Restaurant Tip of the Month
Tip #10: Preparing To Sell Your Restaurant
Can Your Business Be Sold
Many elements of a business make it attractive to buyers. For example, does it have a solid history of profitability, a large and loyal base of customers, a competitive advantage, opportunities for growth, a desirable location and a skilled work force.
Are You Ready To Sell
Make sure you are ready, both financially and emotionally. Think about what life will be like after the sale. What will you, not just for money but also with your time? Many business owners suffer real remorse after handing over their business to a new owner.
Here are a few indicators that it may be time to move on:
- It's not fun anymore. Burnout is a very real issue for business owners, and an entirely legitimate reason to sell.
- You're not inclined to invest in growth. You may be comfortable with the current size and profitability of your business and have no desire to make the capital expenditures necessary to take it to the next level.
- You feel your management skills are overmatched. It is not uncommon for business owners to build their business to a certain point and then realize they lack the skill set required to go further.
Many owners have no idea. Over the years, we have found that a restaurateur's three most popular methods of valuing a restaurant business are:
1. Gross sales (X) some overstated multiplier;
2. The business assets (real estate, furniture, equipment, liquor license, etc.) added to the business value obtained in step one above; and/or
3. The amount I need to retire!
Unfortunately, none of the above methods is the correct way to value a restaurant business. The value of a restaurant should be based upon;
- a multiple of "owner's cash flow" (OCF); or
- the value of the assets of liquidation, whichever is higher.
Steps For Valuation
1. Review your last three (3) years tax returns and formulate a Profit and Loss Statement for the past 12 months;
2. Determine earnings before interest, depreciation, taxes and amortization - (EBIDTA);
3. Add to EBITDA any personal expenses of ownership, such as health insurance, benefits, etc. to derive OCF, "owners cash flow;"
4. If the business owner owns the real estate, factor in an occupancy cost equal to between six and ten (6-10%) percent of gross sales and deduct it as rent from EBIDTA;
5. Assign a multiplier of between two and fixe. Two for high costs of good sales (i.e. fine dining, BYOB, etc.) and increase it up as high as four for higher profit sales (majority of sales are liquor, etc.);
6. The value of the business is the OCF times the assigned multiplier.
Check Your Valuation
To check your calculations, a simple question to ask is: "If someone bought my business and ran it exactly as I do, what can he/she expect to earn annually." Multiply that number by your assigned multiplier and it should conform.
Seek Professional Advice
On rare occasions, the restaurant use is not the highest and best use for a particular restaurant property. It could be that a building on a highway has a rental potential which would be more valuable if sold, than if operating the restaurant. The best way to determine value is to have an industry professional analyze your business, location and assets and determine its highest and best use and value.
Preparing Your Business For Sale
There is no way to overstate the intensity with which buyers will scrutinize your business. But here are things you can do to put your best foot forward.
First, get your books in order. Not being able to provide accurate financial statements in a timely manner can cause a deal to unravel in short order. Be sure to have the following on hand before you go to the market:
- Last three years' profit-and-loss statements;
- Last three years' balance sheets;
- Year-to-date profit-and-loss statement;
- Current balance sheet;
- Last three years' full tax returns;
- List of furniture, fixtures and equipment, and
- Commercial property appraisal or lease agreement
You will also want to spruce up your business to make it attractive to buyers. Make any needed cosmetic improvements to the premises.
- Is the premise clean?
- Are the chairs, tables and decor in good shape?
- Does the facility need paint (exterior/interior), new carpet/flooring, etc.?
- Is the kitchen spotless and free of clutter?
- Is all the equipment operational?
- Are the bathrooms spotless?
The last thing you want to happen after following all of the preparation steps above is to randomly announce the sale of your business to the public. When customers learn you are selling, they don't come back. When your help finds out, they look for new jobs. Maintaining the strictest confidentiality through the marketing and sales process is paramount to a successful sale. Once again, seek the services of an industry professional.
Bielat Santore & Company is an established commercial real estate firm. The company's expertise lies chiefly within the restaurant and hospitality industry, specializing in the valuation and confidential sale of restaurants and other food and beverage real estate and businesses. Since 1978, the principals of Bielat Santore & Company, Barry Bielat and Richard Santore, have sold more restaurants and similar type properties in New Jersey than any other real estate company. Furthermore, the firm has secured in excess of $500,000,000 in financing to facilitate these transactions.