As a restaurant owner you invested countless hours and hefty chunk of cash in building and growing the business. Most likely, you had some good times there,... and some bad times - a lot of memories. But enough lyrics, this is not what I want to discuss with you. I want to talk about the very last step of your owner ship - exiting the business. Regardless how good or bad your restaurant is, sooner or later your ownership comes to the end, and it's up to you how it will end. You can exit it with flying colors and pockets full of cash... or shut the door and beg the landlord to break the lease without much penalty. Restaurants used to be a type of business that was passed from generation to generation. Although you can still find family owned restaurants, more and more restaurants are getting sold, rather than passed to the next generation.
What we'd like to do here, is to help you avoiding major mistakes that can negatively affect value of your business, or prevent from selling altogether.
How To Increase Restaurant Value And Chances Of Selling
Tidy Up. It seems to be a very simple and intuitive thing to do, but you'd be amazed how often it's overlooked. Like before selling a house you're putting a new coat of paint, do the same to your restaurant. Make step back and take a fresh look at what has to be done. First and foremost, everything has to be clean; from front door to the kitchen, to the utility closet. Remember, buyers will look everywhere and greasy, dusty corners create negative impression. Fresh coat of paint wouldn't hurt either. Consider touch-ups of dents in chairs, holes in the carpet, etc. Separate attention pay to cleanliness of the kitchen. Spend a thousand dollars and do deep steam cleaning of kitchen equipment, if it's greasy and dirty. These thousand dollars will be paid back many times over.
- Minimize Your Role. Remember, your restaurant will be bought without you being included in the package. The greater your involvement, the less value of your business. If you business can operate without the owner being present, it has the highest value. Alternatively, if you are the business, it practically has no value. If you're heavily involved in the operation, try to delegate your responsibilities to employees. Consider hire a manager, if necessary.
- Check Leases For Transferability. Unless you own everything, including the real estate, free and clear, the leases for the location and equipment should be transferred to the buyer. Review your leases to confirm that they are transferable. If they're not, contact the landlord and equipment leasing company to make changes to the lease agreement.
- Organize Business Documents.It doesn't matter what documentation you're using while running your business, however, full set of financial and business documents has to be prepared before the sale. Good documentation package will include the following:
- tax returns for the last three, profit and loss statements, balance sheets for the last three years
- bank statements for the last three years
- current leases for the real estate, equipment, vehicles, etc.
- all insurance policies
- licenses, permits, code requirements, etc.
- detailed list of furniture, fixtures and equipment
- agreements with vendors and customers
- Business Valuation. Don't expect to recover your investment into the restaurant. Restaurant value is just as great as profit that it generates for the owner. Business value should be calculated by a professional business broker. All rules of thumb for calculating the purchase price, like 1x annual revenue, or 2 times net income, are grossly inaccurate and may be misleading. Experienced business broker takes into consideration around 50 parameters to calculate the purchase price. In case you are signing up to list the restaurant with a broker, most likely, business valuation will be done free of charge.
- Expect To Carry A Note. Nowadays, carrying a note for a part of the purchase price became very common. Buyer wants to leverage available capital and to get security by keeping the seller on the hook. Depending on your circumstances, expect to carry 25% - 50% of the purchase price.
- Select Business Broker. Selecting a business broker is very important step, responsible for success of sale. We explained in details the process of selecting a business broker in the article "How To Select The Right Business Broker". Getting the right broker can make a difference between selling and not selling the restaurant.
- Selling Without Broker. If you decided to handle the business sale without a broker, get prepared to work with potential buyers on your own. You have to develop a system that will allow to preserve confidentiality of the transaction and eliminate unqualified buyers at early stages. Requesting all buyers to sign Non-Disclosure Agreement and complete Buyer Profile Form can help to accomplish it. Why confidentiality is important? Well... imagine that the potential buyer starts talking to your employees about working conditions at your restaurant. Let say that one of employees was denied a raise a couple of days ago. What kind of information he or she will share with the buyer? Probably not very favorable. What if your lease is up for renewal and the landlord finds out about you trying to sell the business? What if your vendors find out and start questioning existing credit terms?... I think, I made my case.
- Transferring Liquor License. If sale includes transferring a liquor license, it makes a lot of sense to check buyer's background before submitting transfer application to ABC. You may waste a lot of time, just to find out that the buyer isn't qualified and their application was denied. Consider running the background check while in due diligence.
- Talk To Key Employees. Although employees generally shouldn't be aware of the upcoming sale, discuss it with key employees: managers, all chefs and sous chefs. These are key people and they may not be willing to work under new management. Try to change their opinion and offer some kind of incentive for staying with the new owners.
- Tax Implications Of Restaurant Sale. Sale of a restaurant generates income to the owner, hence taxes are to be paid. Depending on transaction structure and allocation of the purchase price, the amount of paid taxes may vary substantially. Discuss it with both your business broker and your accountant.