CASE STUDY: Dairy Queen

A business broker brought a Dairy Queen opportunity to me a few years ago. It was located in a small rural town in Indiana. It was the only ice cream/fast food restaurant in the town. No McDonald’s, no Wendy’s, no Burger King – nothing except a small sit down diner and a Subway shop. The owners of the DQ were relatives and they were….not agreeing over management and financial issues. The DQ was in a free standing building and owned by the business. It had been built by the current owners to DQ specifications just 12 years prior. It was still like new. The real estate was included in the transaction.

After receiving a number of offers, the sellers accepted my offer of $856,000. This is 4.3 times the annual cash flow of the business. If you were able to pay the total purchase price in cash, you would earn over 23% annual return on your investment. I can tell you, I did not have that much cash. The date of my offer was August, 2007. The transaction closed on December 28, 2007.

Here is how I financed the acquisition:

Loan $811,000
Cash 45,000
Purchase Price $856,000

I used a non-bank lender (CIT) for a term loan of $811,000 with an SBA loan guarantee.

The loan terms were:

  • Interest Rate of Prime + .25
  • 17 year amortization period
  • Equity: SBA required I have $150,000 available cash. $45,000 to give to seller and $105,000 to pay the closing costs and provide sufficient working capital to the business. My cousin went in with me on the deal. I believe we could have easily found additional partners if necessary however we were able to finance this acquisition with our own cash.

We have now owned the business 6 years. We have used all the after tax profits to reduce the debt and to up-grade the facility to now classify as a Grill & Chill. Our total debt is less than $600,000. We are told that our DQ is worth approximately $1.2 million. This means our $150,000 investment is now worth $600,000. This is a 26% annual return on our investment. Beats a 1% CD!

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