Important Points to Consider When Selling your Restaurant

HAVE you decided that it’s time to divest ownership of your restaurant? If you’ve ever bought or sold a business, you know it can be a rather cumbersome process. It all comes down to you and the buyer settling on the “fair market value” of your restaurant. However, fair market value is a relative term. There are some financial computations that are typically used in establishing a fair price for the sale of a restaurant. However, there are many other variables that also weigh heavily on establishing the final price. Here are some to consider when selling your establishment. The following should make the process of selling your restaurant smoother and, hopefully, more successful.

Before you get too far into the process, go over your reasons for selling. You don’t want to make a decision that you’ll regret later. You may be approaching retirement age, which is a good reason to sell. Or you may be burned out and ready to pursue something else as a primary vocation. If this is the case, you might want to take some time away from the restaurant first to make sure selling is the right move. There’s also the possibility that you’re just strapped for working capital and you’re seeking to sell to alleviate the problem. This can work out to the benefit of the buyer and the seller. Many buyers are looking to purchase businesses for a return on investment and are willing to keep the current owner in place.

If you do decide to sell your restaurant, don’t rush things. If you place yourself in a time bind, you’ll probably wind up settling for less. The time to ideally sell your business is when you’ve come off your best year and things are looking great for the current year. I’ve often said, to get the highest gains for your company, you must have worked the hardest to get your just reward.

Since you might have to finance some of the deal and you will probably have to stay on as a guarantor for a lease assignment, it is very important to find the “Right” buyer not just any buyer. You may be hesitant to use a business broker because of the fees these brokers command (between 09 percent and 10 percent of the total sale price), but you really need an intermediary to help put together a deal. A broker working on your behalf can help with the intricacies of negotiating a realistic and fair asking price. Working on your own, you might price your business too low and leave money on the table. Or you might price it too high and scare off any prospective buyers.

A word of caution is in order regarding business brokers. Focus more on the reputation of the broker than the fee level. You’re much better off employing the services of a reputable broker and paying 10 percent than you are in hiring an unknown who offers to sell your business for 8 percent.

Before you start showing the business to prospective buyers, step back and take a good look at your restaurant. The organization of a business will definitely affect the sale price. This is the time to be concerned about the cleanliness, the condition of the bathrooms, and the general organization.

Similarly, make sure your financial records are in good order. You need to be able to present detailed records of revenues and expenses, inventory purchases, equipment purchases and depreciation schedules, debt repayment, and accounts receivable and accounts payable.

Several variables must be factored into the sale price of a restaurant, but there are three basic approaches used:

  • Market value of assets: The business is sold based on the market value of the assets in the restaurant.
  • Earnings approach: The business is valued based on the cash flow potential.
  • A combination of the asset values and earnings approaches: The value is derived from asset values and cash flow.

The most important vehicle we use in our firm is a cash flow availability model. We recast the number to come up with the sellers discretionary earning.

While there are three basic approaches, there are many intricacies involved in the final valuation. The value of a business is much more than the financial numbers, it could be valued less or more than the financial picture represents based on many factors that pertain to the ongoing business.

There are many different ways to value a business but at the end of the day, a business is worth whatever someone is willing to pay for it.

If you’re looking to sell, establish a minimum price that you will take for your restaurant and don’t budge. It may take a while, but if you’ve received input from your accountant, banker, and intermediary in establishing a “rock bottom” price, you’ll eventually get is.

As we said, finding a qualified buyer is critical since you might have to finance a portion of the purchase price. You need to consider the buyer’s experience in the restaurant industry, experience in managing all or part of a business, and experience in managing other people-as well as his financial analytical skills. If you’re loaning the buyer money to buy your business, you’re betting on his ability to make it work! Don’t take this lightly.

When you receive an offer, it will most likely be in the form of purchase agreement rather than an L.O.I. In the purchase agreement, it should clearly state how this deal is to be structured. The agreement should say, how much cash the buyer is willing to put in and when, how much, if anything, the seller is being asked to carry and at what term and rate. It should lay out all the expectations of the buyer, in terms of a non-compete, training, certain assets of the business, liquor licenses, outside financing and anything else that might impede the sale of the restaurant.

Two other considerations are worthy of mention. First, if you’re selling the restaurant just before you retire, Thing about what you’re going to do after the sale. After the hectic pace of running a restaurant you might find yourself board after a month. Make a plan to keep active after the sale so that you don’t have any regrets later.

Second, be sure to consult your accountant and/or attorney regarding the tax implications of the sale. They might advise you to structure the deal a certain way to minimize your daily outlay, which could enhance your return.

Author: Christina Lazuric
C.B.I., C.B.B.

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