Buying or Selling?

Buying or Selling a Restaurant

If you’re considering buying or selling a restaurant, I can help.  I am a licensed broker with years of experience in restaurant transactions.  During my career, I have been intimately involved and brokered the buying and selling individual as well as multi-unit concepts. From establishing valuation, developing the purchase and sell agreement, due diligence, transferring of liquor license, through closing of escrow I stay involved.

If you have spent anytime at all looking to buy or sell a restaurant, you will realize there are more restaurants on the market than any other type of business.  There are two views as to whether or not this is a good or bad thing.  From an optimistic perspective, it can be said that there is a great market when it comes time to sell – especially now. On the other hand, knowing one should need to know the reason for all of these restaurateurs wanting to sell. Either perspective can be correct.  Whether you’re in the market to buy or sell, my expertise can assist you in achieving the maximum value for your dollar.

In assisting my clients in making the right decision when buying/selling a restaurant, my experience has proved the following points are key in any successful restaurant sales transaction:

The Location

Unless a restaurant has long established history, most often the location will play a significant role in its success.  What drives the traffic?  It can be driven by its proximity to office workers, movie theatre, malls, or just a general high traffic location.  Analyzing this site-specific information is crucial to making the right offer on a restaurant.

The Lease

Restaurant operations as well as all retail have entered into a time frame in the market in which landlords are being very difficult and cautious when it comes to assigning a lease to a new restaurant business buyer.   The assignment language in the lease is very important to the seller (can add value) or the buyer (determines whether a transaction is possible or not).

Most sophisticated landlords are flatly refusing to an assignment unless the buyer has prior experience in the field.  Or, they may require the former owner to remain on the lease for the duration or for an extended period of time (this is a very difficult task to get the current owner to sign off on).

With these potential challenges in mind, the first thing I do in working with a client is to address this portion of the lease with between the buyer and seller.  Any transaction contract of this type should include language (condition or contingency) that getting the lease assigned or a new lease that is satisfactory to the buyer.

Presentation by the potential buyer to the landlord is critical to making the transaction happen.  The more professional your presentation in your initial meeting with a landlord, the more likely you are off on the right foot in getting this landlord to accept you as the replacement tenant, allowing you close on the sales transaction with the current owner/operator.  The sooner you know that the landlord will assign or enter a new lease, the better off it will be for the buyer and seller.  Depending upon the language in this portion of the lease, the seller can have every say in what the landlord may or may not be willing to do to accommodate a buyer.

Valuating a Restaurant Business for Sale

There are two primary methods for valuing a restaurant.  Asset Based or Seller’s Cash Flow by a multiple formula.  I use the asset-based method for buying an unprofitable or closed restaurant.  This case is fairly simple if you have completed a thorough examination of the restaurant’s financials.  I prepare a reasonable valuation of the equipment and make an offer supported by the valuation.

For an ongoing location, a multiple of what the owner has benefited from the location (typically last full year) to include owner’s salary + perks + and net income plus depreciation and interest expense.  If the historical sales and profit have declined to a significant amount or “trending downward basis” over the past few years then typical multiple of 2.5 to 4 can be used.  In this case, it is important for the seller to represent his true sales and expenses.  Equally important for the buyer is to do his due diligence to be certain the seller has represented his financials completely and accurately.

Other things about the business I take into consideration are restaurant hours, days of operation and meal periods (breakfast, lunch, and dinner).  A restaurant open 5 days a week doing 100K in sales is worth more than restaurant doing the same sales open 7 days per week.

Dealing with Cash Sales Unreported Income

Recently, and especially in past 10 years, there has been a tremendous amount of unreported income in the restaurant industry – especially in the individual owned and operated restaurants.  The problem occurs when a seller expects to get paid for their “total” profit.  Often, they cannot prove the total profit.  My view is if the seller can’t prove it, they shouldn’t be paid for it.

Costs

Food, labor, and rent (occupancy) costs are the key considerations in a restaurant business.  I do the homework in reviewing and analyzing the profit loss statement and give the upmost consideration to these three cost items.  As a general rule, I look to verify the combined total for these expenses (prime costs) should not exceed 65 % (cost of goods 30-35%, labor 20-25%, and rent 6-10% of the total revenue).  Fast food to fine dining will vary as it relates to these “prime costs”.

Due Diligence

In my preparation for assisting my client in doing a comprehensive due diligence review of the restaurant operation, I would spend time with the client, seller, the seller’s accountant and bookkeeper to be certain all revenue and expenses are accounted for in the profit and loss statement.  Reviewing the physical characteristics of the facility and the furniture, fixtures, and equipment are key in the due diligence process.  Remember that this process is typically done over a very short period of time (generally 30 days).  Generally, it requires a form of outside help to thoroughly get through this process in prescribed time frame.

While the buyer has to get through this process expeditiously, it is equally important for the seller to have all the required information (lease, at least 3 years of verifiable financials, CPA’s tax information, etc.) prepared and ready to deliver to the buyer as the clock starts on the due diligence time frame.

Other Considerations

  • Make sure there are no unresolved health department compliance issues
  • Ask for full disclosure for any and all legal matters associated with the restaurant
  • Ask for the past 3 years of tax returns from the entity that owns the restaurant
  • Make sure all sales, income, and any taxes are paid in full