American Economic Indicators

Much like Atlanta, Knoxville seems to have suffered according to Tam:

Meanwhile, the TeeWee talking heads are cooing at the Dow passing 13,000 again. Investors, they say, are excited about yet another Greek bailout. Let me get this straight: Germany has taken out another cash advance on its maxed-out credit card and given it to its deadbeat cousin, Greece, who swears that this time they’ll use the money to get a haircut and a job, instead of wasting it on hookers and blow again, and investors take this as a good sign?

Every time I hear the words “Leading economic indicators are…” come out of a newscaster’s mouth these days, I expect them to be followed by “…from the planet Mars.”

To add to that, places that should be seeing some kind of uptick in revenue (people not eating steak, but shifting to cheap fast food) are not:

Get this: these deals are usually priced in multiples of EBITDA, that is, the earnings before interest, taxes, amortization and depreciation. For non-accountants like me, all that matters is that annual EBITDA  for this package at the time the sale contract was signed four months ago was roughly $900k, so a sale price of 3x EBITDA (a steal, BTW) would be $2.7 million.

So what happened while we were doing all the due diligence, licensing, and other legal crap to actually complete the sale? Well, in the last three months of 2011, yes food costs rose, but more importantly sales plummeted. I am not going to quote numbers because I can’t, but I can say the combination dropped annual EBITDA to roughly $500k. That means that sale price of $2.7 million was transformed to more than 5x EBITDA, taking this from a really good deal to being some of the most overpriced restaurants in the country.

That also means much more than just “oh one year was $400k worse than the other.” It means that just this past quarter alone was SO bad that it caused that kind of drop to the annual figure for this package of stores.

Something to ponder. Spooky indeed.

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