Whenever you buy an existing store, the price should be based on a multiple of the store level profits, and in the SK brand that multiple is typically around 3.0 to 3.5. My $1.25M asking price is a bit higher, but I think it’s a very good price and here’s why…
1). I owned 3 SK Locations in Columbus, GA, all within a 2-mile radius. The store in the middle was cannibalizing the other 2 stores, so I bought the underlying property (to avoid the lease liability) and closed the Smoothie King. My plan is to release that property to a coffee franchise, but more importantly, we're going to push the SK customers to our two nearby locations. I predict that at least half those customers will visit our nearby locations, which means double digit growth for at least the next 12 months. Good operations combined with the closure of the middle SK, these 2 SKs should do $1.6M combined and spin off 25%.
2). A new in-line SK costs about $400,000 to open. A new drive-thru endcap costs about $500,000. A new stand-alone costs about $1.2M. In addition to high build-out costs, new stores have higher risks, and higher default rates (just ask your banker...loans for new construction default at a rate 30% higher than acquisition loans). I'm selling my 2 stores for less than it'd cost to build new.
3). My stores are turnkey. Dependable sales and cash flow. Well-managed, well-staffed, great leases. Although Columbus is a DMA not an MDA, there are no other SK’s in the market, and there won’t be in the foreseeable future. So, while the Atlanta market for SK has over 70 stores and is by some accounts “over-saturated”, my Columbus stores are somewhat protected.
To whomever buys these 2 stores, a higher multiple could make it a bit harder to get financing. Instead of 20% down, the bank might ask for 25%. Would I be willing to hold some of the paper (would I be willing to finance some of the purchase price)? Maybe $50K, but that’s about it. While that might help the down payment, a bigger benefit is that having the seller hold some paper helps ensure a smooth transition.
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