The restaurant industry is notoriously challenging, and even the most talented chefs and restaurateurs can struggle to keep their businesses afloat. For many, the dream of owning a successful restaurant can quickly turn into a nightmare as they find themselves unable to achieve their desired sales or profits.
However, failed establishments can still present desirable opportunities for restaurant buyers. In this article, we will explore five reason every restaurant business, profitable or not, has value to a buyer. For many buyers, purchasing a failing restaurant is a smart investment and a point of pride when buyers turn a struggling business into a thriving one. Sellers should not immediately assume that a failing restaurant isn’t attractive to someone else. Here are five reasons even a failing restaurant has value.
Begin by defining failure. If your restaurant business isn’t making money, it’s easy to write it off as a failure or believe it has no ongoing value. That is a mistake. Strictly speaking, failure can be defined as the state or condition of not meeting your desired or expected outcome, result, or goal. You may have set a goal for this restaurant to earn six figures on the books in the first year or do $1 million in sales. Not meeting that goal may be failure in your book but for another owner, achieving half this goal, $50,000 in earnings and 50% of the sales target or $500,000 may spell success. The first step in how to sell a failing restaurant is to identify if it is in fact, failing, or simply, not meeting your goals.
We often see this condition with multi-unit operators who have strict financial parameters and overhead in the form of personnel to oversee several stores. A “low performing” store for a multi-unit owner, carved out, as a single location, may provide plenty of earnings for the single unit operator.
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One – Buyers Like and Enjoy the Challenge of Turnarounds
Many buyers want and appreciate the opportunity to perform a turnaround on a concept. After all, sometimes the failure of the restaurant is tied directly to easily issues that are easy to overcome. These include things like insufficient capital for marketing and advertising after an extended build out, unexpected obstacles, like a delay in opening, lack of resources or support, like partnerships ending or even mistakes or errors in judgment, like choosing the wrong cuisine. Today’s restaurant failure does not necessarily imply a permanent or irreparable situation, but rather an opportunity to reinvigorate, reinvest and ultimately affect a turnaround in the location.
Two – Even Failing Restaurants Have Plenty of Assets
If your restaurant is failing to earn the return you are seeking, evaluate what you do have to sell. Every restaurant business has existing assets. These are the items a Restaurant Broker will focus on for selling the business and could include not only equipment but inherent goodwill for things like a lease priced below market value for example. Of course, hard assets including restaurant equipment, front of the house furnishing, leasehold improvements and POS systems all have value as well.
Every restaurant item has value to a new operator who will pay for the opportunity to take over the existing concept and convert it to something new. A fryer is the same piece of equipment whether you are lowering a basket of French fries or egg rolls into the hot oil. The outcome is the same. The versatility of restaurant equipment to service any cuisine makes it valuable for someone else to acquire a turnkey location without having to assemble all the equipment one piece at a time.
The same is true for most front of the house layouts. Full service will feature dining while quick service is laid out for counter service. A failed quick service restaurant (QSR) location serving chicken may be perfect with a new operator at the helm with a change of concept to seafood. A fresh coat of paint and new signage can transform the front of house. That means your failing restaurant has value for the new buyer.
Three – Time is Money
This is a major reason why your failing restaurant has intrinsic value for a buyer. We all know that time is money. The faster someone gets to market with their idea, the more likely they are to command the market and solidify share. It is much faster to buy an existing restaurant and make a few tweaks than to build a new one.
There is no permitting and waiting on the licensing authorities to process paperwork and decide if you can move forward. Inspections are generally limited to an updated health inspection, not multiple reviews of every facet of the work. Compare a single inspection for the entire property to those associated with a building out like a plumbing rough-in and electrical inspection, framing inspection, final inspection and more. This eats up valuable time when a restaurant can be open and operating, saving time and money.
Four – Removing Long Term Financial Burdens
The discounted sale of a failing restaurant is a benefit for buyers who want to save money on building from scratch. While the seller of a failing restaurant generally won’t recover their original capital investment, it can provide some liquidity to both pay down debt and stop the drain of cash.
The other benefit realized for sellers is the release from long term lease commitments and personal guarantees tied to those leases. Often, these long term financial obligations are more critical to a seller’s long term financial picture than the short term loss. The buyer gets a discounted set of assets, and the seller can be clear of long term liabilities.
Five – Buyers Have Their Own Reasons
The last thing sellers should know is that the value of a failed restaurant just may not be apparent to the seller. Remember the old adage that "beauty is in the eye of the beholder." Sometimes buyers pay for assets because they’ve always dreamed of a restaurant in a particular neighborhood. Others may acquire a failing business because they are seeking an E-2 visa to enter the U.S. and the type of restaurant or money it is making is secondary to their goal of finding a business to acquire. Overall, sellers shouldn’t guess at a buyer’s motivations but should, instead, know that for every restaurant, there is a buyer at the right price.
Overall, many restaurant sellers mistakenly believe that a restaurant without cash flow on the books is without value. That is not the case. These five reasons show why a failing restaurant can still be valuable assets and create opportunities for both buyers and sellers in today’s restaurant for sale market.
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Robin Gagnon, Certified Restaurant Broker®, MBA, CBI, CFE, is the co-founder of We Sell Restaurants, a brand that has carved an unparalleled niche in the industry as the nation's leading and only business broker franchise focused on restaurants. Under Robin’s leadership, We Sell Restaurants has grown to 45 states where it dominates the restaurant for sale marketplace, including franchise resales, delivering on the founder’s vision to Sell More Restaurants Than Anyone Else. We Sell Restaurants was named one of the most influential suppliers and vendors in the country by Nation’s Restaurant News and has earned a position on INC 5000’s list of fastest growing privately held companies. Franchisees of We Sell Restaurants surveyed by Franchise Business Review placed it 25th in the nation in franchisee satisfaction.
Robin is the Chair of the Women’s Franchise Committee of IFA and is a member of the IFA Board of Directors. She is also an MBA and Certified Franchise Executive (CFE) and has her CBI (Certified Business Intermediary) designation from the International Business Brokers Association. She co-authored Appetite for Acquisition, a small business book award winner in 2012 and contributes frequently to industry press appearing in Forbes, QSR, Modern Restaurant Management, Franchise Update, and others. Entrepreneur has named her to their list of the “Top Influential Women in Franchising.”