Background
You find yourself at a trendy "Cigar Bar" in Chicago, enjoying the ambiance with a friend. As you sip on cognac and savor a cigar, you ponder the value of this establishment. The bar was bustling with customers on that Saturday night. Your friend asks you how much you think this bar is worth.
Issues to Consider
Customer Volume: The bar saw increasing customer numbers during the evening, with an estimated maximum capacity of around 100 patrons.
Revenue Sources: The bar's primary revenue streams are from liquor and cigar sales, with average costs per cigar at $8 and per drink at $7.
Staffing: The bar had one bartender, a waiter, and waitresses present during the entire evening.
Location: Situated on a trendy street in Chicago with considerable foot traffic.
Operating Hours: Open from 5 pm to 2 am from Tuesday to Sunday.
Possible Solution
Determining the value of the Cigar Bar is a matter of estimating the cash flows it generates and then discounting these cash flows using an appropriate weighted average cost of capital (WACC).
Valuation Process
Revenues: Project revenues by estimating the number of customers per day or week, multiplying it by the average expenditure per customer. Account for variations in customer numbers on different days and seasons.
Costs: Consider both fixed costs (rent, maintenance, management, insurance, liquor license, and employee salaries) and variable costs (cost of goods sold).
Valuation: Subtract the costs from the revenues, and adjust for taxes. This provides annual cash flows generated from the bar. Assume an expected life for the bar, and select a discount rate representative of WACC for similar businesses with the same risk (e.g., 20%).
The value of the bar can be calculated as: Value = CF1/(1.2) + CF2/(1.2)^2 + ... + CFn/(1.2)^n.
Conclusion
By following this valuation approach, you can estimate the value of the Cigar Bar. This valuation is crucial for understanding the worth of the establishment and can be useful for potential buyers, sellers, or investors considering this business.
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