Assumptions, stated
Revenue growth 3% a year on a combined $1.0M base. COGS held at the observed 22%. Operating expenses at 66% of revenue. Depreciation $15,000, CapEx $10,000, working capital moving at 1% of the revenue increase. Tax at 21%.
CORPORATE FINANCE / SMALL BUSINESS VALUATION
Buying theSecond Store.
Valuing a $300,000 acquisition for a Brooklyn pizzeria — on its real operating financials, not a case study's.
Bay Ridge Pizza has traded on 5th Avenue since 1978. Its owner runs it as a sole proprietorship, still bakes the pizza himself, and keeps his accounts in QuickBooks for tax purposes.
Over a semester I interviewed him, normalised three years of his income statements, and built a five-year forecast to answer one question: should he buy a second location, and how should he pay for it?
See the two financing strategies01 / THE BUSINESSNormalised from the owner's accountant's reports
$850KYear 3 revenue
22%Cost of goods sold
$113KNet income after owner's salary
1978Year founded
01The adjustment that
The adjustment that
made the numbers usable.
The owner takes a $100,000 salary, which sits inside operating expenses, and then draws roughly $75,000 from profit for personal use. In a sole proprietorship those two flows look similar on a bank statement and are completely different in an income statement.
Separating them was the first real piece of work: the $113,000 net income is what the business earns after paying the owner to run it. Treat the draw as an expense and the business looks marginal; ignore the salary and it looks far more profitable than it is. The forecast only means anything once that line is drawn correctly.
02 / THE QUESTION
Should he buy it —
and with whose money?
A turnkey second location was available at $300,000. The owner had the cash. That made it two questions rather than one: is the acquisition worth doing at all, and if it is, does paying cash beat borrowing?
Most small operators answer the second question by instinct — debt feels risky, cash feels safe. The point of the model was to put a number on that instinct and see whether it survived.
The owner had the cash.
That is exactly why the
financing question mattered.
03 / THE MODELFive-year forecast · Years 4 – 8
From three years of history
to five years of cash flow.
01
→Forecast
Combined revenue
$1.00M → $1.13M
02
→Free cash flow
EBIT(1−t) + D&A
− CapEx − ΔNWC
03
→Cost of capital
CAPM → 9.1%
WACC → 7.25%
04
Valuation
NPV · IRR
Payback
Cost of equity from CAPM
Risk-free 4% on the 10-year Treasury, market return 10%, and a beta of 0.85 from Damodaran's restaurant industry table — giving a 9.1% cost of equity. Beta is the softest input here: a single neighbourhood pizzeria is not a diversified restaurant group.
Free cash flow, not net income
The valuation runs on unlevered free cash flow — $99,800 in Year 4 rising to $111,400 in Year 8 — so the operating performance is separated from the financing decision. That separation is what makes the two strategies comparable at all.
04 / THE DECISIONTwo financing structures, one project
Same store, same cash flows,
different cost of money.
Strategy 1 buys the location outright with $300,000 of the owner's equity. Strategy 2 puts in $100,000 and borrows $200,000 at 8%. The underlying business performs identically in both — the only thing that changes is what the capital costs.
9.10%Cost of capital
$107KProject NPV
$300,000 of the owner's own money. No debt service, no covenant risk, and no tax shield — every dollar of capital is charged at the full 9.1% cost of equity. Project IRR 22%, payback three years.
7.25%Cost of capital
$128KProject NPV
Interest is deductible, so the after-tax cost of the borrowed two-thirds is 6.32%, not 8%. That pulls the blended cost of capital down by nearly two points and adds roughly $21,000 of present value to the same project.
Both NPVs are computed on the identical unlevered free cash flows against the full $300,000 project cost, discounted at each structure's own WACC. That is the like-for-like comparison.
!The comparison that
The comparison that
looks better than it is.
My original model reported Strategy 2 at an NPV of $324,000 and an IRR of 68%, against $107,000 and 22% for Strategy 1. Read quickly, that says leverage tripled the value of the deal. It doesn't.
Those figures divide the same unlevered cash flows by a smaller number — the owner's $100,000 equity cheque rather than the $300,000 project. That produces a levered equity return, which answers a different question from an unlevered project return. It is higher because the owner commits a third of the capital and takes on fixed debt service; the risk moved, it didn't disappear.
Corrected to a like-for-like basis, leverage is worth about $21,000 of additional NPV — the present value of the interest tax shield. That is a real and sufficient reason to borrow. It is not a tripling.
05
The recommendation.
Proceed with the acquisition, financed $100,000 equity and $200,000 debt. The project clears its cost of capital under either structure, so the acquisition itself is defensible on the numbers. The financing choice is where the value is.
Borrowing also leaves roughly $200,000 of the owner's cash uncommitted — which for a business whose ovens are forty years old and whose stated ambition is to buy the building he rents, is worth more than the modelled tax shield.
05 / WHAT THE MODEL CANNOT SAY
The caveats are part
of the analysis.
01
Beta is borrowed, and it is the weakest input
The 0.85 comes from a published industry table for restaurants — companies that are diversified, professionally managed and publicly traded. A single owner-operated pizzeria in one neighbourhood carries concentration risk none of those firms do. A higher beta raises the cost of equity and shrinks both NPVs; the ranking between strategies survives, the magnitudes don't.
02
Three per cent growth is an assumption, not a forecast
Revenue growth of 3% a year sits close to inflation and is applied uniformly to a business that has just doubled its footprint. A new location has a ramp, a catchment that may not behave like the original, and no operating history. The model treats the second store as a copy of the first from day one, which is the most optimistic assumption in it.
03
No terminal value, and that is conservative
The valuation stops at Year 8 with no residual. A going-concern pizzeria plainly has value in Year 9. Excluding it understates both NPVs — a deliberate conservatism, but worth naming, because a reader comparing this to a model with a terminal value is not comparing like with like.
04
One firm, self-reported, unaudited
The financials come from an accountant's annual reports prepared for tax filing, not from audited statements, and the normalisation of salary against owner's draw rests on what the owner told me. This is a single small business analysed with its cooperation. It supports a recommendation to that owner. It does not support a general claim about pizzerias.
A defensible answer
to a real owner's
real question.
Acquire, and borrow two-thirds — worth roughly $21,000 in present value and $200,000 in retained flexibility.
The semester ran from a kitchen-side interview through statement normalisation and a five-year model to a team presentation of the recommendation. The most useful thing it taught me was not the mechanics of CAPM but how much of a valuation is assumption — and how easily a comparison can flatter itself when the denominator quietly changes.
WHAT I'D DO DIFFERENTLY
Run a proper sensitivity table across growth, beta and expense ratio rather than a single point estimate, so the reader sees where the deal stops working instead of taking one NPV on trust. Model the second location with a ramp rather than as a clone. And add a terminal value, since excluding it distorts a five-year window on a business that has traded since 1978.
Operating financials provided by the owner of Bay Ridge Pizza, 7704 5th Avenue, Brooklyn, and used with permission for coursework. Risk-free rate from the 10-year Treasury constant maturity series (Federal Reserve Bank of St. Louis); industry beta from Damodaran's published tables at NYU Stern; long-run market return from S&P Global. Framework from Ross, Westerfield & Jordan, Fundamentals of Corporate Finance (13th ed.). Coursework for MG-GY 6033, Financial Analysis for Tech Managers, NYU Tandon, Fall 2025 — individual deliverables by me, final presentation with Yash Nirwan, Arnava Dekhne and Rohit Shegokar. Figures describe one small business at one point in time and are not investment advice.