How to calculate a good business based on financial data provided?

I see a lot of properties and business on this website, but how can I calculate the best out of them. I understand cap rate is one, and NNN leases are there. What are the other costs that I am not aware of?
In Buying Property - Asked by Adeel A. - May 12, 2017
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Joel S.
Torrington, CT

It depends on what your goals are. Are you looking to buy a building, a business, or both? Cap rates are based off the 1 year projected net operating income (NOI) for the property, so to decide if a building is a good investment you need to look at your own goals and compare them to those offered by the investment. NOI does not account for needed capital improvements, non-annual costs, or your own cost of capital. If you require a 15% ROI for example, you would need to look at how much you plan to leverage, the building conditions, and terms of the lease.
In regards to looking at leases, NNN (or triple net) leases pass through operating costs from the investor to the tenants, but the details of this pass through are not standard so the details of the lease must be analyzed to get a better picture of what your costs would be. NNN leases are generally less risky for an investor and the income from the building is typically more steady (depending on vacancy obviously).
When looking at businesses you are dealing with a whole different animal. Businesses are valued based on a standard industry ROI, a multiple of discretionary earnings (this varies by industry and business size), or a percent of sales (this also varies by industry and business size). It also matters if you are looking at a main street or middle market business (there is a bit of an overlap between 2 and 5 mil, but generally over 5 mil is middle market and under 2 is main street) as the type of investor and what returns they are looking for changes. You should probably engage a business broker (such as myself) if you intend to buy or sell a business.
Your question about costs is not one that is easy to answer, every building and business is going to have different income and cost structures and because of this it is difficult to establish industry standards. Some of the main terms you might see is Cap rate (which already includes operating costs in the number) for a building, NNN (which eliminates most costs for an investor) for leases, and discretionary earnings (or EBITDA for larger businesses) for businesses (this also includes costs in the number already). Financing costs are always additional to any of these numbers as no 2 investors have the exact same financing needs.

May 15, 2017
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Juanita A.
Hallandale, FL

Cap rates and leases are not costs but rather informational references for expected income. If I understand your question correctly, what you are asking is what else to look for when analyzing/choosing an investment.
There may not be one clear answer but the most important question to ask is: Is this a good investment FOR ME? Are you knowledgeable in the type of business, area where it is located, type of building etc.? For example, a restaurant can have great numbers but if you are not familiar with the restaurant business, it may not be a good investment for you. If you are already clear on what type of investment you want, then you can look at the cap rate and the nature of the leases in place. Other financial data to look at for the building/investment itself is the actual costs it incurs (insurance, taxes, commissions paid, maintenance, assessments, etc). Beyond the building/business itself, look at extrinsic factors: the trade area, vacancy rate, rate of absorption, future projects/competition in the area, etc.
Also, it is important that you determine your required "cap rate" and see how comfortable you feel with taking over more risk in exchange for a higher rate of return. For example, are you comfortable investing in a secondary/tertiary market where there may be more risk, but where you would find better prices/returns (higher cap rates). I hope this was helpful and I understood your question.

May 16, 2017
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Kathleen K.
Sunol, CA

Dear Adell A,
I received your question and here is some information to help you make your decision.
Thank you for your inquiry.
Kathleen Kane
Company Ventures
Irvine, CA
What is the value of my business?
Similar to bond or real estate valuations, the value of a business can be expressed as the present value of expected future earnings. Use this calculator to determine the value of your business today based on discounted future cash flows with consideration to "excess compensation" paid to owners, level of risk, and possible adjustments for small size or lack of marketability.
Annual earnings before interest, taxes, depreciation, and amortization ($)

"Excess compensation" paid to owners (if any) ($)

Anticipated rate of earnings/compensation growth (0 if level) (%)

Number of years earnings are expected to continue
(maximum 10 which assumes perpetuity)

Level of business/industry/financial risk
(Typically restaurants and retail are lower risk than manufacturing and high tech)
Discount for lack of marketability (%)
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May 17, 2017
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