So I was inspired by Ankit Duggal and RER’s “Deal of the Week” and decided to create my own version of that right here!

Target:  Legal Beans in Hoboken, NJ: Click here to view the LoopNet listing http://www.loopnet.com/Listing/17301837/86-Garden-Street-Hoboken-NJ/

Description: Restaurant in Hoboken, NJ that caters to the Breakfast, Lunch, Brunch and Take-Out crowds and, from my observation, appears to have good reputation and plenty of customers. 

Purchase Price: $850,000, which includes the real estate (1,200 square feet), all the equipment in the kitchen and the business’ name (at least the Loopnet ad suggests the buyer can keep the name).

Sales/Operating Profit? This one we don’t get, which is too bad. As investors we are faced with imperfect information all the time, so we can make some inferences, do some back-of-the-envelope math, and determine if we want to explore the opportunity further.

Back of the Envelope Math:
Industry Standard: Full-Service restaurants sell for 30% Annual Sales plus inventory. Our purchase price has the price of the real estate embedded into it though. The listing suggests the real estate is worth $799,000. Feels overpriced. Comp data points to the real estate being worth closer to $600,000 or $650,000

Cost of the Restaurant: $850,000 minus $650,000 = $200,000

Estimated Sales: $200,000/30% = $666,667 per year.

Estimating Operating Profits: $666,667 * 3.0% = $20,000 per year.  (Industry standard suggests operating margins are typically between 3.0% and 3.5%) 

Estimated Financing Costs: If we put down 30% ($255,000), which is standard in commercial loans, we would need to finance $595,000. Using an interest rate of 7%, our estimated mortgage payments would be about $4,000 per month. We still need to account for taxes and insurance though. I assume my operating margin above includes this expense, since that 3.0% margin assumes the cost of leasing the space.

Let’s also assume we can also finance our down payment via a SBA loan, but we need to put down 10% of THAT amount, which would be $255,000 * 10% = $25,500

Estimated Value of Real Estate: This is probably the hardest one to figure out, and you might want to call the guys are RER to help out with this step, but for this exercise, lets assume the value of the real estate grows at 15% per year.

So what is our ROI in 7 years?

Upfront cost: $25,500

Present Value of Annual Profits: $102,000 (assuming a discount rate of 10%)

Present Value of Real Estate (which we assume is worth $650K at period 1): $810,000

Return on Investment: 102,000 + 810,000 - 650,000 = 262,000 

Annualized ROI = (262,000 / 25,000) ^ (1/7 years) - 1 = 40%. Not bad.

Thoughts and Conclusions: There are many flaws in the above math. We have not factored in the likelihood we will need to invest in considerable capex within the 7 year horizon. We have also ignored the start-up costs associated with assuming the operation. Our data is highly suspect, and we have not included the cost to insure the business, property taxes, etc etc. Our discount rate is too conservative as well (and should reflect the opportunity cost of our capital as well as the risk of the venture). We have also highly OVERSIMPLIFIED the calculation of our real estate investment.

Ultimately, more information would be needed for a better analysis. Also, the ability to finance this investment with a commercial loan and a SBA loan is KEY to making this deal worth it. Without the financing, we walk.

Disclaimer: The above post is 100% MY opinion and should not be interpreted as investment advice. 

Never had I seen such concentrated attention. There was none of that piercing ‘soul penetrating gaze’ business. His eyes were mild and genial. His voice was low and kind. His gestures were few. But the attention he gave me, his appreciation of what I said, even when I said it badly, was extraordinary. You’ve no idea what it meant to be listened to like that.

I re-read “How to Win Friends and Influence People” — absolutely one my favorite books. I always seem to grab a new lesson that resonates deeply with me every time I pick up this book. Dale Carnegie, for those who don’t know, was an american writer and lecturer. His book “How to Win Friends and Influence People”, written in 1936, is still one of the most popular books specific to business communication in print. 

Listening skills are KEY to building relationships with anyone. Dale says we should encourage others to speak and we should listen to them intently and sincerely. Everyone wants to be heard and heard with enthusiasm! And according to Dale, there is no better way to be a GREAT conversationalist then to get the other person talking.

But how can you engage someone to point where they will start talking (and talking and talking)? Find out what matters to the other party. It could be their occupation, their love-life, their children — and once you find that hot topic, just sit back and listen.

The Economist featured an article earlier this week which described how manufacturing is slowly leaving China due to the increase in wages in the country. The article goes on to describe that costs have been increasingly steadily and while real estate prices, environmental and safety compliance, and taxes have all gone up, the biggest factor contributing to China’s “un-attractiveness” to global manufacturers is labor costs. Although, global firms can locate cheaper labor elsewhere, China’s economy is still booming because it can still deliver economies of scale and an advanced supply chain. So we haven’t seen a massive outflow just yet…

So what will be China’s next push? What must it do to continue growing at its impressive pace? — (btw, China’s government recently stated it will be aiming for GDP growth of 7.5%, which is the first time in 8 years this figure as been below 8.0%). If China can foster innovation and entrepreneurship, the opportunities would be endless!   

Some amazing internet start ups have come out of China including Tencent and Alibaba.  Tencent was founded in 1998 and created its foundation on instant messaging — it is the largest, most profitable Internet company in China, with about 400 million active users. Alibaba, a site focused on e-commerce, was founded in 1999 and innovated business-to-business trade in China.

It will be interesting to see how China evolves with time as more and more entrepreneurs flock to and are created in the country. Economic theory does suggest that as a economy grows, it will have diminishing returns on its capital as well as its labor (I’m speaking about the Solow Growth Model). I do believe China is quite a ways away from reaching its “steady state” of growth and will be fascinating to see how the country changes and adapts.

What does YOUR Facebook profile really saying about you? There are dozens of social science studies that have emerged in the last few years that want to dissect this very question! Facebook provides a protective veil from the world —- we are behind a computer screen as we communicate our personalities to the masses by way status updates, photos, article postings, etc etc.

The University of Maryland studied about 300 Facebook users and gave them a personality test and tested them on the five major personality traits: openness to experience, conscientiousness, extroversion, agreeableness and neuroticism. The extroverts had more Facebook friends and their networks were very diverse — meaning their friends were less likely to know each other. In contrast, neurotics tended to have more “dense” networks of friends who know one another and share similar interests.

Interestingly, people with long last names were also pegged as more “neurotic,” and the theory behind why is that they probably had a whole lifetime of their last name being misspelled and mispronounced. Neurotics also tended to use a lot of anxiety type words, like as “worried,” “fearful” and “nervous,” on Facebook posts. They also referenced indigestion frequently and (oddly) used words like “pizza” and “eat” very often!

There are equally as many studies that want to decode what a person’s Facebook photo says about them. There was a great article on the gawker.com that really broke this down. Here is a link to the full article, but below are few of my favorite excerpts: http://gawker.com/5669005/what-your-facebook-profile-photo-says-about-you

The Pet Show

How to Spot It: A photo of the subject’s pet, usually without the subject.
What It Says About You: It depends on what kind of animal it is. Cat: You are a woman without a boyfriend. Dog: You are a gay without a boyfriend or Michael Vick. Snake: You are a teenage boy or death metal devotee. Fish: You watch too much The Real World. Dolphin: You have a tramp stamp. Gerbil or Hamster: You are Richard Gere. Unicorn: You are awesome. Rabbit: Who has rabbits as pets? You are a freak!

The Wedding Photo

How to Spot It: Man, woman, dress, tux—you know, the usual. Even if it’s a gay wedding, you know a wedding picture when you see it.
What It Says About You: You want everyone to think that you are a grown-up. You have settled down to a life of calm normalcy and Family Guy reruns. You’re not playing the field and slutting it up anymore. No, you are married! Also, you are entirely defined by your relationship and don’t have any friends of your own anymore. You probably spent too much on the ceremony and your mother-in-law hates you.

The Up Close and Impersonal

How to Spot It: The subject is so close to the camera that you can only see part of her face or appearance.
What It Says About You: You want people to think that you don’t want to be recognized on Facebook, but you really do and you mask that in pseudo artiness. You had an imperfection when you were younger (lazy eye, acne, stutter, irredeemably bad haircut) and still haven’t gotten over being teased. Now you’re the kind of person who is alone at parties not because you’re shy, but because once people talk to you, they get annoyed.

In realty our world is embedded with options. Nearly every decision we make has an optionality attached to it. Before we get into that, lets talk about nuts and bolts of options:

Purchasing a Call Option gives you the option to buy a particular stock at a particular strike price. Buyers of call options are optimistic. They believe that the stock will appreciate in value above this strike.

Purchasing a Put Option gives you the right to sell a stock at a particular strike. Buyers of put options are pessimistic. They believe that the stock will decline in value below this strike.

You’re most likely using some form of options as part of your everyday life. Do you pay for home, auto or health insurance?  If you are, then you have purchased this insurance in order to protect yourself against some unforeseen expenses. This is an option.

Perhaps even more abstract — remember the last time you studied for a big exam? You probably weighed your options:

1) Study enormously hard to ace the exam. Stay home all weekend. Burn the candle and both ends and buckle down!

2) Study just enough to get a B or B+. Enjoy time with friends and family, go out, eat drink and be merry. Time commitment is much less than Option 1 and in terms of your investment (i.e. your time) the payoff in this scenario isn’t entirely unattractive in those terms.

3) Wing it! Very risky payoff (you could potentially fail) — but this could be the highest payoff yet since the ROI on the time you spent studying is infinite if you actually ace the exam in this scenario!

If think about the world in these terms, you will be amazed at how many decisions you make on a daily basis can be dissected with a simple payoff diagram! 

So what is a “synergy” exactly?

Its means, generally, that 1 + 1 = 3 —- two things working together are worth more together than they are apart. This is the foundation of M&A — if the concept of synergy did not exist then companies would have no incentive to merge or acquire one another.

There are 2 broad types of synergies: 1) Operational and 2) Financial. 

Operational Synergies allow firms to increase the return on their assets, their operating income and overall growth. Examples of Operational Synergies are:

• Economies of Scale that result from the merger (i.e. the ability to produce goods a lower marginal cost).
• Exploiting growth in faster/better ways. The merging of two companies can bring out cross-functional strengths which can lead to growth in new sectors OR faster growth in the firm’s current sector.
• The combined firm can further exploit its size by demanding better prices with their suppliers (better purchasing power). 

Financial Synergies allow firms to increase lower their cost of capital and increase their cash flows. Examples of Financial Synergies are:

• More Cash (assuming Target and/or Acquirer have excess cash). More cash can allow a firm to take on projects it probably couldn’t fund before.
• Debt Capacity can go up. Given that the combined firm is larger, and therefore less risky, it can likely borrow more as a combined entity than it could have separately.
• Tax benefits. Tax benefits can arise from a variety of sources, one being the tax benefit of increased debt. Further, if a profitable firm mergers with a firm with losses, the combined firm can take advantage of those Net Operating Losses (or NOLs).  

Most often times, a synergy can be valued and this is usually done by 1) Valuing the Target Company in isolation, 2) Valuing the Acquirer in isolation and 3) Valuing the combined firm.

Value of Synergy = Value of Combined - (Value of Target + Value of Acquirer)

Damodaran has a neat little spreadsheet that provides a very simplified synergy calculation. (Gotta love that Damodaran)

• Tags
• mergers and acquisitions
• valuation