I read through this post and Bridge and others have given you some good guidance on this. I'll chip in some questions and my opinion, which is similar to Bridge's feedback.
Their asking prices is unrealistic but before I give you my two cents on what would be a reasonable offer (price and terms) to make there are a few things:
In today's market I would not use a 2007 appraisal ... I think there is too much chance of a value variation based on when it was done (earlier in 2007 or later 2007) and where things stand right now for real estate in many areas of the US. So step 1 would be to get a new appraisal done or see if the appraiser will review the old appraisal and amend/update based on today's market.
Some Questions:
Who owns the real estate ... the business or the business owner (as an individual or through another entity)?
Is the real estate "free and clear" or does it have a mortgage on it?
If it is mortgaged, how much equity (based on a new appraisal) is there in the real estate?
I ask the above because there may be some ways to use the real estate in the deal in different ways to help you with cash and deal structure components of an offer to the seller.
What is the trend in their financials over the last 3 to 5 year period (revenues and net income going up, down or are they flat?
If there are big drops or increases ... find out why. You don't want to buy the business based on an aberrant high net income number that is not sustainable or repeatable.
How strong stable is the local economy?
Gourmet food, wine and catering - may be discretionary spending purchases that could drop if the economy affects your customers and they cut back spending. Again, you may buy the business based on its current situation/historical performance but what happens in the future is what pays for the business. Factor that thinking into your decision making process.
You have to look hard at their financials (income statement and balance sheets over at least the last 3 years) to get a decent feel for the business. I would also ask the business owner if they have any projections for the next year or two. In a business this size they probably do not but you need to ask. If they don't have them then you should run and re-cast the numbers your self or have someone help you do that so you can get a "forward look" at things as if you own the business for the next year or two.
Now to my opinion on offer price/terms:
Bottom line and in simplest fashion ... simple businesses are generally valued at a multiple of net income/earnings with an allowance/adjustment for asset values included in the deal.
A business this size is not going to command a high multiple. Perhaps 3x net income. That would put a value of $102,000 on the net income of $34,000. Add to that your real estate value (at current appraisal) would give you a reasonable offer price.
I also feel that you should never offer to totally cash an owner out (unless you are getting a deep discount in pricing for doing so); I believe you should see if they will carry back some of the financing. I would start by asking for them to carry back 75% of the offer price and ask for a 5 to 7 year term for any carry back on the balance of sale by the owner at current market rates.
Before you think "they'll never accept that" ... remember you are trying to negotiate a deal that is suitable for you. You don't know unless you ask or try and you need to have a starting point for discussions. The business has been on the market for 8 months ... the owners may feel that if they work with you to negotiate to where you each can accept the deal ... then it is better than waiting for another buyer. These terms and if the real estate can be leveraged/utilized by you as the buyer, could help you create the cash and terms to buy the business and minimize how much of the down-payment comes out of your pocket.
Of course the specifics of what you offer regarding the terms, amount, term and rate need to be looked at by you in advance to be sure that that business cash flow can support that debt. This is very important if you are looking at this from the standpoint where you do not have a lot of your own money to put into the deal and need to try and make this work based on the business itself, its assets and deal structure with the current owner.
I (and others that have relied to your post) obviously cannot know everything about the deal and give you comprehensive advice but the above (and posts from others) in general should give you some food for thought and things to consider. There are a lot of moving parts even to a transaction as small and straight forward as this one should be. As Bridge suggested, you might want to talk with an experienced business broker to help you work through the details to make sure that you make an informed decision and come up with the best offer/deal structures that is right for you.
Good luck with your efforts on this deal.
Dennis Lowery
Adducent, Inc.
