SELLING YOUR RESTAURANT: How to Find & Work With the Right Broker

Posted by on Mar 11, 2014 in "The Smoking Log" | Comments Off on SELLING YOUR RESTAURANT: How to Find & Work With the Right Broker

Ultimately, you make money in the restaurant business by building a great concept and selling the business to an operator who wants to step into a business with a history of success. Whether that is your end game for retirement or a steppingstone to your next big project, you need to think about that day….

Making the decision to sell your restaurant business can be a tough and emotional one — not unlike selling your home. You are in a better position to make a good deal, with a clear head and planning. You need to make your restaurant presentable and available for showings, get your finances together, and be active in the transaction.

 

While some restaurant owners choose to brave selling their restaurant on their own, many decide to go with an experienced restaurant broker to help guide them through the process, and the reasons for doing so are compelling.

 

The right broker will educate the restaurant owner on the process, the legal requirements involved, documentation to prepare, and about current market conditions. Selecting a broker is important and shouldn’t be about using a family friend, someone we know from church or someone who eats in the restaurant regularly.

 

The important decision should be all about someone who specializes in restaurants and retail. The restaurant industry is quite specialized and most owners learned that when they initially selected designers, contractors and marketing professionals. So, selecting a broker that has a history of selling restaurants is a must.

 

Finding the Right Broker for Your Business

 

A restaurant broker has the ability to price your business correctly and is able to use industry comparatives, market conditions and actual performance to price the business to sell. If a business is priced too low, the seller leaves money on the table. If it’s priced too aggressively, it will sit on the market too long.

 

A restaurant broker is properly trained and understands all of the regulatory issues related to liquor licenses, sales taxes, health and safety, building codes, the financial structure of the types of restaurants, and has deep knowledge of the restaurant industry.

 

Eric Gagnon, restaurant broker and

founder of We Sell Restaurants, says that a broker acts as a buffer between a buyer and a seller. “Reaching agreement on a price is often the easiest part of the deal,” he says. “The real effort comes from keeping the deal together while dozens of small deals are worked through so the closing can take place.”

 

He also says that an experienced restaurant broker has seen all the issues that can derail a

start quote… Make sure the broker walks you through the process in advance so that surprises are kept to a minimum….end quote
— Bob Christy, Director of national accounts, National Restaurant Brokers

transaction and knows how to keep it on track and push the sale to the finish line. A broker knows how to market the business confidentially, qualify buyers and package information on the business so it appeals to buyers, he says. A strong firm should have a ready audience of buyers waiting for new listings to appear on the market.

 

Emily Durham, owner of Houston-based Restaurant Connections, says choosing to sell your restaurant through a broker can be beneficial for many reasons. You are presumably working with someone who has good experience valuing your specific type of business, has a good network for marketing the business, including a list of potential buyers, and who is well-versed in the art of negotiation.

 

“Most sellers are busy working and don’t have the time to apply to all that’s involved in selling a business, that which brokers do full time,” she says. “Nor do they have the experience. Just based on the fact that brokers have more experience in doing these things you have to believe that would result in a faster sale with more qualified buyers for the highest possible price when compared with someone selling on their own.”

 

Chris Tripoli, owner of Houston-based A’La Carte Foodservice Consulting Group, says restaurant owners should talk with their banker, CPA and perhaps real estate broker to receive referrals of the business brokers they know. Meet for coffee, discuss their experience with restaurants, get references and take time to check with them.

 

Ask the restaurant references what they learned from the process, what they had to prepare, how long it took to find a purchaser, how long it took to complete the sale and how happy they were with the price they received, Tripoli says. Gagnon also suggests conducting extensive research before choosing a broker to sell your restaurant. “Begin by calling the broker,” he says. “See if he answers his phone or returns calls promptly. No matter how slick an online presence, the No. 1 reason to work with someone is that he’s available and working for you.”

 

Gagnon says that if the phone rolls to unreturned messages while you’re not even a client yet, imagine how he will respond to buyer inquiries. Interview your broker over the phone and in person. Visit their offices. (See “9 Questions” below.)

 

Preparing for the Sale

 

First, prepare your restaurant for sale by getting the financial records in order. Restaurant owners should have multiple years of profit-and-loss statements and tax returns ready for the restaurant broker to provide an accurate valuation. The broker will need a copy of your lease and franchise agreement if applicable.

 

“This is the most critical element of preparing your restaurant for sale because all the pricing is based on your financial records,” Gagnon says. “Without books or records, the restaurant value drastically decreases as you are only offering used equipment for sale.”

 

Indeed, Mel Jones, a restaurant broker and president and CEO of Arizona-based SellingRestaurants.com, says there is nothing more important throughout the process than preparing a restaurant for market.

 

“This doesn’t mean staging the restaurant, this means getting financials in order, getting those percentages in line with industry standards and getting those employees in shape and sharp,” he says. “A restaurant business with bad bookkeeping is like a bad date. It will never change the fact that

the business isn’t performing.”

 

The best time to prepare to sell a business is long before you need to sell, Tripoli says.

 

“If we operate our businesses as if

The pictures complimented have reordering package lotion.

we are going to market them, we would be better restaurant operators,” he says.

 

Proper preparation includes operating the business separately from personal items. Tripoli suggests using the standard restaurant accounting code and chart of accounts so that the cost of sales, labor expenses, direct operating costs, administrative expenses and occupancy costs are categorized separately.

 

This allows for easy comparison with industry standards and also is the best way to operate a restaurant because these categories break out important expenses in a way that allows owners to more easily find specific costs that may have increased and require attention.

 

Grouping expenses together might sound like easier bookkeeping but actually creates confusion, making it harder to solve operational issues as well as determine a true value.

 

Put corporate- and personal-related expenses under the

start quote… I have told clients before that although restaurants are a very personal business, memories are not marketable…end quote
— Chris Tripoli, Owner of Houston-based A’La Carte Foodservice Consulting Group

unit profit line. Although these are actual expenses, they may not be directly related to the restaurant unit being sold. Corporate overhead items like this might include travel, research and development, auto expenses, office rent and insurance.

 

Also, research the market because the value of the restaurant business being sold may vary depending upon more than sales, profits and number of

units. It may also depend on the area you are located, Tripoli says.

 

Just like when people get ready to sell their house and do repairs, Durham says that the same goes for the sale of a restaurant business.

 

“Get your financials in order because the more professionally run your business will appear, the more valuable your business may be,” she says. Secondly, make a list of the equipment that transfers in the sale and make sure that it is in good working order. If there are broken items on hand you don’t use, move them out, as a buyer will expect you to repair it if it’s part of the sale.

 

In addition, make sure the business is clean and continue to keep it in tip-top shape if you want the best possible pricing for it.

 

Pricing and Confidentiality

 

Pricing a restaurant for sale requires experience and knowledge of the market at the local, regional and national levels. Accurate value and pricing begins with an analysis of the profit-and-loss statement and calculations of add-backs.

 

An experienced broker determines the full owner benefit and then applies this information to solid listings, the market environment and other elements that could affect the valuation, such as geography, saturation of concepts, timing or whether it’s a franchise or nonfranchise business.

 

Jones says that valuing a restaurant is more of an art than a science. However, there is a science behind analyzing the financials and that’s an important part of a restaurant’s value and requires a skilled and experienced restaurant broker.

 

Jones points out that properly valuing a restaurant business is the most important step in selling or buying a restaurant.

 

“A poor valuation certainly leads to either a restaurant not selling or one where the seller takes a significant haircut on the price due to a bad valuation and bad marketing,” he says. “On the flip side, for a buyer it could lead to overpaying for a restaurant.”

 

SellingRestaurants.com, which Jones founded more than eight years ago, was approached by a sports bar owner whose restaurant was just appraised by a large national chain business brokerage at $250,000. The seller rightfully thought the restaurant was worth more and called Jones at SellingRestaurants to prepare a valuation analysis.

 

One of the agents spent time with the seller and performed a detailed and thorough analysis of the tax returns and income statements, and came up with a cash flow of $425,000. “We priced the business at over $900,000 and we are in escrow with this business at near asking price,” he says. “We like to think restaurant brokers don’t cost you money, we make you money.” Jones says this is a typical experience of how expertise in the industry can make a difference in the sale of a restaurant.

 

Indeed, Tripoli says that a restaurant broker will become a tremendous asset in helping determine the type of sale and price/value of the restaurant.

 

“He may suggest a business appraiser

be brought in to help determine the value,” he says. This is important because there are two types of sales: One sale involves selling the actual business, its trade name and proprietary information and the other sale is an asset sale, where the business value is in the lease, real estate and fixed assets.

 

“A professional that specializes in restaurants is a great help in determining which choice is most appropriate and creates the best value that is marketable,” Tripoli says.

 

Gagnon added that it’s extremely important for a restaurant for the sale to remain confidential. “Word leaking out that a business is for sale concerns sellers who fear this places key employees or customers at risk,” Gagnon says. “These fears are often not realized since it is rare that any real changes occur once ownership changes hands.”

 

A new owner often brings positive changes to the restaurant business and the customer experience. A strong restaurant broker always protects the confidentiality of his client and gets nondisclosure agreements signed and prequalifies buyers before releasing information.

 

Bob Christy, director of national accounts for National Restaurant Brokers, says his firm lives and dies by confidentiality.

 

“Our marketing process is built around it,” he says. “All prospective buyers are required to sign a confidentiality agreement prior to us even talking with them about it. We also enforce vigorously if someone breaches it.”

 

While confidentiality between buyer and seller is key, Christy recommends telling key employees that the restaurant is on the block. Some may need a bonus to stick around and see the sale through to the end.

 

“Good employees are going to want an assurance that they will have a job after ownership changes hands,” he says. “The key here is to avoid an exodus that causes sales to drop.”

 

The Listing Agreement, Review of Offers and the Deal

 

To sell your restaurant, your restaurant has to be available for showings before and after-hours. During the time the restaurant is on the market, keep the restaurant clean, open all hours and profitable.

 

Indeed, refrain from making any big changes in the restaurant, including changes in hours, menu or large expenditures while the restaurant is in contract.

 

Gagnon advises restaurant owners to operate as if they’re not selling their restaurant and to be sure and return phone calls, emails and messages from brokers as soon as possible, as buyers get cold by the hour. “Be sure and call your broker regularly to get buyer feedback on the restaurant and activity on the listing,” he says.

 

The restaurant broker needs the restaurant owners’ help to sell the restaurant to the best buyer. It’s extremely important that the owner provides updated financial information monthly, or as available, Gagnon says.

 

Restaurant owners should also attend the closing and collect your check in person. That way you can work with the buyer after the closing on training and transition. Be sure to turn over all keys, alarm codes, website access and social media passwords.

 

The amount of time it takes to sell a restaurant varies. On a national level, it ranges from six to nine months; however, some brokers have sold restaurants within days of signing a listing.

 

Each step in this process is important, but Gagnon says the first two are critical. Assembling the information up front will allow the broker to see all the earnings and ensure the most accurate pricing for the business. Hiring the right broker can mean the difference between a successful sale and a listing that drags on without a buyer.

Restaurant Startup &Growth


 

The Dirt On the Dirt

 

If you have the good fortune (in most cases) to own rather than lease your land and space, the valuation of your restaurant is going to be significantly influenced by the value of your real property. Commercial real estate valuation is distinct from business valuation in some pretty fundamental ways. There is a larger market for 2,000 square feet of store front than, let’s say, a Thai restaurant concept. Sales and lease information on the real property in which the restaurant is operating is much easier to find than business sales and income data on comparable local restaurants in that market.

 

In any event, if you own your business’s real property, you may want to know the value of your business as segregated from the real estate, as many operators sell their restaurant businesses, but retain ownership of the space and become landlords. Treat the value of the real estate and business separately. Many operators sell the business and retain ownership of the space, as an ongoing revenue stream. This is an ideal exit strategy for operators in many cases.

 


 

Can You Sell an Unprofitable Business ?

 

Restaurant valuation expert Craig Salvay, principal of QuikValSM based in Prairie Village, Kansas, says that whether the valuation is performed for the benefit of an institutional lender or a prospective buyer, “the number people really look at is sustainable free cash flow.” That is, your “net operating income adjusted for market real estate rent (where the operator owns the real estate), and reduced by both the cost of recurring capital expenditure (leasehold improvements, fixtures, furniture and equipment) and the cost of maintaining inventory, receivables and other current, noncash assets.

 

Buyers are not only interested in the current value of the business, but its long-term prospects, as well. A good percentage of prospective buyers of independent restaurants are focused on whether the business will provide a reasonable living and service the debt of the purchase for the next 20 years.

 

A P&L statement and balance sheet are merely snapshots of your business’s financial status at a certain point in time. Sophisticated buyers and investors are concerned with the future of the business for the long haul. And that’s why you need to consider the sustainability of your revenues in the valuation equation.

 

There are several key factors with which you need to be familiar in creating sustainable revenue. These include the physical condition of fixed assets, competition and location, all of which contribute to the perception of the value of the restaurant at present as well as its staying power.

 

Maintaining your physical assets in good condition influences your ability to serve guests efficiently, and maintains staff morale. When Cary, North Carolina, restaurant broker Neal DePersia contemplates brokering the sale of a business for a new client, his first order of business is to look at the size of the restaurant, its concept, menu, health scores and condition of equipment.

 

The consistency and effectiveness of the business’s marketing and customer service, among other things, will determine how well it has been able to fend off existing and new competition. Location is the most crucial aspect of sustainability, but is the one most difficult to change once you’ve picked a spot.

 

Bottom line: If the economy and/or financial setbacks have made your restaurant marginally profitable or not profitable at all, your restaurant might have qualities on which prospective buyers believe they can capitalize. You need to recognize and emphasize them.

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