Valuing a Business: Why Your Deli (Likely) Isn’t Worth $100 Million

In one of the stranger financial stories in a year of many, it was reported widely that a New Jersey deli, with one location and less than $100,000 in annual sales, was valued at over $100 million.

Right away, this story doesn’t pass the sniff test, but you have to dig a little deeper to figure out why this value could be justified to investors.

A common element of any business valuation is the amount of money that can be expected to be received in the sale of the business. For operating companies, this is most often determined using the income approach, by discounting the future cash flows of the business to their present-day value. In the case of the deli, it’s very unlikely that any buyer would value the future cash flows of a business with less than $100,000 in sales in the range of $100 million.

So what gives? Turns out the stock of the company is owned by a close-knit group of 60 investors, many of which appear to be based in foreign countries. It’s speculated that as the company is traded on the U.S. stock market, it would provide opportunity for a foreign company to enter the market through a merger and avoid the scrutiny and red tape involved with a normal offering.

Although this is a fringe case and the company has subsequently come under scrutiny for its business practices, it does show the potential for the type of nuance involved when determining the value of a company. As was the case with the deli, there are factors beyond the operating cash flows, such as entity structure or restrictions on the sale of the company’s stock, that determine the value to a potential buyer.