When it comes to selling a restaurant, many business owners will turn to a commercial real estate agent and advertise publically or try to sell on their own. However, this is not the best strategy to attract qualified buyers, and it could harm the business in the process. Although location is one of the primary elements that attracts buyers to a restaurant, it does not mean that a real estate agent is best equipped to handle the transaction. Businesses can take a long time to sell, so it is important to have patience and focus on doing it right. Trying to rush the process by openly advertising your business for sale, as opposed to doing so confidentially can negatively affect its value and force you to settle for less. This is one of several reasons for hiring a business broker to list your restaurant for sale. In addition to hiring a broker, there are several other steps you can take to prepare your restaurant to be sold as well as items buyers will be looking at when considering purchasing your business.
Knowing what buyers are looking for is one of the keys to successfully preparing a restaurant for sale. Perhaps the most obvious selling point is the location. While there are several aspects of location that may appeal to the buyer, you must highlight the strengths to attract more buyers. This may include the visibility of the business and accessibility, including how easy it is to access or park. It could also be its proximity to high traffic generators, such as tourist attractions, colleges, sports venues or shopping centers. Restaurants with these features will likely have heavy traffic and according to buyers have an easier time generating revenue.
Other aspects of the location can also be perceived as keys to future success and growth for prospective buyers. This includes the surrounding market and demographics. A market that has a combination of commercial and residential built out can broaden appeal because there will be a smaller likelihood of new competition moving into the area. However, if your restaurant is not in a built out market, you could bring the buyer’s focus towards the opportunity for expansion and the growth of the area, which could benefit future business. As far as demographics go, a stable base of long-term, educated nearby residents, diversified clientele or a strong commercial presence could also be attractive to buyers.
Uniqueness & Scarcity
How does your restaurant stand out from others? Someone looking to get into the restaurant business, or acquire yours will be looking for a competitive advantage, which not only attracts buyers, but may get them to pay more. Maybe the restaurant has a special view, or a theme, or a type of cuisine that is not readily available in the area. Similarly, aspects of the business that are scarce will also bring in more buyers and boost the business’s value. For example, a liquor license can be difficult and expensive to get, so it increases the value of a restaurant and can attract a buyer who may not want to go through the process of obtaining one. Zoning laws or local building codes can also change over time, and an older business that has an appealing feature that isn’t allowed in newer buildings or codes could be more attractive as well. Plan on highlighting these features of your business to help it stand out from the competition.
Determining the Value
The first step of selling any kind of business is finding how much it is worth. Location, uniqueness and scarcity all help contribute to the value of a business, but so do many other factors. Getting a professional like a business broker to perform a business valuation will help take all of these factors into consideration, including those unique to the restaurant industry.
Determining the value of a restaurant can be based upon different approaches. One of these approaches is the Assets in Place method, also known as an asset sale. With this method, the business is usually not profitable, or barely making money and the buyer is mainly interested in the equipment, improvements or any licenses attached to the business. They will typically have their own menu and concept in mind. This method is also used if the buyer doesn’t wish to disclose their financial information. In an asset sale the restaurant is usually sold for a percentage of its total sales, which can be anywhere between 15% and 35%, depending on the amount of the total sales.
Another approach, known as the going concern method, is used when the business is showing profit, and values the restaurant based on yearly adjusted cash flow. This considers the net profit, with several items added back in, including the owner’s salary, payroll taxes, personal expenses being charged to the business, depreciation and any loan interest, as well as several other non-recurring expenses. The adjusted cash flow is then multiplied by the price multiplier, which is typically between 1 and 3. The multiplier is determined by things like risk factor, growth opportunities, upside and lease value. In this situation, the buyer plans on running the restaurant, just as the seller did, so all parts of the restaurant, including assets, the name, menu and concept are included in the sale and are used in determining the value of the business.
The sale price of a restaurant can also depend on outside factors that you have no control over. This includes supply and demand, as well as the condition of the market. The number of restaurants for sale and the price of similar establishments could certainly influence your asking price. Taking a look at similar businesses that are already on the market can help give you a ballpark idea of your potential price.
If your restaurant is profitable, you’ll need the financial data to back it up. Keeping detailed financial records of any business can boost its value and attract more quality buyers. It is always best practice to be diligent about tracking money going in and out of the business from the very beginning. It not only helps if you decide to sell, but knowing where every dollar will help you save money and operate your business with financial efficiency. Using a 3rd party bookkeeper or CPA is usually preferable from the buyer’s perspective, because it gives them an unbiased look at financials. To sell a restaurant, a seller should expect to share profit and loss statements, a list of inventory and other assets, any existing debt, food waste costs and records of cash sales. Having these records handy makes it easy to pull them quickly, and with little stress when a prospective buyer requests them.
If you lease the space your business operates in, the existing lease will be something potential buyers factor into their decision to purchase. The terms of the lease could also affect the asking price of the restaurant. Before beginning the sale process, review the terms of your lease and discuss the possible sale with your landlord to avoid potential obstacles. Knowing where you stand form the beginning is better than having a deal fall apart because of an issue with the lease. A buyer looking to run the business as-is will probably want to stick with the current lease, but the landlord may want to approve the new tenant first. Iron these issues out in the beginning so you do not encounter any surprises down the road. In addition to the space being leased, take the time to look into the status of any equipment that you might be leasing as well.
With the countless steps and pieces of information required to accurately valuate a restaurant and sell it successfully, it may be in the seller’s best interest to hire a business broker. While business brokers do get a percentage of the sale, their knowledge and experience with preparing businesses for sale and closing transactions is extremely valuable. They also know how to find value in many different aspects of your company, helping you increase the chances of getting a higher sale price. Brokers have access to a network of buyers looking for restaurants to purchase. They make sure buyers are qualified before they share sensitive information about a business with them, and they know how to keep the sale of a business from becoming public knowledge. A broker can take you through every step of the business sale process, including negotiation, so you can continue to run your restaurant.
With over 30 years of experience structuring business deals across a wide range of industries, Corporate Investment Business Brokers has the knowledge and expertise to sell Southwest Florida restaurants profitably. If you are considering selling a restaurant you own, you can start the process with a free, no-obligation business valuation. This will at least help you know where you stand, and decide if listing with a broker like CIBB is right for you.