You are considering purchasing a restaurant. The current income statement (2016) is presented below. Anticipating a drop off of sales after the change in ownership, your forecast for 2017 is that sales will drop 5%, and then recover in 2018 by increasing 10%, and increasing 15% in 2019. The gross profit margin will remain constant throughout the 3 years. Labor expenses are expected to increase 1% in 2017, increase 4% in 2018, and increase 5% in 2019. SG&A will increase 2%, 6% and 6% in each of the years. Depreciation will increase 10% in 2017, reflecting the new basis for the assets, then increase by 5% each year thereafter reflecting the new capex. Interest expense will remain constant, and the tax rate will remain constant. You estimate 3 years of free cash flows, then estimate a terminal value by taking the third year FCF and using a multiplier of 3. NWC will increase by $25,000 in 2017 and 2018, and $30,000 in 2019. CapEx of $50,000 per year is expected.
Income Statement for 2016:
Revenues $3,000,000
COGS 1,350,000
Labor 400,000
SG&A 150,000
Depreciation 500,000
EBIT 600,000
Interest 100,000
EBT 500,000
Taxes 200,000
EAT 300,000
Forecast the pro forma income statement for 2017, 2018 and 2019.
Perform a complete margin analysis on the restaurant’s pro forma income statement, and comment briefly on any trends.
Calculate the free cash flows for the restaurant, assuming no assumption of the debt.
Calculate the value of the business, assuming a 12% required rate of return.