Valuation of a hot dog cart business

Post
talon44
Junior Burger
2013/12/17 02:04:31
I am in the process of buying either an existing cart business or my own cart and starting from scratch, haven't made up my mind completely.  I live in an area where the foot traffic is not great except in the major downtown area where spots are as hard to get as 50yd line seats to the 49ers. A few larger players have exclusive rights to the big festivals around here, so most of the hot dog cart folks find small niches.  The business i'm considering has exclusive rights to a glorious street corner in between about 5 bars with no competition between about 1130 and 2am and lots of foot traffic.  My question is what the general consensus is on valuation of such a business. I assume it comes down to some multiple of cash flow.. 3x monthly? 5x? 10x ??   Any input?
 
slammin
Cheeseburger
Re:Valuation of a hot dog cart business 2013/12/17 08:46:06
What you really need to know, how much does the current owner report to uncle Sam at the end of the year and how many hours a week does it take to make that amount.
edwmax
Double Chili Cheeseburger
Re:Valuation of a hot dog cart business 2013/12/17 11:52:43
You said
... The business i'm considering has exclusive rights to a glorious street corner in between about 5 bars with no competition ...

 
What instrument guarantees these 'exclusive rights' and how does this transfer to you?  ... Word of mouth is not exclusive or enforceable for you.    ... Next, i would not put 'a lot' of value of 'established business' as this only give you a very short time to prove your product is 'as good' or better than the previous vendor.    The some existing customers will walk after finding their favorite Vendor is no longer at the cart.
Midnights
Cheeseburger
Re:Valuation of a hot dog cart business 2013/12/17 12:42:59
In my city, that exclusive right is guaranteed by a certified letter from a local government. I was also told that this letter would have to get reauthorized if a new person bought the business, and that the new person would be behind others on the list. I would definitely check if something like this is the case here. You don't want to pay extra for a great location, only to find that the location actually goes to the next guy on the list, and you go to the bottom of he list.
If there is no official mechanism for securing that spot, I would be wary of turf wars (which is why many places are now making such official rights guarantees). In New York, such turf wars have literally lead to gunshots in situations like this. You definitely don't want that.
talon44
Junior Burger
Re:Valuation of a hot dog cart business 2013/12/17 12:45:05
Thanks for the comments folks -- keep 'em coming!
 
The seller operates this as an all cash business as far as this corner is concerned. I have looked at his income statements and some deposit slips, and more impportantly, I have gone out and observed his cart in operation and the foot traffic and cost per sale seem to support his figures.
 
edwmax -- great point.. I asked that question specifically -- the location of the cart is granted by the owner of the bar/nightclub immediately adjacent to it. As part of the sale, the written permission to have the cart there will transfer to me. .  I will use the exact same product as he is using, at least into the near future until I get a better feel for what else might work there. As far as existing customers, I don't really think thats an issue - this location is in between 4 or 5 bars and is open from 1130pm-230am, so the bulk of the clientele are drinkers/partiers who have the munchies. I went out and watched this weekend both nights and around 130 to 230am it was like a zombie horde from the Walking Dead around that cart, and it was about 37 degrees outside.  
 
He is basically asking 9x net sales for the whole sha-bang. I was thinking more like 5.
JayL
Cheeseburger
Re:Valuation of a hot dog cart business 2013/12/17 12:57:24
Cash flow means nothing.  Tax returns mean everything.  Also the old, "I take X number of dollars in cash that aren't reported on my taxes" means absolutely nothing. 
 
 
jman
Double Chili Cheeseburger
Re:Valuation of a hot dog cart business 2013/12/17 15:54:23
talon44
 
He is basically asking 9x net sales for the whole sha-bang. I was thinking more like 5.

 
Any multiplier should be based on Net Profit. I'm not even sure what you mean by Net Sales for a food truck.  Over the years, I've done a ton of Pro Formas for various businesses and Net Sales is a line item that is used if you sell a product that is subject to return by the customer, or is discounted.
 
In calculating Net Profit, it's important to understand if it's before or after EBITDA ( Earnings before interest, taxes, depreciation and depreciation). I suggest you sit down with a qualified accountant to determine fair valuation.

 

 
 
post edited by jman - 2013/12/18 07:03:46
talon44
Junior Burger
Re:Valuation of a hot dog cart business 2013/12/17 17:16:55
Jman is correct, I mis-stated.. I meant multipler of NET PROFIT, not NET SALES..  Still, my question is the same -- the owner showed me what he had for records. It was rather simple but then again, the business he has is very small and simple. Its a small cart, a foldup picnic table, couple ice chests.  He's averaging about 1600/mo based on 2 nights a week of operation(midnight to 230am) in front of a busy nightclub.  the value of this business, to me, is the rights to the location, which are transferrable and exclusive.
assuming we can agree on what his net profit per month is, what is the consensus among all you pro's as to what multiple of that net profit would be a reasonable price to pay?  4x? 5x? 6x?  more?  
JayL
Cheeseburger
Re:Valuation of a hot dog cart business 2013/12/17 20:59:03
He needs to show you his tax return.  If he wants to sell, and is on the up&up, he'll be willing to do that.  If he won't show you his taxes, then he's lying to you.
 
Use your own judgement but if you can make more in the stock market (mutual funds average 12%) without lifting a finger, don't spend the money.  I'd think that if you can make 15%+ per year from your initial investment, then you should make a go of it.  I'd prefer to see a 20% return, but that's me.
 
Right now I think he's a bit high at 9x his $1600/month average. 
Foodbme
Porterhouse
Re:Valuation of a hot dog cart business 2013/12/18 00:24:21