The Restaurant Brokers at We Sell Restaurants work with hundreds of restaurant owners every year. The number one question we are asked is: “What is my business worth?” This is a math problem and easy enough to solve. What may be less obvious are the other items included in the transaction.
Our advice to anyone who is thinking about selling their Franchised or owner-operated restaurant is to make sure all your information is accurate and up-to-date.
We’re not just referring to the obvious…the dreaded Profit and Loss statement. Restaurants are primarily valued based on the sales and cash flow they generate. The better and more verifiable the numbers…the greater your ability to maximize the value of your restaurant. That’s only part of the equation however.
Many owners focus exclusively on financials and fail to make sure they are up to date and accurate when it goes beyond the numbers. Case in point: leases and equipment lists. Sometimes the line between assets – also known as the FF&E or Furniture, Fixtures, and Equipment and leases are blurred, especially if the landlord owns part of the equipment.
Here are a few stories from the Restaurant Broker’s files to give you real life examples of what happens once we bring a buyer to the table. This is AFTER we had a restaurant in contract and past due diligence.
Scenario 1: Seller Doesn’t Own the Assets
In scenario 1, a restaurant owner listed their business for $59,000. He was new to the business, had been open less than a year, but was starting to show some decent sales figures and turning a small profit.
An offer of $55,000 was received and agreed to. The transaction progressed through due diligence and then the lease assignment process began.
The landlord informed the restaurant broker that he owned all the equipment and was letting the current owner use it. Needless to say the seller should have never included assets he did not own as part of the sale. The Buyer and Seller had to renegotiate the transaction for half of the originally agreed to price. The seller only had goodwill to sell.
Scenario 2: Seller Doesn’t Have a Lease in Place
In scenario 2, a bar owner listed his business for $250,000. He had a great location at a below-market rent. The seller had informed the broker and buyer he had five years left on his lease which was correct, according to the lease document.
The value of the furniture, fixtures and equipment combined with the great location and lease rate generated an offer north of $200,000. But when the buyer’s restaurant broker started the lease assignment process, he was informed by the landlord that the seller had failed to exercise his option to renew so he was effectively on a month to month lease.
While the buyer was ready to overpay for assets, the landlord saw the opportunity to jack up the rates and the new rent would be 50% higher than what the buyer was expecting. What happened??? Needless to say, the deal went south in a hurry.
The take-away here is that when you want to sell your restaurant, get all your ducks in a row. Not just your P&L, which is still the most important part. Go through your lease so you know exactly how much time you have left on it and what the assignment criteria is. Confirm when your option must be exercised if you are anywhere near the end of your initial term. For most landlords, they require that you give written notice anywhere from 90 to 180 days PRIOR to the end of the first term. If you skip this step, your lease is not assignable and there are no rates for the option years.
Lastly, when you provide an asset list, make sure it is current and accurate. Don’t list items that are leased (like the dishwasher) or that you don’t own (like the Coke and Tea Machine) or items that are owned the landlord that you did not install.
When you get your restaurant under contract, the rubber meets the road. The last thing you want as a seller is for the buyer’s offer to be based on inaccurate information. These details will kill your deal and the opportunity to sell your restaurant.
Do you want a review of your lease or equipment list? Contact Certified Restaurant Broker Steve Weinbaum for his expert advice on selling a restaurant or check out our restaurant for sale listings online at the link below.