Advice for Buying a Restaurant and Selling a Restaurant

Warning: Bars for Sale indicating "Cash" -- Do You Buy?

Posted by Robin Gagnon on Jul 15, 2019 2:29:48 PM

Bars for sale with cash on the books are promoting earnings that are usually not provable. With a bar, the term, “you get exactly what you pay for,” holds true. Pricing and earnings are difficult to prove resulting in the age-old struggle of how to set pricing on a "cash" business.

We Sell Restaurants would tell you that the only means to value a bar for sale company is based on earnings. Earnings are based on a profit and loss statement on the business and items that benefit the owner directly, called add backs. The sum of these are called Seller's Discretionary Earnings. This method, referred to as the Income Valuation Approach to valuation doesn't work when a bar owner states they have “cash earnings" they want to monetize in the sale.

warning_ bars for sale with _cash_

Buying a bar or pub for sale with verifiable earnings is the answer. The pricing may not seem as great a "bargain" as but if you are a buyer who favors a less risk adverse strategy, it’s the only way to go. Something advertised at a good price with "cash" earnings means there is simply no way to verify that number as a purchaser.

Since pricing is based on earnings that can be proven, any restaurant broker that takes some amount of funds done “off the books” will soon be overpricing the business. The only means by which the value would be right is if the earnings had been authenticated and the purchaser kept the company operating in the same manner he took over. That may mean running afoul of the law since potentially, earnings and revenue are misstated.

Another problem with a valuation that includes “cash” earnings is that the seller has already been overpaid on his unreported income. He (or she) got a huge benefit since he's avoided all the reasonable and customary taxes (state income tax, federal income taxation and more). Now he wants to sell that at a premium.

If the deal looks too good to be true, it likely is and that’s the case with “cash” off the books. Getting to the ideal price is critical. The seller of the bar or pub for sale has operated on a less than candid basis with his franchise (if he has one), the State Alcohol licensing jurisdiction, the state sales tax board and the Internal Revenue Service. It is a little stretch to now believe he or she is going to be forthright with you, as a buyer in an arm’s length transaction. Outside of coming to the business as a worker for a series of months, it is not possible to set up the "actual" earnings.

Trusting in transparency from a Seller that avoids certain tax requirements and doesn't report all his earnings is a difficult task. Should you convert the cash earnings onto the books, you're looking at an instant hit to earnings. The national, state, and sales tax implications alone could drive the operation to a negative earning scenario.

Brokers often promote these listings on the internet with caveats such as “cash to be shown by the seller.” Other restaurant brokers don't take these listings or simply offer them as asset sales since they can't be confirmed.

We Sell Restaurants has a simple recommendation when you buy a bar or pub. Pay for what you can see. Then you avoid the issue entirely and don’t overpay for earnings that never materialize on the back end.

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Topics: Buying a Restaurant