Business Valuation to Resolve a Conflict

The Problem with Wong and Ho - Valuing a Chinese Restaurant

We were recently asked to express a written opinion on the current and potential value of a Chinese restaurant in an English town. Mr Wong had sold it to Mr Ho, who was unhappy about its subsequent performance and felt misled. Mr Wong wanted to settle their argument, and as the landlord wanted a quick review to discuss with Mr Ho.

This is what we had at our disposal:

  1. A BUSINESS DASHBOARD® report completed by Mr Wong
  2. Phone discussions with Mr Wong about the business 
  3. An unaudited set of accounts for the first quarter of 2013 signed by Mr Ho
  4. A review of the website
  5. Exploration of the immediate vicinity via Google Maps
  6. Experience of other business sale transactions and business performance improvement actions

 

THE BATTLE

We started by pointing out that a business’ value is a battle between what the buyer is prepared to pay and what the owner is willing to accept; our opinions would be affected by the existence of a willing buyer and willing seller, and the amount of effort that goes into a sale preparation.

We perceived the following significant facts about this business:

  • Assets comprising equipment and stocks: c £14,000
  • Building sublease for 10 years with a 5 year rent review; rent/rates: £1644 per month
  • Trading losses of £1029 per month between February / May 2013
  • Employment costs for 5 people: £2541 per month 
  • Location close to town centre on the main A road in an area which is a restaurant destination
  • Low grade website

 

OUR OPINION

The Business Dashboard gave the restaurant a value of £8000; our opinion is that this is correct, and it’s what the business could be sold for if subject to a forced sale today. However, that’s just the value of the business at the time of valuation. We could see no reason why it couldn’t sell for much more with competent preparation and marketing (which means, at least, preparing a prospectus showing its potential in the hands of a good business manager and then approaching logical best value purchasers).

Assuming a sale of the business assets and lease only (ie liabilities written off) a figure of somewhere between its £14000 asset value and projected going-concern top level Dashboard value of £43000 was feasible. With the average of these two figures being £28,500, it would only require an annual profit of around £5000 to justify it to most purchasers.

A ‘TODAY VALUE’

The Dashboard’s job is to benchmark a business’ ‘today value’ against what it would be worth if performance of each of the five business pillars (marketingoperationsfinancesystemspeople) reached the upper 33%. How do you get from the original value of £8000 to £28,500? With improved management quality, investment in good business processes, and good negotiating skills.

Our automated BUSINESS DASHBOARD® Report was despatched, explaining this.

THE PHENOMENON OF SYNERGY

There is a phenomenon in business buying/selling known as ‘synergy’. A clever seller will spot a business’ added value and try to raise the price. However, the buyer will also notice the added value and downplay it in an attempt to keep the price down. The Business Buyers Module explains this and more in greater detail

We would normally advise that, before offering a business for sale, the owner should use low cost tools to work on developing the business’ potential – these tools are available online.

A QUICK FIX

However, it seemed that for Mr Ho time was of the essence, so we recommended he immediately reduce costs by £1500 per month and implement a ‘quick fix’ to switch to a less labour intensive business model such as takeaway, and subletting the seating area to another investor, both served from the same kitchen; introducing outside catering was another possibility. These actions could produce the profits needed to justify the sales figures suggested above.

DEVELOPING POTENTIAL

We would normally advise the owner of this type of business to work on developing its potential for some time before offering it for sale and to use the low cost tools on the market for doing that.

The Dashboard report spelt out the many options for action.

We hadn’t seen the operation first hand, so obviously we couldn’t guarantee that the sale would achieve any of the quoted figures, but based on experience, any professionally prepared and marketed business will always achieve far more than a business forced on the market, and/or it hasn’t been well managed.

THE RUNAGOOD APPROACH

So the Runagood approach to business valuation looks not just at what it’s worth today but also at its potential if well managed to proven industry standards.

THE PROBLEM BETWEEN MR WONG AND MR HO

And here was the problem between Mr Wong & Mr Ho: their argument was whether Mr. Ho’s investment in the business was justified. Was the restaurant going to be profitable if run as it was before the recession struck? Or did it need better management to survive today’s world of austerity?

The best possible outcome would be achieved by these two gentleman collaborating and following our advice, giving Mr. Ho the profitable restaurant he wants, and allowing him to pay Mr Wong’s rent; then they’ll both be happy.

GET YOUR OWN VALUATION

Sign in (or register) to get your valuation and generate an improvement plan for free, in a matter of minutes. If you’re having any trouble using the system or generating your plan please just pick up the phone (0845 070 5444) or send us an email, or if you prefer things face-to-face, come in for a coffee and chat.

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Duncan Collins
17.06.2014