Please help me analyze this boba tea franchise that I am considering to buy

[rongold]

ASKING PRICE: $358,800

• $5,000 in inventory
• $50,000 in equipment
• $28,800 franchise fee
• $250,000 in store renovations

Royalties:

• Revenues $24,999 or below: 0% royalty
• Revenues between $25,000 – $29,999: 2% royalty
• Revenues between $30,000 – $39,999: 4% royalty
• Revenues between $40,000 – $49,999: 6% royalty
• Revenues $50,000 and above: 8% royalty

Revenue: 500,000

Total Net Income: 200000 not including payroll and royalty.

This boba tea franchise is fairly small with only 3 stores so far.

Is this a good buy?

 

[tammyinga]

@rongold

Total Net Income: 200000 not including payroll and royalty.

Uh, that's not how "total" net income works... ask for a full set of financials, and ask for the bank statements and tax returns to corroborate them.

What is payroll? How much of payroll is the current owner? That should be important to you because it's not very attractive to just buy an expensive job that doesn't pay that well.

Restaurants generally have bad margins, and that's a LOT of money sunk into renovations and equipment. You could start a franchise NEW and probably spend less. When you are buying an existing business, it DOES NOT MATTER what the original owner put into renovations. Unless the real estate is being sold with the business, that should not factor into the asking price.

Small businesses generally sell for 2-3x SDE or Seller's Discretionary Earnings, which are essentially net profit with a few discretionary expenses added back. Given that a restaurant's payroll can be as high as a third of all expenses, and the royalty here is 6-8%, that means they are most likely barely breaking even.

If the business is only breaking even or earning a few thousand dollars per year of profit, then it's only worth a tiny fraction of the asking price.

Is this a good buy?

No way. I wouldn't pay a dime for the current owner's renovations, especially if the location is not owned. What happens if the lease isn't renewed? Also, even if the renovations were new, you could have possibly gotten by with a fraction of that cost. Renovations don't generate an ROI over time, they are just a sunk cost. All I would look at is the real net profit of the business... after ALL expenses. If the annual net profit x3 isn't anywhere NEAR the asking price of the business then it's not a good buy.

 

[rongold]

@tammyinga Super helpful advice. Thank you very much. I have a meeting with seller tomorrow, will make sure to go through all your questions.

 

[skylynne]

@rongold Labor costs are generally around 30%. What are they here? What was the turnover in the last 12 months? Training is expensive and attrition is often indicative of other issues. One year of P&L is sketch. What is the 3 year annual P&L? How much is left on the lease and do you have an option to renew? You need these answers and more.

 

[rongold]

@skylynne Labor costs should come around 150k. This store is in operation just for one year, so they don't have 3 year annual P&L. Thanks for all these questions.

 

[davidluxembourg]

@rongold Labor is $150k and the royalty is $40k.
Out of their 200k net?
So you make 10k a year to stress over these three locations?

No thank you.

 

[chris239]

@rongold What about rent? Utilities? Why are store renovations listed as an asset?

 

[11thseptember1683]

@rongold One year isn’t enough for proof of concept

 

[dpwell]

@rongold Worth taking a moment to consider why are they selling after just one year in operation? Chances are they are losing money and yet you're going in paying more than their startup costs were.

Also keep in mind most places get a big bump the first 3 months they open as it's a new spot and people want to go try it out but your second year will likely slump unless you're marketing is doing well and worth of mouth ramps up well.

 

[2iddoc]

@rongold Terrible price, for all the reasons already listed. Dont do this.

 

[wanttobefollower]

@2iddoc I agree

 

[khaellis]

@2iddoc Drink the tea... buy a real business.

 

[wanttobefollower]

@rongold The numbers don’t add up. I would not do this deal. Well maybe if the loan was non-recourse but overall no. I don’t ever trust when the numbers are round figures. Revenue at 500,000… What about the other years before that? Why would you do a franchise with only two locations pick a franchise with many locations. How long is the lease at the store? That is the question!

You’re going to need more liquid capital …where do you go for extra money. You’re going to need three times the amount of cash on hand you think you will need.

 

[darrendance]

@rongold This seems pretty overpriced. You can probably set up your own boba place for like $100k. Just did a Google search and the equipment was like $20k. Give it a nice, clean, minimalistic, modern look with lots of light fixtures making it bright and you're good to go. Just saved you 300k, you're welcome.

Really though, you could probably even buy a fully automated robot to make the boba for under $200k.

Edit: was reading more in depth on the boba robot website and apparently it's $50k to deploy and $500 to maintain per month.

 

[togetherinhim]

@rongold Where is 300k in revenue going?

 

[rongold]

@togetherinhim Cost of goods sold: 117k

Rent and Lease: 105k

Rest includes taxes and licenses, marketing, merchant fees, apps subscriptions etc.

 

[barneyo]

@rongold

$250,000 in store renovations

Does the building not have a roof? Why are you paying for his renovations?

Have you looked into franchises with more than 3 stores?

What's the payroll? Your labor costs will be a lot of your expenses.

Not a lawyer not legal/business advice.

 

[bigtop0]

@rongold Is Boba still trending? I feel it was played out like 3 years ago.

Have you camped out to check out the traffic?

 

[sierra1412]

@rongold That's a huge up front cost to also be paying royalties.

Run.

 

[balders]

@rongold Sounds terrible given this info