Advice for Buying a Restaurant and Selling a Restaurant

As the Restaurant Brokers Predicted, 2018 Business Sales Climb to New Heights

Posted by Robin Gagnon on Apr 16, 2018 10:03:51 AM

The Restaurant Brokers have been bullish on restaurant sales since very early in 2017 and our predictions have been spot on with reports from the marketplace.  BizBuySell is confirming our findings, stating that the first quarter of 2018 brought "record-breaking sales prices and transactions"  for  business sales.

Orange Accent Photography Quote2018 Versus 2017 Results

Asking prices, count of restaurants on the market and selling prices all rose in the first quarter of 2018 versus 2017 acording to the latest tracking data released by BizBuySell.  In their report, "small businesses sold for the highest sale prices since they started tracking data in 2007."  That's a decade ago!  Selling prices were up 3.4 percent increase from last year at this same time.  Asking prices are up as well.  Their report says that the median asking price of sold businesses also hit a record high.  The number was $262,000, a 4.8 percent increase over 2017.

There were a total of 2,678 businesses sold in the first quarter of 2018. This represents a 13.1 percent increase from this time last year and the most businesses reported as sold in a quarter since BizBuySell began collecting this data. What about restaurant sales?  Restaurants represented 21% of all businesses sold.  From our internal data, as the largest restaurant brokerage firm nationwide, we can confirm that transactions, asking prices and selling prices are all up from last year.  Restaurant transactions were up 7.65 nationwide in the first quarter. 

Drivers of these Results

What's driving the change?  It's the Trump effect and specifically, the tax bill.  Small business owners are listing businesses they previously held back on because they know the tax consequences are less when it sells in 2018.  Simultaneously, small business confidence is at an all time high.  The tax bill has made a number of buyers and seller realize that their efforts will put more money in their pocket so small business ownership is looking good to them.  

The strong stock market has also contributed to the boom in restaurant sales.  Many buyers rely on 401K savings and fund acquisitions through rollover products.  Now that their savings have seen a 20% to 25% bump in the last year, they are feeling flush with cash and ready to invest in themselves. 

Will it Continue?  Only if the Tax Bill Remains Unchanged

What do the trends look like?  Here's the quarter by quarter graph released by BizBuySell showing the sale price versus asking price since 2014.  You'll see that the first quarter of 2018 has the highest point on the graph.  The restaurant brokers fully expect this trend to last for the year with one caveat.  Should the Democrats take back control of the House or Senate, putting them in a position to reverse the tax package, as they have pledged, expect these numbers to tumble significantly.  

2018 Q1 Small Business Sale Price vs Asking Price

For now, the tax package has not only spurred tremendous growth in sales, it is also paying for itself, a little discussed fact released by the Congressional Business Office or CBO last week.  Last June, the CBO said GDP growth for 2018 would be just 2%. Now it figures growth will be 3.3% — a significant upward revision. It also boosted its forecast for 2019 from a meager 1.5% to a respectable 2.4%. The CBO now expects GDP to be $6.1 trillion bigger by 2027 than it did before the tax cuts. The CBO report also makes clear that this faster-growing economy will offset most of the costs of the Trump tax cuts.   BizBuySell surveyed business owners and and nearly half of them (more than 48 percent) believe the tax changes benefit small businesses.  Less than a quarter (24 percent) found it harmful. 

Business Confidence Rules

The restaurant brokers aren't the only ones discussing business confidence.  The NFIB or National Federation of Independent Business group surveyed its members in February.  In their  Small Business Economic Trends Survey, they reveal that "small business owners are showing unprecedented confidence in the economy."  These results are spilling over to unemployment numbers which has fallen to 4.1 percent, the lowest since the dotcom boom back in 2000.  That is also affecting small business owners and of those surveyed by BizBuySell, 60 percent plan to hire more staff and 57 percent plan to raise compensation.  

 All of this economic growth is pushing those interested in small business ownership to seek opportunities like our restaurants for sale, especially since the businesses themselves are performing better. 

Cash Flow Trends

Restaurants for sale like the ones we represent are priced based on cash flow.  The businesses sold in the first quarter of the year reproted higher earnings.  That is the trigger for rising valuation and ultimately, higher selling prices.  The median cash flow of businesses sold in Q1 increased to $120,000, a 2.3 percent increase over the same time last year.  This is still a minor raise that would not dramatically affect pricing but we expect to see this trend continue up as well.  Businesses selling in 2018 are reflective of 2017 earnings.  As trends strengthen this year, this will be factored into the valuation of transactions later in the year.  

Are more sellers putting their businesses on the market?  Yes.  The report found an increase of 6.9 percent in businesses listed.  The restaurant brokers continue to believe the time has never been bettter for selling.  Between small business confidence, the number of buyers in the market and continued favorable lending trends, 2018 is the year to sell your restaurant.

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Topics: buying a restaurant, selling a restaurant

Why Restaurants Fail - a Restaurant Broker's Perspective

Posted by Robin Gagnon on Apr 12, 2018 9:38:51 AM

As a Restaurant Broker dealing with dozens of franchise resale opportunities every single day, I am often asked why restaurants fail.  Here are the candid and all too real answers about why restaurants fail. They can be summed up in three ways.  

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Reason Number One - "If you build it, they will come" is not a business model, it's a movie. 

Restaurants fail because grown men and women believe that "if you build it, they will come." That single line from the movie Field of Dreams is the number one reason we see those operating great franchise brands failing in the market.  The operator believes it's enough to open the door, put up the sign and sit back and wait for the business to happen.  

They refuse to acknowledge that the business world has expanded far beyond the four walls of the store and now requires the active pursuit of customers.  They do not want to take a hard look at their catering line and decide they have to invest to develop this all important way to add top line sales and ultimately, bottom line profit. They don’t want to acknowledge that people would rather stay home than dine out and fail to sign up for delivery services.  Lastly, they believe that investment in the brand name of the franchise is enough.

Restaurants fail because owners believe that a franchise brand is their lifeline and a guaranteed path to success.  It is not.  The brand is the starting point for developing the business. It's up to the business owner to grasp that fact and grow the business. 

Reason Number Two:  Restaurant Ownership Is a Hands-On Business 

The second reason why restaurants fail is that owners in countless other fields see the business model as one they can operate on an absentee basis.  In most cases, this is just not a viable option.  Many restaurant buyers contact me and insist they can operate while pulling down a full time job or from many miles away or even from out of state. 

A restaurant buyer last month made an offer on a business in Florida while he and his wife lived in Missouri.  He did not reveal, until very late in negotiations with the seller, that he intended to stay in Missouri for two more years.  He seemed incredulous that the franchise brand would not approve him to operate a brand from hundreds of miles away.  His plan was to give the current manager a minority stake in the business and let him keep running it. 

Is a minority stake for managers a good idea?  Absolutely.  This can lock in front line people to contribute their best and stay in place.  It is not, however, a guarantee that manager will not leave, not like the new owner, fall in love with someone moving out of state or continue to run the business well, knowing the owner is thousands of miles away. 

Most franchise brands require an ownership stake in the operations of the business.  They want to see a family member with equity in the business at the helm if you're not running it.  Otherwise, if you want to operate as an absentee owner, get ready to add your business to the list of restaurants that fail.

Reason Number Three:  Failure to Grasp the Basics -- It's the Numbers

The third reason restaurants fail, in this restaurant broker's opinion, is an underlying failure to understand the three key financial variables required to manage for success:  food cost, labor cost and occupancy cost.  These three items drive the lion's share of the monthly profit and loss statement.  Food costs and labor costs have to be closely managed on a day to day basis (refer back to Reason Number Two in why restaurants fail).  Now you see why absentee ownership is a bad idea. 

Food costs mean managing the portion size to exactly what is laid out in the brand requirements.  It also means control over ordering.  Your inventory ages and when it ages, it results in waste.  Control over food costs mean managing what goes out the front door and what ends up in the dumpster at the back door.  This and labor cost, are the single most important variables to control 

In today’s high tech world, failure to exercise control over labor is just inexcusable.  It is very easy to see in advance the number of meals that have to be prepared.  Any POS system is going to tell you what you did for a Tuesday at lunch last year, last week, last month and yesterday.  Absent any unforeseen event like weather, tourist influx or natural disaster, any owner should be able to plan the schedule and labor correctly to maximize results and minimize costs.  For that reason, failure to grasp this basic and control it within acceptable financial reasons contributes, along with food costs into why restaurants fail.

The last large variable in costs are the occupancy costs and this is the rent number.  Once that number is determined, it’s very difficult to change.  Getting the cost right up front and not inflating sales estimates are the only way to keep from getting into an occupancy cost over 10% which starts highly impacting profitability.  There is generally no way to renegotiate a lease mid-stream.  Landlords have you locked in with personal guarantee.  You will have to sell yourself out of this problem by getting the top line sales results up.

Overall, there are many reasons why restaurants fail.  In this restaurant broker’s experience, however, the three above are the main reasons we see otherwise successful opportunities take a turn for the worse.

Looking for franchise resale opportunitities  Visit us online at wesellrestaurants.com or follow the link below to view our listings.

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Topics: buying a restaurant, selling a restaurant

What’s the Best Way to Sell a Restaurant?

Posted by Robin Gagnon on Apr 5, 2018 7:35:13 AM

Wondering about the best way to sell a restaurant? Here are some of the common approaches along with the pros and cons.

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One common approach to selling your restaurant is to find a local commercial real estate agent. This seems like a good starting point. They know the local market. They are familiar (or should be) with lease rates and they are licensed and in good standing. These are all the positive points. Is this the best way to sell your restaurant?

Compare this information with these less favorable reasons to list with a local commercial real estate agent. First, a local commercial real estate agent does not have access to a ready database of buyers in the market to buy a business. He or she typically deals with those in the market to buy a cash flow property generating a return, but these are generally people that want to be landlords rather than operators. Secondly, an agent like this is often using marketing tech

niques tied to the location like Co-Star or LoopNet. They aren’t familiar with the national marketing sites, featured listings, costs and methods to draft and market a confidential transaction. Lastly, a commercial real estate agent has comps and models for doing valuation on real estate property but frequently lack the training and skills to do a valuation on a business. It’s simply not their core expertise. For all these reasons, using a commercial real estate agent is not the best way to sell a restaurant.

General Business Broker

In seeking the best way to sell a restaurant, talking to general business brokers is a great approach. They are familiar with valuation methods, are sometimes credentialed (i.e. have a C.B.I. or Certified Business Intermediary status). They represent customers in the market to buy a business and understand how to market businesses for sale which is very different from traditional real estate. All of these are positive reasons that using a generalized business broker may be the best way to sell a restaurant.

Unfortunately, the term “general business broker” is the first clue that they may not be the best way to sell a restaurant and here’s why. A general business broker sells everything from manufacturing plants to liquor stores; from day care centers to dry cleaners. Throw a restaurant in the mix and he or she will sell that as well. That’s where the break down occurs. The analysis of the financials is best understood by someone who has sold dozens of restaurants that year, not someone selling one in 100. The ability to interact with buyers and answer questions they have related to infrastructure (is there a grease trap? How long is the hood?), and others posed by buyers is much more difficult when they are trying to remember or learn multiple industries. That’s very different from the granular level someone specializing the field will understand it. Lastly, remember the old saying that a “jack of all trades is master of none?” That applies to this instance. Based on their very generic approach to selling businesses, a general business broker is not usually the best way to sell a restaurant.

For Sale by Owner

On option for selling your restaurant is the “for sale by owner” route. Is this the best way to sell a restaurant? This is for you to gauge independently based on your situation. There are definitely risks to selling on your own. One issue is dealing with the confidentiality of the business. Who and how do you tell the world you’re for sale while keeping your employees from learning? How do you price it? What about marketing? For sale by owner is a tricky proposition that could actually cost more than it saves. We recommend avoiding this course of action unless you have a ready buyer already identified. Even in that case, it’s a good idea to bring a broker in for representation and to cover the basics.

Specialized Restaurant Broker

In this writer’s opinion, a restaurant broker, specializing in the field exclusively is the best way to sell a restaurant. Why is this the best choice?

A Restaurant Broker is both focused and expert in the industry. They are valuation specialists and understand the cash flow and add backs of a restaurant situation. A Restaurant Broker is working with clients every single day who have one single interest and that is buying a restaurant. In the case of our firm, We Sell Restaurants, we have more than 70,000 people in our database all looking for a restaurant for sale. They don’t come to us for day cares or dry cleaners, they have one mission.

A specialized brokerage firm has the depth and breadth of knowledge that is unmatched by either a commercial broker or a general business broker. For these reasons, they are the best way to sell a restaurant if you’re seeking to sell for the most money in the shortest period of time.

Do you have questions about selling your restaurant? Visit us online or give us a call today.

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Topics: buying a restaurant

Three Rules for Buying a Restaurant Franchise Every Buyer Should Know

Posted by Robin Gagnon on Mar 29, 2018 7:26:16 AM

Every would-be restaurant franchise owner dreams of opening the next big franchise winner but the likelihood is low. Here the Restaurant Brokers advice for getting the best deal when buying a restaurant franchise.

What are the odds of building a successful restaurant from the ground up and lasting three years? According to a hospitality management professor who studied failure rates, it’s less than 40%. A professor at Ohio State University authored a study that found 57% of all newly opened franchises didn’t last beyond 36 months. That’s only slightly better than independent restaurants that experienced a failure rate of 61%.

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Does this mean you should avoid buying a restaurant franchise altogether? No. An open and operating unit for sale represents a great value if you know when to buy and how much to pay. This article lays out the pitfalls of buying a restaurant franchise. Our full series will teach you our three rules for buying a restaurant franchise every buyer should know.

The books and records of an established restaurant franchise for sale are the true picture of its earnings. If you want a business that’s beaten the odds of surviving the three year mark; look at buying a restaurant franchise that’s three years old with repeated years of earnings. If a brand gets your attention because you’re a raving fan, are convinced it’s the next big thing or the food gets high marks, by all means pursue your dream. If you want to pursue that dream while making the most money, the Restaurant Brokers will teach you our “Rule of Three” for buying a Restaurant Franchise.

Here’s the typical story of a new operator. The restaurants brokers have seen this exact scenario hundreds of times. A new owner learns of a concept and is instantly excited about the potential and ready to build from scratch. A new build out for the simplest sandwich concept can easily cost the new operator $350,000 or more. Add in full service, specialized equipment, or a large space and this can quickly top the million dollar mark – before you open the door and make the first dollar.

Eager to experience his success, our hypothetical entrepreneur is sure he’s on the way to making millions. A simple review of the math however shows he’s paying franchise fees of more than 8%, marketing fees of 2%, and rent of 10 - 12% all before he buys the food and serves his first chicken wing and beer at an average check price of $12.00. After that first tough year or so he calls a restaurant broker to ask how much his business is worth. He’s not happy to learn that with a money losing operation, the most he can expect is about 25% of what he’s invested or roughly $125,000. That’s if he has a good franchise concept and a strong site.

A smart restaurant buyer picks up the pieces of the franchise and becomes owner number two. He’s still losing money but he only paid around $100,000 so his cost to acquire is much lower and the debt service is either very low or zero because he paid cash.

Our new entrepreneur is in year two so his sales are beginning to catch up with his fixed costs. By working hard at the business and operating it himself, he can probably go from losing money to making money. By the way, both owners have paid the franchise many thousands of dollars in royalties and marketing fees this entire time even while they lost money.

Another year into the business, this smart buyer realizes he didn’t get such a great deal after all. He’s in the black but when he adds up the time in the business against his return, he’s making less than the federal minimum wage. He calls the restaurant brokers to list the business. Sales have developed to the point that all fixed costs are covered and he’s in the black. With add backs, he’s earning $35,000 or so a year. Priced at three times earnings, it goes on the market for $115,000 and he nets $99,000.

This is when buyer number three steps in and hits his stride on this offering. He gets the deal when he is buying the restaurant franchise. The business is now valued on earnings, not hype. The sales cycle has matured and all costs are covered. Buyer number three has a real opportunity in his hands. He owns a good franchise brand. Sales are still growing and he is operating in the black. Since he didn’t overpay, the cost of repayment is minimal and the business can easily service the debt. While the first two buyers are telling their friends why they would never buy a franchise restaurant, the new owner has never been happier. This business cycle of these restaurant owners demonstrate why you should follow the Restaurant Brokers Rules of Three in Buying Franchise Restaurants.

Rule #1 -- Restaurant buyers never want to be first or second to own. Number three’s the lucky winner.

Rule #2 -- Buy close to the start of year three for the best opportunity. Sales are still trending up and it’s making money. Best of all, there’s still opportunity.

Rule #3 -- Never, ever pay more than three times owner benefit (that’s the amount of earnings plus take home pay for a manager or owner). Hold to that rule no matter how great a pitch you get from the franchise or the owner. Opportunity is a lottery ticket but none of us like the odds.

To see the Restaurant Brokers complete list of franchise restaurants for sale, visit this link online. 

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Topics: buying a restaurant

Affordable Restaurant Franchises for Sale -- How do they rank? 

Posted by Robin Gagnon on Mar 26, 2018 9:30:36 AM

In the market for a restaurant franchise?  Curious about how much money it takes?   Here's a recap from a recent article in Entreprenuer Magazine on those that require either the smallest amount of capital to launch or the least amount of cash on hand.  The good news -- half of all baby boomers and 16% of Millenials have the nest egg needed to start today!

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The path to business ownership feels a little more secure when you buying a restaurant franchise for sale versus a start up concept.  But how much money do you really need?  You may be thinking, “I can’t afford to become a franchisee, it requires hundreds of thousands to millions of dollars up front to join the brand.” While this is true for franchising giants like Taco Bell who requires $1 million all the way up to $2.5 million to become a franchisee, it is not a reflection of all of the franchises for sale in the restaurant industry. Read on as the Restaurant Brokers break down some of the least expensive franchises for sale.

  • Jimmy John’s – Jimmy John’s is taking the sandwich and sub world by storm due to their delicious menu offerings and their signature “Freaky Fast Delivery Service”, and it’s no wonder their franchises for sale are a hot topic. However, if you think that their popularity means that these franchises for sale are unattainable, think again. The franchise fee is a low $35,000, and you’ll need to prove liquid assets of only $80,000. The magazine Entrepreneur named this franchise as one of the top five best franchises to own, which is no surprise: in 2016 the average Jimmy John’s owner took home nearly $122,000.
  • Ben and Jerry’s – $100,000 is the magic number when it comes to the amount of liquid assets Ben and Jerry’s franchises for sale require to get into the game. You can join this Vermont born brand of franchises for sale for a franchising fee of just $37,000. With fun flavors like Cherry Garcia, Phish Food, Chunky Monkey, who wouldn’t want to dip into this affordable brand of franchises for sale?
  • Cold Stone Creamery – The second brand of frozen decadent treats to make our top five list of most affordable franchises for sale is Cold Stone Creamery. This giant has more than 1,000 locations across the county, as well as locations in 30 other countries! You will need to produce proof of liquid assets in the amount of $100,000 to enter into these franchises for sale opportunities, and come up with the low $27,000 franchise fee.
  • Little Caesars – For over 60 years, Little Caesars franchises for sale have been scooped up by entrepreneurs ready to serve up no fuss carry-out pizza and side items! It’s no surprise that in these six decades more than 4,500 locations have popped up across the globe. Little Caesars requires $100,000 in liquid assets, and if you’re a veteran you will be able to take advantage of the reduced franchise fee! Invest in one of the Little Caesars franchises for sale and you’ll be saying “Pizza, Pizza!” while you roll in the dough!
  • Subway – Subway franchises for sale are king on our list as the brand has locations almost everywhere – over 45,000 locations throughout the world to be specific. This sandwich giant requires $100,000 in liquid assets for new franchisees. Once you purchase one of the Subway franchises for sale, you can expect to join the ranks of the rest of the brands franchisees doing an average sales amount of $490,000 annually!

There you have it, finding affordable franchises for sale CAN be done, and it can be done with worldwide brands!   It looks like the magic number is the hundred thousand dollar mark.  How many people have that much?  A recent Bank of America statistic revealed that even Millennials are beginning to put that much money in the bank.  According to their survey,  "16% now have savings of $100,000 or more, double the amount of young people who had socked away that much in 2015."  Price Waterhouse Cooper says more than 50% of all baby boomers have more than $100,000 set aside.  Are you looking at your savings and ready to invest?  

You an go the route of a new business by purchasing a franchise brand like the ones listed above.  Better yet, you can buy an existing franchise for sale that's already up and running and generating cash flow!  The Restaurant Brokers have an abundance of franchises for sale on our website, including this Subway franchise for sale in beautiful Palm Beach County, Florida or this Ben & Jerry's franchise that's netting six figures toay.  If you’re ready to take the plunge into the franchise world, check out our website by clicking the link below!

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Topics: buying a restaurant

Does Selling a Restaurant Require a License? You better believe it - in Many States

Posted by Robin Gagnon on Mar 15, 2018 9:14:33 AM

If you’re selling a house, you know you need a real estate agent.  That means someone who has achieved educational requirements, passed significant testing, undergone a background check and reinvests each year in continuing education. Do you know that in many states, selling a restaurant also requires a license?

It’s true. For sixteen states, it is a specific and certain legal requirement that business brokers or restaurant brokers hold a real estate license. Failure to do so is a Third Degree Felony in the state of Florida and a misdemeanor in Georgia punishable with a fine of $1000 for each violation with each day that person practices as a separate violation.

As of this date, the following states both require a license and have been very consistent in requiring a real estate license in order to sell a business without any real estate. These include: Florida, Georgia, Colorado, California, Washington, Oregon, Nevada, Arizona, Nebraska, Utah, Idaho, Wyoming, South Dakota, Minnesota, Wisconsin and Alaska. In Illinois, the law is slightly different and requires that you register with the Securities Division of the Secretary of State.  That's a total of 17 states with a licensing requirements for business brokers.  In the event that real estate is involved, all fifty states require a license for the transaction to occur legally.

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What are these states hoping to accomplish by requiring a real estate license or other form of licensing for selling a restaurant?

First of all, each license holder is subjected to fingerprinting and a background check. If there are any convictions, clouds or issues arising from the background check, the applicant will not be able to get a license. If you consider that you’re about to spend several hundred thousand dollars at the advice of business broker, is it really such a bad idea to know if they’ve been convicted of fraud first?

Secondly, a real estate licensee is subject to specific educational requirements, including legal and ethics coursework. This education insures that the person holding money and advising you on buying or selling a restaurant understands the legal elements of a contract including, escrow, consideration, buyer and seller acceptance and much more. You would never dream of visiting an unlicensed doctor, why would you put thousands of dollars in the hands of an unlicensed person practicing business brokerage?

Lastly, a real estate license holder is held to specific standards for holding escrow money, advertising listings, the language and content of listings and in some cases, even the legal forms he or she may use for a business.

Each of these items protects the consumer, you, the person buying or selling a restaurant. In the event something goes wrong, the Real Estate Commission in each state has a full complaint and disciplinary process that can result in fines, loss of a license and other sanctions, including, for those operating illegally, criminal charges.

How do you know if your broker has a license to sell your business or help you buy a restaurant? Don’t bother trying to find out on the national listing websites. This restaurant broker did a quick check online and found that in Georgia, fully 50% of the “featured” brokers advertising on BizBuySell did not have a current Georgia real estate license.

The internet has made it incredibly easy to advertise, leading to what I personally believe is the “wild west” mentality where anyone gets listings anywhere. There are no checks and balances on the national listing websites so you will not be able to tell if someone is licensed. For this restaurant broker, who spends an incredible amount of time and money each year complying with educational requirements, paying for licenses and renewal fees and staying current in many states, it is inconceivable that others simply operate in the open without proper licensing. All listings on the We Sell Restaurants website are represented by duly licensed representatives for that state.

How do you confirm a business broker is operating legally? Fortunately, the real estate commission for each state has a simple process where you can verify licensing. I’m including links to each state below. Before you inquire on a listing for sale, take five seconds and confirm the person representing it has the legal right to do so.

What happens if you’re listed with an unlicensed broker? In my opinion, you should immediately terminate the listing. That person has no legal right to represent you and any agreement would be unenforceable in a court of law.

What if you are in contract on a listing with an unlicensed broker? Seek legal counsel. If the broker has mistakenly represented the he or she has the authority to represent your business, you may avoid paying commission. An unlicensed party to a contract making a false claim could easily void any requirement to pay on your behalf.

Lastly, if you discover a broker is unlicensed and representing a listing in a license state, take a moment and report this activity to your real estate commission. There are laws on the books to protect your community and while the real estate commission may not be swift in follow up, they will ultimately investigate any claim you file.

Confirm a real estate license for each state by clicking the link on each state below:

Robin Gagnon is the co-founder of We Sell Restaurants and a licensed real estate agent in Georgia and Florida. She is also an M.B.A. and Certified Restaurant Broker. Her firm represents sellers in forty states and has licensed brokers handling those transactions legally in all states.

 

Topics: buying a restaurant, selling a restaurant

So You’re Interested in Buying a Restaurant? The Restaurant Brokers Share Their Knowledge.

Posted by Robin Gagnon on Feb 1, 2018 4:01:02 PM

First are foremost, the first thing we tell individuals interested in buying a restaurant is that you must have knowledge of the industry and a good database of restaurants for sale. The Restaurant Brokers share with you how to tackle both.

2-1661.jpgA multitude of Americans interested in entrepreneurism and the explosion of food connoisseurs over the past few years has created a blizzard of demand for people interested in buying a restaurant all across the United States. Where are these buyers turning to when the time comes for buying a restaurant? They are more interested in buying a restaurant that is already established and operating as opposed to tackling the huge expense and time consuming project of doing a complete build out. Did you know that six out of 10 startup restaurants are closed before they even enter their fourth year of business? What about the endless amount of restaurants that never ever get to open because all of the resources were used up building out.

Like with most things, instant accomplishment and prosperity doesn’t exist in this industry, and it will be no different for you when buying a restaurant. However, when you consider buying a restaurant that already exists, you will have leverage over starting the whole thing from the ground up. Buying a restaurant that already exists will put you on the fast track to success, as you will be coming into a business that already has clientele and is making money.

Buying a restaurant that is already operating gives you domination over the cost to start up. The main reason most restaurants fail is due to lack of money, plain and simple. Money goes quickly when the restaurant industry pro tries to turn into a general contractor just for the sheer fact that the business is in the restaurant industry. If you happen to be in the restaurant industry AND a licensed general contractor, congratulations, you will make out much better with a restaurant build out than most. But the fact of that matter is that probably is just not the case!

Buying a restaurant that’s already in place with staff and operations saves you a ton of money on marketing. Why? Because people already know about the establishment, and the money was already spent by the initial owner on marketing. Marketing costs thousands of dollars – buying a restaurant that’s already operating saves you this huge expense. What else? Buying an existing restaurant means you are ready to jump right into the business. No time is wasted on getting permits, building, planning a grand opening, and hoping for success.

Buying a restaurant that already exists take the guess work out of, “I wonder how much this business could make?” You’ll have the financials for the past several years. Did you know that the first $100,000 in business is the hardest to reach? Saving money on marketing and building will allow you to reach this goal much faster. Starting from zero and working your way up may take you a very long time, if you reach it at all when you start from scratch.

We have saved the most critical reason to buying a restaurant already open and operating for last. When you purchase an established business you are purchasing the cash flow that already exists as well. Purchasing cash flow of a business that has been operating and practicing good bookkeeping practices will save you far more money that many other businesses.

When you are ready to start the process of buying a restaurant, you can find hundreds of listings on our website. Click the link below to see all of our listings of restaurants for sale across the country. If you have any questions about buying a restaurant for sale, call the Restaurant Brokers today at 404-800-6700.

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Topics: buying a restaurant

Reasons You May Not Be Ready to Buy a Restaurant

Posted by Robin Gagnon on Jan 5, 2018 12:19:27 PM

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Topics: buying a restaurant, selling a restaurant

Tips on Buying a Bar for Sale – Evaluating Cash Flow

Posted by Robin Gagnon on Dec 8, 2017 9:32:46 AM

When the deal seems too good to be true, it probably is. A Restaurant Broker shares the secrets of paying the right price for earnings when you find a bar for sale.

An age-old struggle with how to set pricing on a “cash” business like a bar for sale is put to rest in this article. Expert restaurant brokers know that the only real way to value a bar for sale opportunity is based on earnings. Earnings are based on a profit and loss statement on the business and additions to earnings known as add backs to calculate Seller’s Discretionary Earnings. This method, known as the Income Valuation Approach doesn’t work when bar for sale listings states they have “cash earnings” they want to use in the valuation.Tips on buying a Bar for Sale.png

Cash earnings are generally not provable. They results when the seller avoids certain tax requirements and doesn’t report all of his sales and thus, his earnings. Some restaurant brokers promote these listings online and say things like “cash to be proven by seller.” Other restaurant brokers don’t take these listings or simply offer them as assets since they can’t be verified. Cash earnings are not the same as items “added back” to earnings to arrive at the owner benefit on a bar for sale. Anything that is customarily added back can be substantiated with documents during a period of review on the books and records. Here are some of the issues presented by “cash” businesses.

The first is valuation. A bar for sale advertised with earnings of $100,000 offers no way for a restaurant buyer to confirm that number. Since pricing is based on earnings, the restaurant broker that takes this number at face value will be overpricing the business. The only way the value would be correct is if the earnings were authenticated and the buyer kept the business the same when he took over the bar for sale. The other problem with the valuation is that seller is being asked to be paid twice for the same income. He’s already received a huge benefit since he’s avoided all the reasonable and customary taxes (state income tax, federal income tax and more). Now he wants to sell this bar at a premium.

Some buyers are willing to take the risk and decide they will just run on the up and up once they take over the bar for sale. There’s a problem with this approach. If you convert the cash earnings onto the books, you’re looking at an immediate hit to the earnings. The federal, state, and sales tax implications alone could drive the operation into a negative earning situation.

The larger problem for most however is one of transparency by the seller of the bar for sale. He has operated on a less than candid basis with his franchise (if he has one), the State Alcohol licensing authority, the state sales tax board and the Internal Revenue Service. It’s a bit of stretch to now believe he or she will be forthright with you at the point you are buying this bar. Outside of coming into the business as an employee or minority partner for a series of months, it’s impossible to establish the “real” earnings.

If you are a buyer that prefers a less risk adverse approach, than a bar for sale in with verifiable earnings is the answer. The pricing may not seem as good a “deal” as something advertised at a good price with “cash” earnings but the old adage that you get what you pay for holds true in this scenario. Pricing and earnings are not a game in the valuation of a restaurant or bar for sale. They are a simple math problem and they do have a right and wrong answer – whether you are buying a franchise restaurant or buying a bar or club.

Robin Gagnon is Co-Founder of We Sell Restaurants and www.wesellrestaurants.com. She holds an MBA in finance and frequently writes on the topics of restaurant sales, restaurant valuation, and financial topics surround the buying and selling or restaurants, clubs or bars.

Topics: buying a restaurant

Tips on Leasing a Restaurant – What Landlords Expect from a Tenant

Posted by Robin Gagnon on Nov 27, 2017 10:00:00 AM

You can get respect from the landlord when leasing a restaurant as long as you take the time to assemble a package with the help of an expert restaurant broker.

Leasing a restaurant can be a daunting task for the inexperienced restaurant owner. Here’s everything you need to know to present your offer in a way to get serious consideration from landlords who see multiple submissions for the best space. Start and end your negotiations with the landlord on the best foot by treating this as a serious business deal.

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Lending covenants or other restrictions on landlords often dictate the mandatory materials he needs to consider any new tenant leasing a restaurant space. This can be for a new lease or even the transfer of an existing one. By understanding the requirements early in the game and presenting a well organized and complete package, your application moves to the top of the list, important in the current competitive market for leasing a restaurant. Once the landlord has a package, he will meet with the proposed tenant but generally not before he has a package. Why? The landlord wants to understand who he or she is dealing with and their credit quality before they meet with a would-be tenant and enter into negotiations.

How can using a qualified restaurant broker assist you in leasing a restaurant? There are multiple ways. First, the best spaces move quickly and restaurant brokers with established relationships with landlords often get the first look at spaces that will be available. Secondly, using a restaurant broker that has established a rapport with the landlord increases your chance of success when leasing a restaurant. Since the landlord isn’t meeting directly with you as the tenant, he’s relying on the expertise of the restaurant broker to communicate information about your concept and you personally. That’s important when the developer is weighing multiple offers or considering tenants that do not have as strong a credit position. Leasing a restaurant for locations in demand are typically managed by firms who are very experienced in conducting background reviews and credit quality reviews on would-be tenants. Lastly, a qualified restaurant broker is going to prepare your package for the landlord and help you put forth as the best candidate.

You can indicate a lack of sophistication or inexperience on the part of your broker if your package is incomplete or missing elements. For big landlords, this can be a deal breaker when there are competing packages though less established or single unit operators are more forgiving. Anyone leasing a restaurant should get a full list of requirements from the broker.

Be prepared to produce any or all of the following items. The most important item is your financial statement. This should be accurate and dated within the last 30 days. Landlords will want credit checks so be prepared to give them approval to pull your credit. Often they will want two years of federal income tax returns. Most of this is a required need to have; not a nice to have. The landlord is looking for three things: cash on hand to operate, assets sufficient to secure the lease and history of paying bills on time. In addition, they want to understand how you will operate in their restaurant for lease so provide a copy of your menu and outline of your business.

The actual discussions on lease terms begin after the full package is submitted. If you have a powerful package and strong financial results you’ll have more negotiating room in leasing a restaurant and the terms. If there are lots of people vying for the same space and your restaurant brokers submits the best package on your behalf, you’ll win out. Weak credit or insufficient cash positions can be overcome in multiple ways. A strong restaurant broker can offer you suggestions to overcome or secure the landlord’s risk on these elements.

Want more information on leasing a restaurant? Download our free Guide to Leasing a Restaurant available at this link.

 

Topics: buying a restaurant