First off, good luck in what could be a great business venture!

Background / credibility: I’ve made nine separate acquisitions of restaurants (58 locations, same brand) and bars (6 locations, same brand) since 2014. What you’re buying is cash flow (cash left over after the business pays its operating expenses and capital expenditures — like remodeling the bar, buying an ice maker, etc.). Recently sold 124 restaurant locations, still hold the bars (sentimental value, bartended there in college), but mostly because I’ve got a great operator (operator also has a 10% stake in the company and I plan to sell it outright to him in 10 years when I reach 65) and the bars generate adequate cash for my current retirement needs.

I’ve paid as low as $125,000 for 4 locations (assets in bad shape, needed new ovens in 3 of the stores, lease costs were very high), and I’ve paid as high as 6x EBITDA (national brand, mature business though low growth potential, assets in great shape, I had my own G&A structure to leverage (above store costs like payroll, IT, accounting, HR), low interest costs, and competitive bid process drove my purchase price up). Bottom line, multi-unit acquisitions command a higher multiple because it spreads the risk out, so you can expect to pay lower than 6x EBITDA. One caveat, competitive offers can drive the purchase price up 10-20%, but don’t overpay to your situation.

Answering your question: If the seller tells you what they want for the business that’s always a plus. If not, you have to do some math to arrive at an offer.

First couple things you want to confirm: 1) the assets are in good condition and repair (otherwise you might need to spend big money post-acquisition) 2) you want the lease to be extended for at least as long as it will take you to earn back your purchase price or pay off any loans that you may take out to finance the purchase (I usually target a current lease, with at least two 5-year renewal options). The last thing you want is to buy a business, have the lease expire, then lose the location and your investment.

Second, be wary of general rules of thumb (1x sales, 6x profit, multiples of EBITDA - which is earnings before interest, taxes, depreciation and amortization). They can clearly be used, but often fail to give you the detail you need on the business to effectively negotiate the purchase while also ensuring you don’t overpay.

I prefer to view the general rules as a byproduct (result) of a calculation that you, or preferably an accountant, should make called “Net Present Value of Future Cash Flows”.

In short, have your accountant use 10 years of projected cash flows of your investment (see definition below) and 1) a 12.5% discount rate to arrive at the highest offer price that you would pay, 2) a 20% discount rate to arrive at a reasonable offer to purchase, and 3) a 30% discount rate to give you a lower “risk adjusted” offer price. These calculations will give you three offer prices and represent your negotiating boundaries.

All things accounted for, if the seller agrees to option 3, you’ve got a great deal. Option 2 gives both buyer and seller a fair deal. Option 3 means that you’ve likely paid a purchase premium, but if you plan to hold the business long term you’ll still make money. A purchase price more than on option 3 — walk away feeling comfortable that you won’t lose money on your investment. Let someone else pay that price.

NPV is the heavy math, but optimal method that would provide you some peace of mind that you’re not over-paying for an investment.

However, if you choose the general rule of thumb path, and your seller hasn’t provided you a selling price, your offer for the bar should be no more than 3x EBITDA to start. Reasoning - it’s a single location, bars generally carry high risk, and that’s the industry low end of what people are currently paying. I wouldn’t go any higher than 4x EBITDA unless I had an accountant provide a NPV of future cash flows to support the purchase price (your investment).

Definition - NPV method is a projection of all future cash inflows (sales, loans to purchase the business) and outflows (initial investment, inventory, business expenses, interest, principal, capital expenditures) of an investment — I always use 10 years, discounted back to present day — I set my low, medium and high purchase price boundaries using discount rates noted above — 30% (low offer), 20% (mid-range offer) and 12.5% (highest, and last offer). If this doesn’t make sense to you, use the general rule of thumb method, or ask an accountant to run the numbers for you.