Our client was interested in acquiring a suburban restaurant. The vendor advised that the asking price was $250,000, and that the business had been in operation for about 2 years. It had been established by the vendor, who had installed equipment costing some $200,000. The vendor claimed that turnover was some $420,000 per annum, with a gross profit of $300,000 (70% +) and a net profit of $100,000 (24%).
Analysis of the vendors figures indicated that the net profit, after adjustment, was $36,500. On this basis, our accountants valuation of the business indicated a value of $166,000, considerably short of the asking price. We prepared a report to the buyer setting out these conclusions, and decided on a strategy.
We arranged a meeting with the vendor, in which we showed how our adjustments and calculations established a value of $166,000 for the business. The buyer was given a copy of our report, and went away to think about our findings.
Several days later, after consultation with our client, we made a written proposal to the vendor, in which our client offered $170,000 for the business. While this was slightly higher than our valuation, it provided an incentive for the vendor to accept. As well, our proposal structured the deal so that the majority of the purchase price was allocated to the equipment. This arrangement enabled our client to claim tax deductions based on the higher portion of the price that was attributed to the depreciable equipment.
As a result of the strategy proposed and undertaken by us to negotiate the purchase price, we achieved a reduction $80,000 (over 30%) on the asking price (with reduced exposure to stamp duty) and with increased tax claims for the client.