Restaurants for Sale - the cheaper it is, the less you get (Part 2)

In our last blog posting, we discussed the common theme between all restaurants for sale – Atlanta, Denver, Florida or nationwide.  If a buyer is “bottom feeding” i.e. looking for the cheapest thing on the market, he or she should expect to get the least amount of information in due diligence.

Restaurants for sale are priced on EITHER buying cash flow or buying assets.  Many buyers make the mistakes of buying an asset sale and requesting records that should accompany a cash flow purchase.

Here’s a recent example.  A buyer inquired about a $65,000 restaurant for sale in Atlanta Georgia.  The restaurant does sales of approximately $240,000 a year.  The ad clearly stated that it was being sold for assets only.  The buyer’s email to us requested all of the following (and some additional items we left out of this article).      

• Income statement and balance sheet by month and by year.
  • By month for no less than the last twelve months.
  • By year for the last three years.
  • The last 12 months bank statements and CC statements.
  • The Balance Sheet
  • Taxes:
    • The last 2 years tax returns.
    • The last 12 months sales and use tax filings.
    • The last 12 months of payroll 941s and the state payroll filings..

This was obviously a rookie buyer who had copied a “due diligence” list from the internet somewhere without knowing that the list was written for a cash flow positive business and a much larger transaction than this example.

For businesses doing sales of under $1.0 million a year, it is extremely rare that a broker would have monthly profit and loss statements.  Is it because they don’t want to?  Is it because they are too naïve to carefully monitor their financial position?  No. It’s a matter of expense control.

A Certified Public Accountant will charge between $250.00 and $450.00 a month to produce a monthly P&L and balance sheet.   A business doing sales of $240,000 a year has on average, a net profit margin (for a good operator) of around 15%.  That means he or she would reduce their monthly earnings (of approximately $3000 a month) by 11.7% a month in order to produce frequent P&L’s that would not marginally change their operating model. 

That’s on top of the expenses they already generate for forced regulatory compliance for filing 941 returns, monthly sales and use tax filings, workman’s comp and unemployment tax compliance.

Risk has its reward.  You can get a great deal on a restaurant for sale by choosing low priced opportunities.  However, the cheaper the prospect when buying a restaurant for sale, the less you should expect in due diligence.  Our next article will focus on due diligence for money making cash flow positive businesses and the timing of your requests for due diligence.