Question

After slaving for others, you finally decided to go to Rio and open a small bistro so you can enjoy the free time and partake in the festivities of the Carnaval do Brasil. You find an excellent location and the owner of an old bistro is willing to sell his store for $120,000. He gives you a nice cup of espresso and while talking he gives out the details of his operation: You put them in the right order as follows:

Cash $18,000 Bank loans $6,000

Receivables 6,000 Payables 12,000

Inventories 39,000 Accruals 3,000

Net fixed assets 42,000 Net worth 84,000

Total Liabilities

Total assets 105,000 Net worth 105,000

Annual pretax earnings (after rent, interest, and salaries) have averaged $24,000

For the preceding three years. The store has been in this location for a long time and has a six years remaining on a 10-year lease. The purchase price includes all assets except cash. The liabilities have to be assumed by you, the buyer.

1. Would you pay the asking price or is $120,000 a reasonable offer?

2. What other factors should you consider in arriving at the purchase price?

3. What is the significance of the lease, if any?

Answer 1