Eli,
I’m really glad you enjoyed the article. Definitely keep in touch if you need any advice moving forward.

Hi Nicole,
This is a great question. In my experience business brokers or business owners selling their business will set the price of goodwill as the difference between what their business appears to be worth on paper and the price they would actually like for the business. Now i know that sounds a little arbitrary, but this is my observation. I don’t subscribe to goodwill. If you’re buying a business you’re paying for all of the mechanisms that generate that income. If those mechanisms cannot be substantiated tangibly, they shouldn’t be paid for or at the very least it should be your prerogative as to weather or not you want to pay more for this. But given that it is intangible, what is the guarantee to you that you can continue to reap the rewards from this intangible element? So personally i don’t put a price on goodwill. My offer would always be based on the businesses ability to generate a return on investment and what that return actually is. My apologies for the long winded answer. I hope this helps.

Hi Ian,
The comments are seriously the best part of this article aren’t they? Some great questions.
thank you for the kind words. Keep in touch. Pete

Thanks very much for your thorough and extremely useful response. It is much appreciated.

Ali,
There are various other considerations here. Firstly you want to check their profit and loss statements and examine any other expenses the business may have that can lower or completely eliminate the 10% profit.
An example of this is a lease that is too high. This is common. If the business isn’t run correctly labour can easily erode the 10% profit as can miss managed stock purchases and pricing.
You shouldn’t include your wage as a return on investment. Because a true investment should be able to run without you in it. So the best case scenario in this business is that they are making a 10% profit which would leave $78,000 per year profit.
I would make an offer only after i could confirm this level of profits and once i knew how much was left on the lease. There is no point offering $250,000 if the business is making 78,000 per year and there is only 2 years left on the lease. Make sure you make an offer so that you can pay off your investment and then continue to make a return on your investment for the remainder of the lease. Never make an offer in the hope that you can extend the lease.
I hope this is clear and makes sense Ali. Pete 🙂

Thanks very much for your quick and complete response. Let’s to have some dollar figures if you don’t mind:
Assume that the taking is $15k pw (GST exclusive) for a coffee shop working 5 days a week totally 50 hours (That is what they say). It includes selling coffee and sandwiches. And let’s say that a net taking of 10% will remain which is 1500 pw. If both myself and my wife work there and have a pay of let’s say $20 per hour, we will earn another $2k pw. If this is the Scenario, we will earn something about $180k per year. Do you think investing $250k and earning such amount is a smart one?
Cheers,
Ali

Hi Ali,
I’m glad you’ve found this page useful,
Unfortunately i would say it is too good to be true.
Takings generally means ‘the money your customers give you for goods’ or ‘the money you put in the till’
from your takings you then need to pay staff, suppliers, rent etc. The average cafe, run relatively well can expect a profit of 10% of ‘net takings’ (takings less GST collected from customers) A good operator may be left with up to 20% of takings. Another word for takings is also turnover or revenue.
Remember to also ask if the takings someone is reporting when selling a business is inclusive of GST. Of late i’ve seen many business brokers presenting prospective buyers with profit and loss statements which have Gross takings (takings inclusive of GST) instead of net takings. This is a sly move because GST collected is payable to the government and isn’t our money. So always ask for confirmation that the takings are ‘net turnover’ figures.
I hope that’s not too confusing.
Banks currently are very cautious in their lending. It is highly unlikely that you will get a loan against a business in the current economic environment. The banks will most likely ask for a guarantee/guarantor in the form of real estate. So it’s highly unlikely you’ll secure any financing against equipment, certainly not against goodwill in hospitality.
Please keep in touch if i can assist further. Pete