ounce the first year hoping to generate some income. The first year (not counting startup costs) he grossed 1.1 million and profited 90k.

The next year they caught him and forced him to drop his price down to 30 cents an ounce, even sued him till he gave in.
The next year he grossed 1.4 million and profited only 60k.

Pretty sad.

We need to count our blessings in this industry.
Click to expand...

On a national basis mall food courts average about $650/SF in annual sales and generally produce the highest square foot sales.

Against his current sales, your friend's yogurt shop sales are equivalent to about $1,556/SF annually. That's a bunch!

In my first post I estimated that to pencil the cookie shop needed to produce annual sales of $969K, which is equivalent to about $1,384/SF. However, the shop is generating sales of only $357/SF. That is only 26% of what it needs to be and it's also just 55% of the national average!

I'd bet a $1 that the lease doesn't have a "no cookie competition" clause because the nationals would never stand for it (e.g. McDonalds, Subway, etc).

Is the food court overpopulated with purveyors of deserts?

Does the store have a bad reputation for selling chitty cookies or having bad service?

Did the operator get behind in paying rent during the recession and did the landlord then agree to amortize past due rents into the balance of the lease term? There was a LOT of this going on a few years ago because landlords knew they couldn't fill vacant holes. And in retail malls vacant holes are the kiss of death as they spread like the plague.

Sales of $969K per year is an awful lot of cookies and I doubt the store could or would ever get there.

Sadly, the cookie store operator is IMHO baked!
 
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