Subway shop valuation

submarine sandwich, sub, subway-702802.jpg

How would I know if its worh it??
Posted by: Marty Jul 20 2004, 07:54 PM
I have a couple of questions about this subway I am seriously looking into buying it, it’s in a good location, it grossed 520,000.00 last year and their asking for $400,000.00 (I think I can get it for 375) $100,00.00 net profit.
My first question, is it worth 400? I did a research online and only gotten more confusing!
My second question is how hard it to get a loan? I have great credit and $80,000.00 for a down payment witch is 20%.
how long is the loan term, is there 10 or 20 years or only 5?

Thank you so much in advance.
Posted by: loanuniverse Jul 21 2004, 08:59 AM

I am not a business valuation person. In fact, I have never had to appraise the value of a business in my line of work. However, I can give you some feedback on the information that you provided.

”…. it grossed 520,000.00 last year…. Revenue is only good if you can make money from it.

”…. $100,00.00 net profit.…. Hmmm, how do you know this? Are the sellers providing financial statements and tax returns? You really need to see at least three years if not more to find out the performance of the business. I seriously doubt that this Subway can produce $0.19 in net profit from every dollar in sales.. You really need to go over the numbers and most likely get help from a professional to do a “discounted cash flow” of the business. It does sound like an expensive proposition, but it is best to spend a couple of thousand up-front instead of regretting it afterward.

You will also need to take a look at other aspects of the transaction such as the lease, or any requirement that Subway might put on its franchisees.

Also, net profit is a nice number, but I am more interested in cash flow. Look around the site for a traditional cash flow article I prepared a while back.

”…. how hard it to get a loan?.…. If the Subway has a real estate component, it should not be too difficult to find a loan for the real estate. A loan for the restaurant business is another matter. {Granted this is a well known franchise, but it will still be difficult to get}.

Frankly, you are looking at a short amortization here. Somewhere in the neighboorhod of 5 years give or take a couple would be my guess. Then again this is just me guessing based on the few deals we have done that involve a purchase of a business or a leveraged buyout of management or a partner. I just don’t see many mainstream lenders interested in a restaurant loan.

Good luck
Posted by: Marty Jul 21 2004, 03:04 PM
Thanks a lot for the response.
I saw the tax returns and it showed a 100+ in net income, after paying all expenses.
Anyway, I went to the Subway head office in California to take a test and they told me that 400 is way too much and even if a bank would approve me Subway might not!
He also said if I did end up buying it, it would be the most expensive subway ever sold in the bay area!
I did a lot of research on the net and after reading and using all the formulas to come up with a price I kept coming out with 280-300.
So I decided to start my own.

Thank you for this wonderful website.
Posted by: marty Jul 21 2004, 03:19 PM
ohh and Here is even a bigger problem; this subway is up for a new “compulsory improvements” in 5 years that will cost 40-60 thousand dollars!
Posted by: loanuniverse Jul 21 2004, 06:10 PM
…So I decided to start my own…. Good deal!

You know for a while, I toyed with the idea of getting a Quiznos franchise for the area where I work at {the financial center of the city}. I figured that with dozens of financial service companies in the neighborhood, I would make a killing. I saw how busy the Subway was so the Quiznos and its toasted bread would have been a hit. It is now too late since they opened one about a year ago, and it is indeed very busy.

I think that you will find that the hardest boss you ever had is yourself wink.gif

Good luck!
Author: Commercial Loan Underwriter