. 

. 	Star Bucks	Coffee Bean
Assets		
Cash	$10,000	$25,000
Accounts receivable	2,000	4,000
Coffee equipment	50,000	80,000
Supplies	11,000	18,000
Other assets	22,000	34,000
TOTAL ASSETS	$95,000	$161,000
		
Liabilities and Owners' Equity		
Accounts payable	$21,000	$38,000
Bank loans payable	49,000	68,000
Owner's equity	25,000	55,000
TOTAL LIABILITIES & OWNERS' EQUITY	$95,000	$161,000
		
Other data		
Personal withdrawls from cash during 2003	$40,000	$38,000
Owners' investments in business during 2003	$16,000	$32,000
Capital balances for each business on January 1, 2003	$30,000	$12,000

December 31, 2003, year end balance sheets

Im thinking of buying a business with a partner who decided to look at
two existing establishments, Star Bucks and Coffee Bean. The two are
for sale at the same price, and they are located in equally attractive
areas. I got enough financial data to compare the year-end condition
of the two companies, as shown above. What factors should I consider
before deciding which company to buy? What additional data might be
helpful What questions should I ask about the methods used to record
revenues and expenses ?On the basis of the data provided, which
company should i purchase?

sanfran49ers,

The most imprortant pieces of data for your decision are actually
completely missing from the picture. You need to know two things:
1) How much income and/or free cash flow does each business generate a year?
2) What is the dynamics of these figures year after year? Are the
sales increasing?  Does income growth outpace the sales growth or lag
behind? Oh, the most important one! - is there any profit to begin
with? What are the profit margins and how do they change year after
year?

The value of any business is determined by the amount of cash it's
going to generate for you over the years to come minus the amount of
long-term debt you're inheriting from the previous owner.

Now, lets imagine that both businesses are equally profitable and grow
at the same attractive rate. If this is true, you can judge them by
their balance sheets. First of all, Coffee Bean is obviously a larger
business. Hopefully, it's generating more income than Starbucks too.
Then the answer is clear. If not, this means that Coffee Bean is
underutilizing (or mismanaging) its capital. It might be something you
will be able to change (good news) or something inherent in the
business itself (bad news).
Second, you can run a few ratios and compare them between companies. 

                      SB     CB
Cash/TotalAssets ->  0.11   0.16 (The higher the better)
Equipment/A ->	     0.53   0.50 (These are productive assets)
Supplies/A ->	     0.12   0.11 (The less the better)
		
QuickRatio ->	     0.48   0.66 (The higher the better, ideally > 1 )
		
AccountsPayable/ -> 10.50   9.50 (Could be good news - see below)
AccountsReceivable

Debt/Equity ->	     1.96   1.24 (The lower the better, ideally < 1 )
		
Leverage ->	     3.80   2.93 (Depends on what return these assets earn)
(Assets/Equity)

* The very first thing I would look at is Debt/Equity ratio. It should
be as low as possible. Coffee Bean clearly looks a bit less stretched
by debt.
* Leverage can be a good thing if you get good return on your assets
or can be a bad thing if you get deeper in debt without much benefit.
I can not call this one.
* Quick ratio is the ratio of current assets minus accounts receivable
to current liabilities. I estimated it by dividing cash by accounts
payable. Ideally, it's higher than 1 and the higher the better. Coffee
Bean looks a bit better again.
* Cash/Assets is a good measure of how much breathing space your
business is going to have, since it's cash that moves it. If you have
fancy machinery but can not pay your electric bill you're toast. If
you don't have fancy machinery but have tons of cash, you'll find your
way to profit. Coffee Bean seems a bit better.
* Equipment/TotalAssets just shows you how much of your assets are
actually productive. What I said about cash is true, but only as long
as you use it. If you sit on it it does not do you any good. Having
right equipment always helps. These companies seem to have about the
same ratio, Starbucks a bit higher. I can not definitively tell you
whether these figures are good or not because I don't know how much a
coffee place needs in productive assets. A software company would have
this ratio far lower than a steel mill, for example.
* I am assuming that "Supplies" means "Inventory". It's not bad to
have plenty of coffee around, the main thing is to make sure your
inventories do not increase at a pace higher than sales growth. No
need to store more things than needed to make money.
* Last, but not the least, high AccountsPayable/AccountsReceivable
ratio could mean two opposite things. It could mean that the business
is not generating enough sales (bad news). Or it could mean that the
management is quicker at collecting debts than at paying them (very
good news for the cash flow). You need the sales figures from the
income statement and cash flow figures from the cash flow statement to
figure that out.

If these companies have similar profit margins and growth rates but
cost the same, Coffee Bean seems more attractive to me. However, I
would not come to any conclusion without carefully digesting both
income and cash flow statements. Besides, even if the businesses are
worth the same ammount of money and are selling for the same price,
that price still might be too high compared to the fair value. You
really need to see the free cashflow to determine that.

I hope this helps.

FlyingHippo

flyinghippo is very correct. What are the operating expenses? Month by
month for the last 12 months, and annually as far back as they will
give you. Compare those line by line, particularly payroll, which is
likely going to be your biggest expense.

thanks, this helps out alot...