Advice for Buying a Restaurant and Selling a Restaurant

Selling a Restaurant for Full Value Isn't a Guessing Game

Posted by Ken Eisenband on Sep 18, 2013 4:41:00 PM

No Guessing Blog ArticleI worked for a national restaurant chain many years ago. I’ve recently noticed that I still own a couple of hundred shares of stock in this company.  The stock is currently selling at about 25 percent of what I purchased the shares for...  It’s not fair that I don’t get all of my money back.

Sound ridiculous doesn’t it? As a certified restaurant broker, I meet restaurant owners everyday who say the same thing to me in all seriousness, “I bought this restaurant 10 years ago for $200,000 and I will not take a penny less” or “It cost me $275,000 to get this place up and running last year and I deserve more than that from anyone who buys the place because I did all the work.” Sorry to be the bearer of bad new, but no one cares how much you spent to buy or open your restaurant. What matters is what it’s valued at today. Want to know what else doesn’t matter?  Purchase costs, build-out costs, future growth and previous sales don’t matter. The most important component to valuation is the owner’s benefit or how much money the owner made in the recent year. There are factors outside of profits that go into the valuation such as location, concept, and seasonality, but understand that profits are the driving force in the valuation of a restaurant.

Once an owner understands that the value of the restaurant is based on owner’s benefit, the certified restaurant broker’s job should become easier right? That is not necessarily the case. Here is an example of a comment I heard, “Sales are $800,000 per year and I take home$300,000 per year. I should be able to sell for $600,000.” Really? Do you have tax returns, profit and loss statements that back up your claim?  Remember, if you have not reported $100,000 of the $800,000 in sales and then show $200,000 in owner’s benefit your value is $400,000. Do not be upset about losing $200,000 in value because you saved $6,000 in state sales tax payments. Remember, if you get caught you could be fined and be subject to jail time.

Many of the owners who do not report all of their sales for tax payments pay some or the entire payroll “off the books.”  The most common reason to do this is to avoid paying payroll taxes and workman’s compensation insurance. Tell me, how great are your savings when one of your employees cuts themselves and has to go to the emergency room for stiches… with no insurance? Or better yet, when a former employee tries to claim unemployment wages based on the job you were paying “off the books.” The defense, “everybody does it” probably won’t work with the department of labor.

“Saving” money by not paying taxes or not buying insurance will lower the value of your restaurant when it is time to sell. It also can keep you awake at night always worrying about a possible audit or accident that could cost you so much money it will force you to close the business.

What can you do to get the full value for your restaurant (when it’s time to sell) and get a better night’s sleep while running your business? Have an accounting program, such as QuickBooks, in place. Every day, record your actual sales in this accounting program. Every check that is written for the business should be recorded in the accounting system. This program will be able to give you daily, weekly, monthly, quarterly, and yearly reports on sales, expenses, and profits with the push of a button. An added benefit is that you will control your costs on a daily basis, also adding value to the business. When you list and sell your restaurant you will have accurate numbers that will match completely with all of your tax filings. Many businesses have expenses that will go away when the owner sells. Examples would be salary and payroll taxes to owners, cell phones, health insurance, car payments, depreciation, amortization, interest on loans. You will still pay for these items through the business. Check with your accountant for ramifications. A certified restaurant broker will add back the payments that are entered in the accounting system and will adjust the owner’s benefits so that you receive maximum value for your business. You will not have to spend sleepless nights worried about slip and falls in the kitchen and payroll or IRS audits anymore.

Make no mistake about it, a restaurant with verifiable books will sell quicker and for more money than the same restaurant that has no books. An owner MUST have records to verify the owner’s claims of sales and profits.

Topics: Selling a Restaurant